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AP Micro Unit 2

TermDefinition
demand amount consumers are willing/able to purchase at a given price.
law of demand price has an effect on the amount of a particular good purchased. as the price of an item increases (decreases) consumers will demand less (more) of that item.
demand curve quantity demanded at each price by consumers in the market. price is horizontal, quantity is vertical.
demanded movement along the curve, only triggered by a change in price of the item.
law of diminishing marginal utility utility decreases as additional units consumed.
income and substitution effect income- less income/more income. substitution- lower price= greater substitution.
inverse relationship between price and quantity demanded. inverse relationship between price and quantity demanded.
utility satisfaction
marginal additional
supply amount producers are willing and able to sell at a given price.
law of supply as price of a good increases, firms will supply more of the good ( to increase revenue)
supply curve quantity supplied at each price by producers in the market. price is on vertical axis, quantity is on horizontal axis.
law of increasing opportunity costs the more a producer decides to allocate resources to one product, the more opportunity cost is lost.
the pursuit of profits profits equals revenue-costs. revenue= price x quantity. Therefore, an industry will produce more at higher prices to increase revenues.
law of diminishing marginal returns in production, there will be a point where the next additional resource used will result in less production (marginal cost). Therefore, it will cost the firm more to increase the additional good/service.
market equilibrium the point at which quantity demanded = quantity supplied.
market equlilbrium at equilibrium, the market for a good is stable.
market goal = to reach equilibrium
market goal buyers purchase as much product as firms are willing to sell at a given price.
disequilibrium occurs when quantity supplied is NOT EQUAL to quantity demanded in the market.
produces 1 of 2 outcomes excess demand or excess supply
excess demand quantity demanded is greater than quantity supplied.
when actual price in a market is below the equilibrium price = excess demand
excess demand low price encourages BUYERS and discourages SELLERS
aphic summary finding equilibrium
excess demand shortage
excess supply quantity supplied exceeds quantity demanded (excess supply = surplus)
excess supply when actual price in the market is above equilibrium price
population increase in number of consumers = increase in demand
income increase in income = increase in spending on all goods, increase in demand
normal goods demand more of when income increases - EX: food or car
inferior goods increase in income causes demand of these to fall ( you can afford something better) EX: hamburger vs steak
as income increases demand increases for normal goods and demand decreases for inferior goods
tastes/preferences people differ in tastes. demand reflects differences in consumer attitudes and preferences
substitute goods goods that can replace another. increase in the demand for one usually decreases the demand for the other EX: pen vs pencil
complementary goods two goods that are used together. demand for one increases, demand for the other will increase too EX: table and chairs
expectations of future price (consumers) if future price is expected to decrease, current demand decreases. if future price is expected to increase, current demand increases.
costs of production (resource cost) cost of input materials (labor, machinery, raw materials). costs increase; supply decreases
the number of sellers # increases; supply increases
price of other goods with similar factors of production. price increases; supply of original good decreases.
technology improvements/advancements increase production (supply). technology increases; supply increases
subsidy government money to help a business or market (production less expensive)- subsidy payment increases; supply increases
excise tax tax on production or sale of a good- (production more expensive). taxes increase; supply decreases
expectations of future price (suppliers) if future is expected to increase, current supply will decrease
elasticity measure of how do consumers respond
law of demand, price increase quantity demand decrease
price elasticity of demand (Ed) responsiveness of consumers to a price change
price elasticity of demand coefficient & formula = % change in quantity demanded (Q) of X OVER % change in price of X
if Ed> 1 = elastic relative responsive to price change
if Ed < 1 = inelastic relatively unresponsive to price change
if ED= 1 unit elastic % change in price = change in quantity - constant
if Ed = 0 = perfectly elastic no response to price change
if Ed = infinite= perfectly elastic always responsive to price change, can't divide by 0
how to find price elasticity of demand (Ed) coefficient? 1. Given in the question ( do not use mid-point formula). 2. Mid-point formula
change in quantity demanded OVER sum of quantities/2 divided by change in price OVER sum of prices/2
total revenue test easiest way to determine price elasticity of demad
total revenue = price x quantity
if TR changes in opposite direction from price Ed > 1 = elastic increase in P, causes decrease in TR
if TR changes in same direction as price Ed < 1 = inelastic increase in P, causes increase in TR
substitutability the more substitutes, the greater the elasticity
proportion of income the greater the price relative to consumers income, the greater the elasticity
luxury vs necessity luxury goods more elastic than necessary goods
time - longer time period = greater elasticity
cross price elasticity of demand (Exy) how sensitive consumers' purchases of one product (x) are to a change in price of some other product (y)
exy= % change in quantity demanded (Qd) of product x OVER % change in price of product (y)
if Exy = + - substitute goods the larger the value, the greater substitutability of the goods
if Exy = - - complementary goods the larger the - value, the greater complementarity of the goods
if Exy = 0 - independent or unrelated goods
income elasticity of demand (Ei) degree to which consumers respond to change in income - to buy more or less of a good
Ei= % change in quantity demanded (Qd) OVER % change in income
Ei = + positive value normal good
Ei= - negative value inferior goods
applications help predict which products decline in demand more rapidly than others
greater Ei more affected by economic decline
lower Ei less affected by economic decline
producer surplus difference between the minimum
producer surplus producer surplus and price are directly related (+)
higher prices increase total producer surplus
lower prices reduce total producer surplus
equation to find total producer surplus = 1-2 base x height
tax incidence who pays the "burden" of an imposed tax
elastic price increase small, producers have most burden
inelastic price increase big, consumers have most burden
efficiency loss (DWL) non production of small amount of good/service
government revenue amount of $ government takes from tax
government revenue price of tax X quantity (new equilibrium Q)
price ceiling a maximum price that can be legally charged for a good
if lower than equilibrium excess demand
result of price ceiling shortage
price floor a minimum price that can be charged for a good or service
tariff tax on imported good
effect of tariff creates revenue for government, domestic suppliers = no revenue ($), increase cost for consumers
quota (numerical limit) restricts supply
supply curve shift left quota supply curve is vertical- perfectly inelastic supply (5 units)
effects of quota limits on quantity supplied, no revenue for government, foreign suppliers receive ll revenue, increase cost for consumers
world price below US domestic equilibrium price
world price above US domestic equilibrium price
Created by: macdermidlilly