AP Microeconomics - Unit 2 Notes
Unit 2.1: Demand
1. What is Demand?
- Demand is the different quantities of a good that consumers are willing and able to buy at
various prices.
- Example: If you can afford diapers but don’t want to buy them, there is no demand.
2. Law of Demand:
- There is an inverse relationship between price and quantity demanded.
- As price increases, quantity demanded decreases, and vice versa.
3. Why the Law of Demand Occurs:
- Substitution Effect: If the price of a good rises, consumers switch to cheaper substitutes.
- Income Effect: As prices decrease, purchasing power increases.
- Law of Diminishing Marginal Utility: The more of a good consumed, the less satisfaction
(utility) is received from each additional unit.
4. Demand Curve:
- The demand curve is downward sloping, showing an inverse relationship between price
and quantity demanded.
- Assumes ceteris paribus (other factors like income are held constant).
Unit 2.2: Supply
1. What is Supply?
- Supply refers to the quantities that producers are willing and able to sell at various prices.
2. Law of Supply:
- There is a direct relationship between price and quantity supplied.
- As price increases, producers are willing to supply more.
3. Supply Curve:
- The supply curve is upward sloping, showing a positive relationship between price and
quantity supplied.
4. Shifts in Supply:
- Non-price factors such as the price of inputs, technology, and number of sellers shift the
supply curve.
Unit 2.3: Price Elasticity of Demand
1. Price Elasticity of Demand (PED):
- PED measures the responsiveness of quantity demanded to changes in price.
- Elasticity Coefficient = % change in quantity demanded / % change in price.
2. Elastic Demand:
- When the elasticity coefficient is greater than 1, demand is elastic.
- This means consumers are highly responsive to price changes.
3. Inelastic Demand:
- When the elasticity coefficient is less than 1, demand is inelastic.
- This means consumers are less responsive to price changes.
4. Unit Elastic Demand:
- When the elasticity coefficient equals 1, the demand is unit elastic, indicating proportional
responsiveness.
Unit 2.4: Price Elasticity of Supply
1. What is Price Elasticity of Supply?
- Price Elasticity of Supply (PES) measures how responsive producers are to changes in
price.
- Elastic supply means producers can quickly adjust production.
- Inelastic supply means production cannot be adjusted quickly.
2. Determinants of Supply Elasticity:
- Time period: In the short run, supply is often inelastic.
- Availability of resources: If resources are easily available, supply tends to be elastic.
3. Supply Curve:
- An upward-sloping curve represents supply. The steeper the curve, the more inelastic the
supply is.
Unit 2.5: Other Elasticities
1. Cross-Price Elasticity of Demand (XED):
- Measures how the quantity demanded of one product changes when the price of another
product changes.
- Positive coefficient: Goods are substitutes (e.g., Pepsi and Coca-Cola).
- Negative coefficient: Goods are complements (e.g., Hot dogs and buns).
2. Income Elasticity of Demand (YED):
- Measures how quantity demanded changes as income changes.
- Positive coefficient: Normal goods (demand increases as income rises).
- Negative coefficient: Inferior goods (demand decreases as income rises).
Unit 2.6: Market Equilibrium and Consumer/Producer Surplus
1. Market Equilibrium:
- Occurs when quantity demanded equals quantity supplied.
- At this point, the market price clears all goods.
2. Consumer Surplus (CS):
- The difference between what consumers are willing to pay and what they actually pay.
3. Producer Surplus (PS):
- The difference between what producers receive and the minimum amount they are willing
to accept.
4. Deadweight Loss:
- Occurs when the market is not in equilibrium, leading to inefficiency.
Unit 2.7: Market Disequilibrium and Changes in Equilibrium
1. Disequilibrium:
- Occurs when the market is not at equilibrium, leading to a surplus or shortage.
2. Shifts in Supply and Demand:
- Changes in non-price determinants cause shifts in the supply and demand curves.
- Rightward shift: Increase in demand or supply.
- Leftward shift: Decrease in demand or supply.
3. Double Shifts:
- When both supply and demand shift simultaneously, either price or quantity will be
indeterminate.
Unit 2.8: Government Intervention
1. Price Ceilings:
- A legal maximum price, typically set below the equilibrium, which leads to shortages.
2. Price Floors:
- A legal minimum price, typically set above the equilibrium, which leads to surpluses.
3. Taxes:
- Excise taxes shift the supply curve to the left, raising prices for consumers and reducing
producer surplus.
4. Deadweight Loss:
- Price controls and taxes can create inefficiencies in the market, leading to deadweight loss.
Unit 2.9: International Trade and Public Policy
1. World Price:
- Countries can purchase goods at world price if it is cheaper than the domestic price.
2. Tariffs:
- A tax on imported goods that raises their price, protecting domestic industries but hurting
consumers.
3. Quotas:
- A limit on the quantity of imports, protecting domestic producers but leading to higher
prices.
4. Effects of Trade Restrictions:
- Tariffs and quotas increase producer surplus but decrease consumer surplus, leading to
deadweight loss.
Below is a sample Demand Curve:
