ap micro study guide
: demand, supply, and consumer
unit 2
choice
Biggest concepts are Elasticity, Taxes, Types of Goods, and Graph movements
Demand - downward sloping curve that shows law of demand
● When price goes up, people by of stuff
● When price goes down, people buy more
● Downward sloping because of:
1. Substitution Effect
2. Income Effect
3. Law of DIminishing Marginal Utility
● Demand Shifters SPICE
○ Substitutes
○ Price
○ Income
○ Complements
○ Expectations
Supply - Upward sloping curve that shows law of supply
● Price goes up, supply goes up
● Price goes down, supply goes down
● Supply Shifters: COTTEN
○ Cost of inputs
○ Other goods’ prices
○ Technology
○ Taxes and subsidies
○ Expectations
○ Number of goods made
, Demand and Supply intersect to make Market Equilibrium
● A change in price does not shift the curves, it causes a movement along
● In a double shift either Q or P will be indeterminate
Price Floor - Above market equilibrium, sets minimum price, causes a surplus Qs > Qd
Price Ceiling - Below market equilibrium, sets maximum price, causes a shortage Qd > Qs
Substitute Goods - Replacement goods, P for one good goes up QD for another goes up
Complementary Goods - Bought together, inverse relationship, P for one goes up QD for another
goes down
Normal Goods - Income increases, QD increases
Inferior Goods - Income increases, QD decreases
Elasticity - How sensitive QD/QS is to a change in price
● Elastic - Sensitive, QD will either increase or decrease
● Inelastic - Insensitive, QD wont increase or decrease much
● 0 = Perfectly Inelastic, vertical demand curve
● Infinity = Perfectly Elastic, horizontal demand curve “Mr. Flat”
● <1 = Relatively Inelastic
● >1 = Relatively Elastic
● 1 = Unit Elastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷
Price Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
= ||
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝐴
Cross Price Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝐵
● Positive means they’re substitutes
● Negative means they’re complements
● Show how sensitive QD of product A is to the change in price of Product B
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷
Income-Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
● Positive means normal good
● Negative means inferior good
● All these formulas show the sensitivity of something relative to percent change in
something else
Consumer Surplus = price willing to pay - price actually paid
● The top half of the triangle
● If the triangle gets smaller, then CS is increasing
● In international trade, if more goods are imported CS gets bigger and PS gets smaller
Producer Surplus = price - price willing to sell
: demand, supply, and consumer
unit 2
choice
Biggest concepts are Elasticity, Taxes, Types of Goods, and Graph movements
Demand - downward sloping curve that shows law of demand
● When price goes up, people by of stuff
● When price goes down, people buy more
● Downward sloping because of:
1. Substitution Effect
2. Income Effect
3. Law of DIminishing Marginal Utility
● Demand Shifters SPICE
○ Substitutes
○ Price
○ Income
○ Complements
○ Expectations
Supply - Upward sloping curve that shows law of supply
● Price goes up, supply goes up
● Price goes down, supply goes down
● Supply Shifters: COTTEN
○ Cost of inputs
○ Other goods’ prices
○ Technology
○ Taxes and subsidies
○ Expectations
○ Number of goods made
, Demand and Supply intersect to make Market Equilibrium
● A change in price does not shift the curves, it causes a movement along
● In a double shift either Q or P will be indeterminate
Price Floor - Above market equilibrium, sets minimum price, causes a surplus Qs > Qd
Price Ceiling - Below market equilibrium, sets maximum price, causes a shortage Qd > Qs
Substitute Goods - Replacement goods, P for one good goes up QD for another goes up
Complementary Goods - Bought together, inverse relationship, P for one goes up QD for another
goes down
Normal Goods - Income increases, QD increases
Inferior Goods - Income increases, QD decreases
Elasticity - How sensitive QD/QS is to a change in price
● Elastic - Sensitive, QD will either increase or decrease
● Inelastic - Insensitive, QD wont increase or decrease much
● 0 = Perfectly Inelastic, vertical demand curve
● Infinity = Perfectly Elastic, horizontal demand curve “Mr. Flat”
● <1 = Relatively Inelastic
● >1 = Relatively Elastic
● 1 = Unit Elastic
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷
Price Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
= ||
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝐴
Cross Price Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝐵
● Positive means they’re substitutes
● Negative means they’re complements
● Show how sensitive QD of product A is to the change in price of Product B
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝐷
Income-Elasticity of Demand = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
● Positive means normal good
● Negative means inferior good
● All these formulas show the sensitivity of something relative to percent change in
something else
Consumer Surplus = price willing to pay - price actually paid
● The top half of the triangle
● If the triangle gets smaller, then CS is increasing
● In international trade, if more goods are imported CS gets bigger and PS gets smaller
Producer Surplus = price - price willing to sell
