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AP Micro Mod 2 Review
Terms in this set (45)
consumers are both willing and able to pay for a good or service
law of demand
relationship between the price of a good or service and the quantity demanded is inverse. (When the price of a good or service falls, consumers tend to demand more (a greater quantity) of that good or service. Vice versa
if price goes down for a product, the purchasing power increases for consumers. The opposite happens when prices rise
if the price goes up for a product, consumer buy less of that and more of another
law of Diminishing marginal utility
the more you buy of anything, the less you'll be satisfied
collection of the different quantities of a good that consumers hypothetically would demand at different prices
income increases, demand increases ; income falls, demand falls
income increases, demand falls; income falls, demand increases
What causes shifts in demand?
T - consumer TASTES and preferences
R - the price/availability of RELATED goods
I - the amount of INCOME consumers have to spend on the good
B - the number of BUYERS in the market
E - consumers' EXPECTATIONS about the future
price for one increases, demand for other increases (coke vs pepsi)
if price of one increases, demand for other decreases (price of hot dogs and buns)
Supply is the different quantities of a good sellers are willing to and able to sell (produce) at different prices
Law of Supply
-direct (positive) relationship btwn price and quantity supplied
As price goes up, quantity producers make goes up
As price falls, quantity producers make falls
What changes Supply?
R - The availability and cost of RESOURCES used to make the good
O - the selling price of OTHER goods firms could make/sell
T - TAXES, subsidies (when the government provides money to firms), and other government regulations
T-changes/advances in TECHNOLOGY
E - EXPECTATIONS
N - the NUMBER of firms in the market that are producing the good
Do changes in price affect the supply?
no, only causes movement along the curve
more was produced but less is being demanded (producers will lower prices)
quantity demanded is higher than quantity supplied (producers will raise prices)
What does a change in price do to supply and demand?
ONLY causes a change in quantity
point at which the downward-sloping demand curve intersects the upward-sloping supply curve
equilibrium ; the quantity demanded by consumers is equal to the quantity supplied by firms
1. New technology?
2. Price of input increases?
3. Price decrease?
4. Price of sub increases?
1. p down, q up
2. P up, q down
3. DONT CHANGE IT: quantity demand increases, quantity supplied decreases: shortages
4. p up, q up
if 2 curves shift at the same time, either PRICE OR QUANTITY will be indeterminate (we can't say)
(Draw it out separately)
buyers max minus price: difference between what you are willing to pay and what you did pay
seller's minimum minus price: difference between the price the seller received and how much they were willing to sell it for
Calculating the surplus
Area of a triangle = ½ base x height
max legal price a seller can charge for a product; goal is to make affordable
what does a price ceiling cause?
if you lower the price, more people will be willing to buy it (increases demand) when the supply is low because companies are less willing to sell it at that point; Price ceilings also cause black markets
min legal price a seller can sell a product
what does a price floor cause?
supply is going to be more than demand: government has to step in and buy the surplus
Can a price floor or ceiling cause deadweight loss?
measure of responsiveness to a change in price.
How do you calculate Price elasticity of demand?
% change Q demanded / % change in Price
Why is price elasticity important?
-important to firms because it helps them decide on pricing strategies
-important to gov bc helps them determine taxes
Price elasticity coefficient less than 1.0
inelastic demand (Q doesn't respond as much to price change)
Price elasticity coefficient greater than 1.0
elastic demand (Q more responsive to price change)
Price elasticity coefficient equal to 1.0
unit elastic demand (Q and P respond equally)
Price elasticity coefficient equal to 0
-quantity is INsensitive to a change in price
-Small portion of income
-Required now rather than later
-quantity is sensitive to a change in price
-Large portion of income
-Plenty of time to decide
Cross Price Elasticity of Demand
-% Change in Q of Product X / % Change in Price of Product Y
-Negative : complementary goods
-Positive: Substitute goods
Income-Elasticity of Demand
-% change in Quantity Demanded of Good X / % Change in Income
-Negative: inferior good
-Positive: normal good
Price Elasticity of Supply
-based on time
-Percent change in q / percent change in p
-INelastic: insensitive to a change in price (steep curve); most goods have inelastic supply in the short run
-Elastic: sensitive to a change in price (flat curve) ; most goods have elastic supply in the long run
-Perfectly inelastic supply: Q doesn't change; set quantity supplied (vertical line)
per-unit excise taxes are a specific amount that the producer (firm) must pay to the government every time they sell one unit of an item
Graphing with excise tax
-Add whatever the tax is to price; shifting the curve up
-Makes gap, between before and after, is the tax (shared btwn producer and consumer)
-Tax: area of the tax rectangle
FOLLOW THE CURVE AND GRAPH
-Deadweight Loss is difference between the quantities
-difference of enjoyment at each level
-Want to consume until marginal benefit equals marginal cost
-Marginal utility divided by price equals marginal utility per dollar(You are able to compare what is better thru marginal utility per dollar)
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