Name
Date
Period
AP Macro Unit 2: Guided Reading Questions
Demand and Supply
Objectives: These are the key concepts that you must be able to answer after Unit 2.
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9.
Explain and illustrate what the demand and supply curves are and what causes them to shift.
Explain and illustrate how the supply and demand curves determine a market’s equilibrium.
Explain and illustrate how the equilibrium price of a market is affected by shifts of the demand and supply curve.
Explain how government intervention in the markets can create both problems and solutions, along with who benefits and
loses, and why this intervention is used.
Explain why the deadweight loss of a tax means that its true cost is more than the amount of tax revenue collected.
Explain and illustrate the meaning of consumer surplus and its relationship to the demand curve.
Explain and illustrate the meaning of producer surplus and its relationship to the supply curve.
Explain and illustrate the importance of total surplus and how it can be used both to measure the gains from trade and to
evaluate the efficiency of a market.
Explain and illustrate how to use changes in total surplus to measure the deadweight loss of taxes.
Chapter 3 Vocabulary: competitive market, supply and demand model, demand schedule, demand curve, quantity demanded, law of
demand, shift of the demand curve, movement along demand curve, substitutes, complements, normal good, inferior good, quantity
supplied, supply schedule, supply curve, shift of the supply curve, movement along the supply curve, input, equilibrium price, marketclearing price, equilibrium quantity, surplus, shortage. (23)
Chapter 4 Vocabulary: Price controls, price ceiling, price floor, inefficient, inefficient allocation to consumers, wasted
resources, inefficiently low quality, black market, minimum wage, inefficient allocation of sales among sellers, inefficiently high
quality, quantity control/quota, quota limit, license, demand price, supply price, wedge, quota rent, excise tax, incidence, excess
burden/deadweight loss. (21)
Chapter 6 Vocabulary: willingness to pay, individual consumer surplus, total consumer surplus, consumer surplus, cost,
individual producer surplus, total producer surplus, producer surplus, total surplus, market failure. (10)
Homework Assignments:
Chapter 3 Materials
Vocabulary
 Chapter 3 Vocabulary Notecards: Due:
 Vocab Quiz:
Textbook:
 Chapter 3: Supply and Demand (pp.56-78) Due:
 Chapter 3 Quiz:
Chapter 4 Materials
Vocabulary
 Chapter 4 Vocabulary Notecards Due:
 Vocab Quiz:
Textbook:
 Chapter 4: The Market Strikes (pp. 83-104) Due:
 Chapter 4 Quiz:
Chapter 6 Materials
Vocabulary
 Chapter 6 Vocabulary Notecards Due:
 Vocab Quiz:
Textbook:
 Chapter 6: Consumer and Producer Surplus (pp. 135156) Due:
 Chapter 6 Quiz:
Extra Unit 2 Practice:
 Krugman/Wells website  animated graph tutorials at www.worthpublishers.com/krugmanwells
 ACDCLeadership.com:  our units are based on Mr. Clifford’s work  check his site out!
 5 Steps to a 5  Chapter 6 (2017 Edition)
Unit 2 Test:
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Basic Economic Concepts Problem Sets: Answer these on a separate sheet of paper unless otherwise noted.
Chapter 3.1
1.
Explain whether each of the following events represents (1) a shift of the demand curve (2) a movement along the demand
curve. Explain your answer.
a. A store owner finds that customers are willing to pay more for umbrellas on rainy days.
b.
When XYZ Telecom, a long-distance telephone service provider, offered reduced rates on weekends, the volume of
weekend calling increased sharply.
c.
People buy more long-stem roses the week of Valentine’s Day, even though the prices are higher than at other times
during the year.
d.
The sharp rise in the price of gasoline leads many commuters to join carpools in order to reduce their gasoline
purchases.
Chapter 3.2
1.
Explain whether each of the following events represents (1) a shift of the supply curve (2) a movement along the supply
curve. Explain your answer.
a. More homeowners put their houses up for sale during a real estate boom that causes house prices to rise.
b.
Many strawberry farmer’s open temporary roadside stands during harvest season, even though prices are usually low
at that time.
c.
Immediately after the school year begins, fast-food chains must raise wages to attract workers.
d.
Many construction workers temporarily move to areas that have suffered hurricane damage, lured by higher wages
which represent the price of labor.
e.
Since new technologies have made it possible to build larger cruise ships (which are cheaper to run per passenger),
Caribbean cruise lines have offered more cabins, at lower prices, than before.
Chapter 3.3
1.
In the following three situations, the market is initially in equilibrium. After each event described below, does a surplus or
shortage exist at the original equilibrium price? What will happen to the equilibrium price as a result?
a. 1997 was a very good year for California wine-grape growers, who produced a bumper-crop (extra-large crop of
grapes).
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b.
After a hurricane, Florida hoteliers often find that many people cancel their upcoming vacations, leaving them with
empty hotel rooms.
c.
After a heavy snowfall, many people want to buy secondhand snow blowers at the local tool shop.
Chapter 3.4
1.
Periodically, a computer chip maker like Intel introduces a new chip that is faster than the previous one. In response, demand
for computers using the earlier chip decreases as a customer’s put off purchases in anticipation of machines containing the
new chip. Simultaneously, computer makers increase their production of computers containing the earlier chip in order to
clear out their stocks of those older chips.
a.
Draw two diagrams below of the market for computers containing the earlier chip: (a) one in which the equilibrium
quantity falls in response to these events and (b) one in which the equilibrium quantity rises. What happens to the
equilibrium price in each diagram?
Chapter 4.1
1.
True or false? Explain your answer. Compared to a free market, price ceilings at a price below the equilibrium price do the
following:
a. Increase quantity supplied.
b.
Make some people who want to consume the good worse off.
c.
Make all producers worse off.
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Chapter 4.2  use the graph on pg. 94 to answer this question
1.
The state legislature mandates a price floor for gasoline of $4 per gallon. Assess the following statements and illustrate your
answer using the figure provided:
a. Proponents of the law claim it will increase the income of gas station owners. Opponents claim it will hurt gas
station owners because they will lose customers.
b.
Proponents claim consumers will be better off because gas stations will provide better service. Opponents claim
consumers will be generally worse off because they prefer to buy gas at cheaper prices.
c.
Proponents claim that they are helping gas station owners without hurting anyone else. Opponents claim that
consumers are hurt and will end up doing things like buying gas in a nearby state or on the black market.
Chapter 4.3
1.
Assume that the quota limit is 8 million rides. Suppose demand decreases due to a decline in tourism. What is the smallest
parallel leftward shift in demand that would result in the quota no longer having an effect on the market? Illustrate your
answer using Figure 4-5.
Chapter 4.4
1.
Use figure 4-3 to answer the following questions.
a. What amount of excise tax generates the same level of inefficiency as a quota of 9 million pounds of butter?
b.
What quota level generates the same level of inefficiency as an excise tax of $.60 per pound of butter?
c.
In part A, find how the burden of an excise tax is split between buyers and sellers, that is, explain how much of the
tax is paid by buyers and how much by sellers in each case.
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Chapter 6.1
1.
Consider the market for cheese-stuffed jalapeno peppers. There are two consumers, Casey and Josie, and their willingness to
pay for each pepper is given in the accompanying table (pg. 142) Use the table to:
a. Construct a demand schedule for cheese-stuffed jalapeno peppers
b.
Calculate total consumer surplus when the price of a pepper is $.40
Chapter 6.2
1.
Consider the market for cheese-stuffed jalapeno peppers. There are two producers, Cara and Jamie, and their costs of
producing each pepper is given in the accompanying table (pg. 146) Use the table to:
a. Construct a supply schedule for cheese-stuffed jalapeno peppers
b.
Calculate total producer surplus when the price of a pepper is $.70
Chapter 6.3
1.
Using the tables in Check Your Understanding for 6.1/6.2, find the equilibrium price and quantity in the market for cheesestuffed jalapeno peppers. What is total surplus in the equilibrium in this market and who receives it?
2.
Show how each of the following three actions reduces total surplus:
a. Having Josie consume one less pepper, and Casey one more pepper, than in the market equilibrium.
b.
Having Cara produce one less pepper, and Jamie one more pepper, than in the market equilibrium.
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Chapter 6.4
1.
2.
Suppose that an excise tax of $.40 is imposed on cheese-stuffed jalapeno peppers, raising the price paid by consumers to $.70
and lowering the price received by producers to $.30. Compared to the market equilibrium without the tax from Check Your
Understanding 6.3, calculate the following:
a. The loss in consumer surplus and who loses consumer surplus
b.
The loss in producer surplus and who loses producer surplus
c.
The government revenue from this tax
d.
The deadweight loss of the tax
In each of the following cases, focus on the elasticity of demand and use a diagram to illustrate the likely size -small or largeof the deadweight loss resulting from a tax. Explain your reasoning.
a. Gasoline
b.
Milk chocolate bars
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