AP Economics
Mr. Trenkle
Name _______________________________
Unit 2 Review Sheet
DEMAND
- Law of Demand, Demand Schedule, Demand Curve
- Reasons why Demand Curve is downward sloping – Diminishing marginal utility,
Substitution Effect, Income Effect
- Change in Quantity Demanded vs. Change in Demand
- Determinants of Demand- Consumer Income (Normal, Inferior), Consumer Tastes
and Preferences, Price of Related Goods (Substitute, Complementary), Number of
Buyers, Expectations
SUPPLY
- Law of Supply, Supply Schedule, Supply Curve
- Change in Supply vs. Change in Quantity Supplied
- Determinants of Supply- Resource Costs, Number of Sellers, Taxes and Subsidies
EQUILIBRIUM
- Intersection of S & D curves, Quantity Supplied = Quantity Demanded
- Consumer Surplus, Producer Surplus
- 8 graphs of changes in equilibrium (Changes caused by changes in Determinants of
Demand and/or Supply)
- Disequilibrium is when market is not in equilibrium. If price is too high will lead to
Surplus, If price is too low it will lead to Shortage.
Elasticity
- Elasticity of Demand – measure of how responsive Demand is to changes in price
(Elastic, E>1 Inelastic,E<1, Unit Elastic, E =1, Perfectly Inelastic, Perfectly Elastic)
- The more inelastic the Demand, the more vertical the Demand Curve, the more
elastic the more horizontal. Unit elastic 45 Degree.
% Change Quantity Demanded/% Change Price
- Total Revenue Test – Elastic Demand then TR and Price move in opposite directions,
if Inelastic Demand TR and Price move in same direction, Unit Elastic Price changes
and TR stays the same
- Determinants of Elasticity of Demand- Substitutes, Luxury vs. Necessity, % of
Income
- Elasticity of Supply - %Change in Quantity Supplied/%Change in Price
- Determinant of Elasticity of Supply is Time
- Cross Price Elasticity %Change in Q Demanded Good A/% Change in Price GoodB
(- means goods complements, + means goods are substitutes)
- Income Elasticity of Demand- % Change in Quantity Demanded/%Change in Income
(- means inferior good, + means normal good.)
Government Intervention
- Price Floor, Price Ceiling, Subsidy, Excise Tax, Tariff & Quota
- Economists prefer to have markets establish price – more efficient
Consumer Choice and Utility Maximization
- MUx/Px = MUy/Py