AP Microeconomics · Unit 2
Supply and Demand: every key term you need (+ practice quiz)
38 flashcard terms for AP Microeconomics Unit 2, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 20-question quiz — free, no account needed.
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Demand The various quantities of a good consumers are willing and able to buy at each price during a period, ceteris paribus.
Law of Demand Price and quantity demanded are inversely related: as price rises, quantity demanded falls, ceteris paribus.
Substitution Effect When a good's price rises, consumers switch toward relatively cheaper substitutes, reducing quantity demanded.
Income Effect A price change alters purchasing power: a higher price makes consumers effectively poorer, so they buy less.
Change in Quantity Demanded A movement along a fixed demand curve caused only by a change in the good's own price.
Change in Demand A shift of the entire demand curve caused by a non-price determinant such as income, tastes, or related-goods prices.
Normal Good A good for which demand rises when consumer income rises (e.g., restaurant meals).
Inferior Good A good for which demand falls when income rises (e.g., instant noodles or bus rides).
Substitutes Goods used in place of each other; a rise in the price of one increases demand for the other.
Complements Goods used together; a rise in the price of one decreases demand for the other (e.g., printers and ink).
Supply The quantities producers are willing and able to sell at each price during a period, ceteris paribus.
Law of Supply Price and quantity supplied are directly related: higher prices induce firms to offer more for sale.
Determinants of Supply Non-price shifters: input costs, technology, taxes and subsidies, producer expectations, prices of related outputs, and number of sellers.
Market Equilibrium The price and quantity where quantity demanded equals quantity supplied; the market clears with no shortage or surplus.
Shortage Excess demand that occurs when the market price is below equilibrium; buyers bid the price up.
Surplus (excess supply) Excess supply that occurs when price is above equilibrium; unsold goods push the price down.
Price Elasticity of Demand (PED) The responsiveness of quantity demanded to a price change: %ΔQd ÷ %ΔP (absolute value).
Elastic Demand PED greater than 1: quantity demanded changes proportionally more than price; total revenue falls when price rises.
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Inelastic Demand PED less than 1: quantity changes proportionally less than price; total revenue rises when price rises.
Unit Elastic Demand PED equal to 1: total revenue is unchanged by a small price change; revenue is maximized here.
Perfectly Inelastic Demand A vertical demand curve (PED = 0): quantity demanded does not respond to price, as with a life-saving drug.
Perfectly Elastic Demand A horizontal demand curve (PED = ∞): any price increase drives quantity demanded to zero, as faced by a perfectly competitive firm.
Determinants of Elasticity Demand is more elastic when close substitutes exist, the good is a luxury, it takes a large share of income, and consumers have more time to adjust.
Total Revenue Test If price and total revenue move in opposite directions, demand is elastic; if they move together, demand is inelastic.
Price Elasticity of Supply %ΔQs ÷ %ΔP; supply is more elastic when producers can adjust output quickly and over longer time horizons.
Income Elasticity of Demand %ΔQd ÷ %Δincome; positive for normal goods, negative for inferior goods.
Cross-Price Elasticity %ΔQd of good X ÷ %Δprice of good Y; positive for substitutes, negative for complements.
Consumer Surplus The difference between the maximum buyers are willing to pay and the price actually paid; area below demand and above price.
Producer Surplus The difference between the price received and the minimum sellers would accept; area above supply and below price.
Total Economic Surplus Consumer surplus plus producer surplus; maximized at the competitive market equilibrium (allocative efficiency).
Deadweight Loss The loss of total surplus that occurs when output differs from the allocatively efficient quantity, such as under price controls or taxes.
Price Ceiling A legal maximum price set below equilibrium (e.g., rent control); creates a persistent shortage.
Price Floor A legal minimum price set above equilibrium (e.g., minimum wage); creates a persistent surplus.
Excise Tax A per-unit tax on a good that shifts supply left, raises the buyer price, lowers the seller price, and creates deadweight loss.
Tax Incidence How a tax burden is split between buyers and sellers; the relatively more inelastic side bears the larger share.
Subsidy A per-unit government payment that shifts supply right, lowering the price consumers pay and raising quantity.
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Tariff A tax on imports that raises the domestic price, helps domestic producers, hurts consumers, and creates deadweight loss.
World Price and Trade If the world price is below the domestic equilibrium price, a country imports; domestic consumer surplus rises and total surplus increases.
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