Supply, Demand, Elasticity: every key term you need (+ practice quiz)
36 flashcard terms for AP Macroeconomics Unit 2, written to match the course framework. Read them here, drill them as flashcards, or take the 16-question quiz. Free, no account needed.
For normal goods, rising income raises demand. For inferior goods such as instant noodles or intercity bus travel, rising income lowers demand.
Income Elasticity of Demand
Percent change in quantity demanded divided by percent change in income. Positive means normal, negative means inferior, and greater than 1 means a luxury.
Substitutes in Production
Goods a firm can produce with the same resources. A higher price for corn pulls acreage away from soybeans, shifting soybean supply left.
Complements in Production
Joint products such as beef and leather. A rise in the beef price raises beef output and therefore increases the supply of leather too.
Double Shift Indeterminacy
When supply and demand both shift, one of price or quantity is determined and the other depends on the relative sizes of the shifts.
Area below the demand curve and above the price. It measures the value buyers receive above what they actually pay.
Producer Surplus
Area above the supply curve and below the price. It measures revenue received above the minimum sellers would have accepted.
Deadweight Loss
The lost total surplus from trades that are mutually beneficial but do not occur, caused by price controls, quotas, or taxes.
Effective Price Ceiling
A legal maximum set below equilibrium. It creates a persistent shortage, quality deterioration, and often black markets.
Effective Price Floor
A legal minimum set above equilibrium, such as a binding minimum wage. It creates a surplus, in labor markets a form of structural unemployment.
Total Revenue Test
If demand is elastic, price and total revenue move in opposite directions. If inelastic, they move together. At unit elasticity revenue peaks.
Elasticity Along a Linear Demand Curve
Demand is elastic on the upper half, unit elastic at the midpoint, and inelastic on the lower half, even though the slope is constant.
Midpoint Formula
Elasticity computed using averages of the two prices and two quantities as the base, so the answer is the same in either direction.
Tax Incidence
The side of the market with the more inelastic curve bears the larger share of a per-unit tax burden.
Time and Elasticity
Both supply and demand grow more elastic over longer horizons because buyers find substitutes and firms adjust plants and technology.
Perfectly Inelastic Supply
A vertical supply curve, such as seats in a stadium tonight. Any demand increase raises price with no change in quantity.
Loanable Funds Market
Saving supplies funds and investment demands them; the real interest rate is the price. A government deficit increases demand and raises the real rate.
Crowding Out
Government borrowing raises the real interest rate in the loanable funds market, reducing private investment and slowing capital formation.
Labor Market Supply and Demand
Firms demand labor based on the marginal product of workers; households supply it. The intersection sets the real wage and employment level.
Foreign Exchange Market
Currencies trade in supply and demand markets. Demand for a currency comes from foreigners buying its exports, assets, or interest-bearing debt.
Excise Tax Graph
A per-unit tax shifts supply up vertically by the tax amount. Price to buyers rises, price received by sellers falls, and quantity drops.
Subsidy Effects
A per-unit subsidy shifts supply right, lowering the market price and raising quantity, but creates deadweight loss by pushing output past the efficient level.
Quantity Demanded vs Demand
A price change moves you along the curve to a new quantity demanded. Only a non-price determinant shifts the whole demand curve.