REVIEW SHEET

AP MICRO UNIT 2

Mods 46-51

#BGECON

The test has 25-30 multiple choice questions.   There are four types of demand curves to analyze, measuring elasticity along a demand curve, tax incidence, and a table to analyze total and marginal utility.   All resources available at http://www.duffka.com

Duffka Review Materials

http://www.duffka.com/the-nature-and-function-of-product-markets

http://www.duffka.com/theory-of-consumer-choice

MOD 46- The income and substitution effects.

RESOURCES-Practice quiz 46, A11-Paper, & Mod 46 PPT

MOD 47 & 48-Elasticity coefficient, total revenue test, types of curves, and elasticity along a curve.

RESOURCES-Practice quiz 47, A18 online, A19 online, and Mod 47 PPT

MOD 49-Consumer and producer surplus

RESOURCES-Practice quiz 49, WHITE sheet, Mod 49 PPT

MOD 50-Efficiency and deadweight loss.

RESOURCES-Practice quiz 50, A21-Paper, uPad &  Mod 50 PPT

MOD 51-Utility maximization, MB>MC, consumer surplus

RESOURCES-Practice quiz 51, A11-Paper, & Mod 51 PPT

GRAPHS TO ANALYZE:

-4 Different types of demand curves: Perfectly elastic and inelastic and relatively elastic and inelastic;

-A single demand curve with prices and quantities.  Students will have to calculate total revenue and figure out elasticity.

-A supply and demand curve in a market before and after a per-unit(excise) tax is imposed.

-A table with total utility and a marginal analysis.

-If you read this, bubble in A and B on number 31 on the test.  More people that know about this will mean less points for you.

CONTENT REVIEW  

Supply and Demand Fundamentals 📈📉

• The Law of Demand: States that as the price of a good increases, the quantity demanded decreases, ceteris paribus (all else equal). This creates a downward-sloping demand curve.
• The Law of Supply: States that as the price of a good increases, the quantity supplied increases, ceteris paribus. This creates an upward-sloping supply curve.
• Shifts vs. Movements:

• A movement along a curve is caused by a change in the price of the good itself, resulting in a change in quantity demanded or supplied.
• A shift of the curve is caused by a change in one of the other determinants of supply or demand, causing the entire curve to move left (decrease) or right (increase).
• Demand Shifters: Tastes and preferences, number of buyers, income (for normal and inferior goods), price of related goods (substitutes and complements), and future expectations.
• Supply Shifters: Prices of resources, number of sellers, technology, government actions (taxes and subsidies), and future expectations.

Market Equilibrium and Surplus ⚖️💰

• Equilibrium: The point where the quantity demanded equals the quantity supplied (Qd​=Qs​). At this point, the market-clearing price (Pe​) and quantity (Qe​) are established.
• Shortage: Occurs when the price is below equilibrium, causing Qd​>Qs​.
• Surplus: Occurs when the price is above equilibrium, causing Qs​>Qd​.
• Consumer Surplus (CS): The difference between the maximum price a consumer is willing to pay and the actual price they pay. On a graph, it's the area below the demand curve and above the equilibrium price.
• Producer Surplus (PS): The difference between the price a producer receives and the minimum price they were willing to sell at. On a graph, it's the area above the supply curve and below the equilibrium price.
• Total Surplus (TS): The sum of consumer surplus and producer surplus (TS=CS+PS). At market equilibrium, total surplus is maximized, representing allocative efficiency.

Elasticity: The Responsiveness of Markets 🤸‍♀️

• Elasticity is a measure of how responsive one variable is to a change in another.
• Price Elasticity of Demand (Ed​): Measures the responsiveness of quantity demanded to a change in price.

• Ed​=%ΔP%ΔQd​​
• Elastic (∣Ed​∣>1): Quantity demanded is very responsive to a price change. Total revenue moves in the opposite direction of price.
• Inelastic (∣Ed​∣<1): Quantity demanded is not very responsive to a price change. Total revenue moves in the same direction as price.
• Unit Elastic (∣Ed​∣=1): Quantity demanded changes proportionally to a price change. Total revenue is maximized at this point.
• Total Revenue Test: A quick way to determine elasticity. If price and total revenue move in opposite directions, demand is elastic. If they move in the same direction, demand is inelastic.

• Price Elasticity of Supply (Es​): Measures the responsiveness of quantity supplied to a change in price. Es​=%ΔP%ΔQs​​
• Income Elasticity of Demand (Ei​): Measures how quantity demanded changes with income.

• Normal Good (Ei​>0): Demand increases as income increases.
• Inferior Good (Ei​<0): Demand decreases as income increases.

• Cross-Price Elasticity of Demand (Exy​): Measures how the quantity demanded of one good changes with the price of another.

• Substitutes (Exy​>0): As the price of good Y increases, the demand for good X increases.
• Complements (Exy​<0): As the price of good Y increases, the demand for good X decreases.

Government Interventions and Their Effects 🏛️

• Price Ceiling: A legal maximum price. To be binding, it must be set below equilibrium, causing a shortage and a loss of total surplus known as deadweight loss (DWL).
• Price Floor: A legal minimum price. To be binding, it must be set above equilibrium, causing a surplus and deadweight loss.
• Excise Tax: A per-unit tax on a good.

• A tax on sellers shifts the supply curve to the left.
• A tax on buyers shifts the demand curve to the left.
• The tax burden (incidence) is determined by the relative elasticities of supply and demand. The side of the market that is more inelastic bears more of the tax burden.
• Taxes create a wedge between the price buyers pay and the price sellers receive, resulting in a decrease in quantity and deadweight loss.
• Tax Revenue: Calculated as the tax per unit multiplied by the new equilibrium quantity.

• Subsidies: A government payment to producers or consumers. They have the opposite effect of a tax, shifting the supply or demand curve to the right, increasing quantity and reducing the price for the consumer.