AP Micro - Unit 2

• Law of Demand: Inverse Relationship
• Shifters of DEMAND:

  1. T Tribe
  2. R Related Goods
  3. I Income
  4. B Buyers
  5. E Expectations
• Law of Supply: Upward Curve
• Shifters of SUPPLY

  1. R Resources
  2. O Other Goods
  3. T Taxes and Subsidies
  4. T Technology
  5. E Expectations
  6. N Number of Sellers
• Consumer Surplus: Top Triangle and What people are willing to pay minus what they are actually paying
• Producer Surplus: Bottom Triangle: What producers are selling for minus how little they are willing to sell for
• Elastic Good: Quantity Demand does really change when price changes
• Inelastic Good: Quantity Demand doesn't really change when price changes
• 5 C's of Inelastic Goods

  1. Few Substitutes
  2. Necessity
  3. Small portion of income
  4. Required Now: Yes
  5. Elasticity Coefficient less than 1
• 5 C's of Elastic Goods

  1. Many Substitutes
  2. Luxury
  3. Big portion of income
  4. Required Now: No
  5. Elasticity Coefficient greater than 1
• Percent Change: New minus Old all over Old then multiplied by 100
• Price Elasticity of Demand: Change in Quantity over Change in price
• Total Revenue Test:

  1. If Demand is inelastic, an increase in price will cause TR to increase
  2. If Demand is elastic, an increase in price will cause TR to decrease
  3. If unit elastic: TR doesn't change
• Cross Price Elasticity of Demand: Change in quantity demanded of Good A over change in price of good B
• If XED is positive: Goods are substitutes
• If XED is negative: Goods are complements
• Income Elasticity of Demand: Change in quantity demanded over change in income
• If YED is positive: Good is normal
• If YED is negative: Good is inferior
• What is the result of Taxes: Dead Weight Loss: Phineas' Nose Points towards equilibrium