AP Microeconomics Unit 2: How Markets Work with Supply, Demand, and Elasticity

Demand

The relationship showing how much of a good/service consumers are willing and able to buy at each possible price, holding other factors constant (ceteris paribus).

Quantity Demanded

The specific amount consumers are willing and able to buy at one particular price (a single point on the demand curve).

Ceteris Paribus

“All else equal”; the assumption that other relevant factors are held constant when analyzing the effect of price changes on quantity.

Movement Along the Demand Curve

A change in quantity demanded caused only by a change in the good’s own price (the demand curve itself does not shift).

Shift in Demand

A change in demand where, at every price, consumers want to buy a different quantity due to a non-price factor (demand curve shifts left or right).

Law of Demand

All else equal, as price rises quantity demanded falls, and as price falls quantity demanded rises (downward-sloping demand curve).

Demand Shifters (NIFTY)

Factors that shift demand: Number of buyers, Income, Future expectations, Tastes/preferences, and Prices of related goods (substitutes/complements).

Normal Good

A good for which demand increases when consumer income increases (positive income-demand relationship).

Inferior Good

A good for which demand decreases when consumer income increases (negative income-demand relationship).

Substitutes

Related goods that can replace each other; if the price of one rises, demand for the other increases (positive cross relationship).

Complements

Related goods consumed together; if the price of one rises, demand for the other decreases (negative cross relationship).

Market Demand

The horizontal sum of all individual demands; add quantities demanded by all consumers at each price.

Supply

The relationship showing how much producers are willing and able to sell at each possible price, holding other factors constant.

Quantity Supplied

The specific amount producers are willing and able to sell at one particular price (a single point on the supply curve).

Shift in Supply

A change in supply where, at every price, producers want to sell a different quantity due to a non-price factor (supply curve shifts left or right).

Law of Supply

All else equal, as price rises quantity supplied rises, and as price falls quantity supplied falls (upward-sloping supply curve).

Supply Shifters

Factors that shift supply, including input prices, technology/productivity, number of sellers, taxes/subsidies, expectations, prices of related goods in production, and natural events.

Equilibrium (Price and Quantity)

The market outcome where quantity demanded equals quantity supplied; the price/quantity at which the market “settles.”

Shortage

Occurs when price is below equilibrium, so quantity demanded exceeds quantity supplied; creates upward pressure on price.

Surplus

Occurs when price is above equilibrium, so quantity supplied exceeds quantity demanded; creates downward pressure on price.

Price Elasticity of Demand (PED)

Measures responsiveness of quantity demanded to a change in the good’s own price: Ed = %ΔQd / %ΔP (often reported in absolute value; >1 elastic, <1 inelastic, =1 unit elastic).

Midpoint Method

Elasticity calculation method using averages to find percent changes: %Δ = (new − old) / [(new + old)/2]; gives the same elasticity magnitude in either direction.

Income Elasticity of Demand

Measures responsiveness of quantity demanded to a change in income: EI = %ΔQd / %ΔI; EI>0 normal good, EI<0 inferior good.

Cross-Price Elasticity of Demand

Measures responsiveness of quantity demanded of good x to a change in the price of good y: Exy = %ΔQx / %ΔPy; Exy>0 substitutes, Exy<0 complements, ≈0 unrelated.

Price Elasticity of Supply (PES)

Measures responsiveness of quantity supplied to a change in price: Es = %ΔQs / %ΔP; often more elastic over longer time horizons as producers can adjust capacity/inputs.