AP Microeconomics Unit 2 Notes: Equilibrium, Efficiency, and Policy in Markets

Market

Any setting where buyers and sellers interact to exchange a good or service.

Demand

The buyer side of the market model; shows the quantities consumers are willing and able to buy at different prices.

Supply

The seller side of the market model; shows the quantities producers are willing and able to sell at different prices.

Market equilibrium

The situation where quantity demanded equals quantity supplied (Qd = Qs).

Equilibrium price

The price at which Qd equals Qs; the market-clearing price.

Equilibrium quantity

The amount actually bought and sold at the equilibrium price.

Surplus (excess supply)

When price is above equilibrium so Qs > Qd; tends to push price downward.

Shortage (excess demand)

When price is below equilibrium so Qd > Qs; tends to push price upward.

Movement along a curve

A change in quantity demanded or quantity supplied caused by a change in the good’s own price (no shift of the curve).

Shift in demand

A change in demand (entire demand curve moves) caused by non-price determinants like income, tastes, related goods’ prices, expectations, or number of buyers.

Shift in supply

A change in supply (entire supply curve moves) caused by non-price determinants like input prices, technology, taxes/subsidies, expectations, number of sellers, regulations, or natural conditions.

Consumer surplus (CS)

The difference between what consumers are willing to pay and what they actually pay; a measure of consumers’ net benefit.

Producer surplus (PS)

The difference between the price producers receive and the minimum price they are willing to accept (based on marginal cost/supply curve).

Total surplus (TS)

Overall gains from trade in a market; TS = CS + PS.

Deadweight loss (DWL)

Lost total surplus from trades that do not occur due to an intervention (e.g., taxes or binding price controls) that reduces quantity below the efficient level.

Price ceiling

A legal maximum price set by the government; only affects the market if set below equilibrium (binding).

Binding price ceiling

A price ceiling below equilibrium that creates a shortage (Qd > Qs) and reduces quantity traded to Qs at the controlled price.

Price floor

A legal minimum price set by the government; only affects the market if set above equilibrium (binding).

Binding price floor

A price floor above equilibrium that creates a surplus (Qs > Qd) and reduces quantity traded to Qd at the controlled price.

Per-unit tax

A fixed tax charged on each unit bought/sold; creates a wedge between the price buyers pay and the price sellers receive.

Tax incidence

How the burden of a tax is shared between consumers and producers; the more inelastic side bears more of the burden (economic incidence may differ from legal incidence).

Tax revenue

Government revenue from a per-unit tax; equals t × Q after the tax (a rectangle on the graph).

Subsidy

A payment that encourages production or consumption; creates a wedge where sellers receive more than buyers pay and typically increases quantity traded.

World price (Pw)

The international price of a good; in the small-country model, it is taken as given and determines whether a country imports or exports.

Tariff

A tax on imported goods that (for an importing country) raises the domestic price to Pw + t, reduces imports, and generates tariff revenue but creates deadweight loss.