Name ________________________________________________________________AP ECONOMICS
Section 9: Behind the Demand Curve
Module 46: Income Effects, Substitute Effects, and Elasticity (pages 458-464)
1. Terms:
a. substitute effect
b. income effect
c. price elasticity of demand
d. midpoint method
2. Why does an understanding of the substitution effect explain why the demand curve slopes
downward?
3. What does “real income” mean?
4. What does “nominal income” (“money income”) mean?
5. What are two things that you need to know to understand the difference between the substitution
and income effects?
6. What is the difference between normal goods and inferior goods?
7. What is very important to consider when thinking about changes in independent variables (like
price) and subsequent changes in dependent variables (like quantity demanded)?
8. What are the steps in calculating the price elasticity of demand?
9. What do large (greater than one) elasticity values indicate?
10. What do small (less than one) elasticity values indicate?
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11. What is the formula for the midpoint method? When and why should it be used?
Module 47: Interpreting Price Elasticity of Demand (pages 466-473)
1. Terms:
a. perfectly inelastic
d. inelastic
b. perfectly elastic
e. unit elastic
c. elastic
f.
total revenue
2. What is the difference between perfectly inelastic and perfectly elastic?
3. Using a correctly labeled demand graph, show perfectly elastic demand. What is the elasticity
value?
4. Using a correctly labeled demand graph, show perfectly inelastic demand. What is the elasticity
value?
5. On any demand curve there will be areas on the curve that are more elastic, areas that are inelastic,
and perhaps even areas that are unit-elastic. Draw a demand curve (will not be a straight line) and
label areas on the curve that are elastic, unit-elastic, and inelastic. Use Figure 47.2 for help.
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6. What is the formula for total revenue?
7. Does increasing the price of a good necessarily increase total revenue? Why or why not? (Explain
the price effect and quantity effect on total revenue)
8. What is the relationship between elasticity (unit-elastic, inelastic, and elastic), price, and total
revenue? (We use what is called the “total revenue test” to determine elasticity.)
9. What factors determine the price elasticity of demand? Explain each factor.
Module 48: Other Elasticities (pages 475-480)
1. Terms:
a. cross-price elasticity of demand
e. price elasticity of supply
b. income elasticity of demand
f.
perfectly inelastic supply
c. income elastic
g. perfectly elastic supply
d. income inelastic
2. Explain how an understanding of elasticities would be useful to a business owner.
3. What is the formula for calculating the cross price elasticity of demand?
4. Explain how cross price elasticity is used to determine whether two goods are complements or
substitutes.
5. What is the formula for calculating income elasticity of demand?
6. Explain how income elasticity of demand is used to determine whether a good is a normal good or
an inferior good.
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7. What is the difference between income-elastic and income-inelastic?
8. How is price elasticity of supply calculated?
9. What are the differences between elastic supply, unit-elastic supply, and inelastic supply.
10. Create a supply graph showing perfectly inelastic supply.
11. Create a supply graph showing perfectly elastic supply.
12. What factors determine the price elasticity of supply? Explain each factor.
Module 49: (pages 482-492)
1. Terms:
a. willingness to pay
e. cost
b. individual consumer surplus
f.
individual producer surplus
c. total consumer surplus
g. total producer surplus
d. consumer surplus
h. producer surplus
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2. Explain the usefulness of measuring consumer and producer surplus.
3. Explain how the concepts of willingness to pay and net gain are related when considering consumer
surplus.
4. “The total consumer surplus generated by purchases of a good at a given price is equal to the area
below the demand curve but above that price.” Draw a demand curve, set a market price (straight
line) and shade in the area of consumer surplus.
5. On the demand curve you drew for number 4, lower the price and shade in the increase in
consumer surplus.
6. What does the textbook author mean he discusses opportunity cost in selling a used textbook?
What does the “real cost” mean?
7. “The total producer surplus from sales of a good at a given price is the area above the supply curve
but below that price.” Draw supply curve, set a price (straight line) and shade in the area of
producer surplus.
8. If the price lowers, what happens to total producer surplus? What happens to total producer surplus
when the price increases?
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Module 50: Efficiency and Deadweight Loss (pages 495-508)
1. Terms:
a. total surplus
f.
tax incidence
b. progressive tax
g. deadweight loss
c. regressive tax
h. administrative costs
d. proportional tax
i.
lump-sum tax
e. excise tax
2. How does the concept of total surplus illustrate the concept of “gains from trade”?
3. Define the term efficiency as it is used in this module. How does consumer and producer surplus fit
in with the concept of efficiency?
4. Explain why reallocating sales among sellers may result in an inefficient outcome.
5. Explain why changing the quantity traded may result in an inefficient outcome.
6. What four functions does an efficient market perform?
7. Explain why the concepts of equity and efficiency often conflict.
8. How are taxes used to make things more “fair” in our economy?
9. Draw a supply and demand graph. Show the effect of an excise tax on price and quantity? Label
consumer price (Pc) and producer price (Pp)
10. What happens to total surplus when an excise tax is applied?
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11. Explain the following statement: ”An excise tax drives a wedge between the price paid by
consumers and the price received by producers.”
12. Who bears the tax burden when there is an excise tax?
13. How does elasticity impact tax incidence?
14. Under what conditions do consumers pay more of the tax?
15. Under what conditions do producers pay more of the tax?
16. Draw a supply and demand graph and show the impact of an excise tax. Shade in the areas of tax
revenue, consumer surplus (after tax), producer surplus (after tax), and deadweight loss.
17. Why are “lump-sum taxes” unfair? Why are they better at promoting efficiency? (I have seen some
tricky FRQs with questions about “lump-sum taxes”)
Module 51: Utility Maximization (pages 511-521)
1. Terms:
a. utility
f.
budget constraint
b. util
g. consumption possibilities
c. marginal utility
h. budget line
d. marginal utility curve
e. principle of diminishing marginal
utility
i.
optimal consumption bundle
j.
optimal consumption rule
2. What does utility maximization mean? How does the concept fit in with decisions about
consumption?
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3. Look at the Graphs in figure 51.1. Why does the Total Utility curve begin to flatten?
4. Look at the Graphs in Figure 51.1. What is the relationship between the Total Utility graph and the
curve that shows marginal utility? (What does the total utility curve and the marginal utility curve do
at 8 Clams?)
5. How do these curves (Figure 51.1) demonstrate diminishing marginal returns? After which clam
does diminishing marginal returns happen?
6. Explain how economists use the budget line and the concept of utility to explain consumer
decisions?
7. Explain how the optimal consumption bundle fits in with rational choice theory of economics.
8. Examine table 51.1, table 51.2 and then the graphs in figure 51.3. How was the budget line
created?
9. Examine table 51.1, table 51.2 and then the graphs in figure 51.3. How was the Utility Function
created? Can you see why point C represents maximum utility?
10. How do you calculate the marginal utility of a good? How do you calculate marginal utility per
dollar?
11. State the optimal consumption rule in the form of an equation.
12. Look at figure 51.4. What happens on the graph when the marginal utility per dollar of one good is
equal to the marginal utility per dollar of another good?
13. How can marginal analysis help us gain a deeper understanding of the demand curve?
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