AP Microeconomics
Unit II: The Nature and Function of Product
Markets
13-20% of AP Micro Exam
Unit II Exam: October 16/17
What is a Product Market?
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Market: any structure
that allows buyers and
sellers to exchange any
type of goods, services
Product market: goods
and services produced
by businesses are sold
to households.
Households use the
income they receive
from the sale of
resources to purchase
commodities.
Households demand
goods and supply
resources.
The money they spend
is returned to the
businesses as revenue.
Businesses supply
goods and demand
resources.
Resource Allocation (Distribution)
• Society’s scarce resources are allocated among their many possible
uses.
• Markets use prices as signals to allocate resources to their highest
valued uses.
• Consumers will pay higher prices for goods they value more highly
• Producers will devote more resources to the production of goods with
higher prices.
• Workers will provide more hours of labor to jobs that pay more.
• Principle applies to product market and resource market.
• Markets DO NOT exist in isolation of other markets
• Example: Rapid rise in price of gasoline
AP Economics
October 1, 2014
1. Review Activity 2-1: Resource Allocation
2. Lesson 2-2: Marginal Utility and the Law of Demand
3. HW: Activity 2-2
Marginal Utility and the Law of Demand
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What is Law of Demand?
Why is it downsloping?
Why does a person buy more of a good when its price is reduced?
Utility: The total satisfaction received from consuming a good or service.
Total Utility: Sum of satisfaction or benefit (measured in dollars) that an
individual gains from consuming a given amount of goods or services
This is subjective!
Marginal Utility: The maximum gain (in dollars) from an increase in the
consumption of a good or service.
∆ in total utility when an extra unit is consumed.
Total utility is sum of the marginal utilities of given units.
If total utility increases, then marginal utility from the extra unit is
positive, and vice versa.
Activity 2-2.1
Diminishing Marginal Utility (the increase in total utility is less with
each extra unit consumed) : Consumer will only buy MORE of a good if
its price is reduced: Law of Demand 