AP/IB Economics
Chapter 4: Demand and Chapter 7: Consumer Surplus
Guided Outline Mankiw 65-72; 137-142
Main Ideas
What does an economist mean
by the term ‘market’? What
are the characteristics of a
‘perfectly competitive’
market?
What is the Law of Demand?
How do we show it visually?
What variable changes
quantity demanded? How do
we show this change visually?
Notes, definitions, examples, diagrams, formulas
Main Ideas
What variables change
demand? How do we show this
change visually?
What does consumer surplus
measure?
How does the market price
create consumer surplus?
Draw a graph which shows
consumer surplus.
Notes, definitions, examples, diagrams, formulas
AP/IB Economics
Chapter 4: Supply and Chapter 7: Producer Surplus
Guided Outline Mankiw 73-76; 143-146
Main Ideas
What is the Law of Supply?
How do we show it visually?
What variable changes
quantity supplied? How do we
show this change visually?
What variables change supply?
How do we show this change
visually?
Notes, definitions, examples, diagrams, formulas
Main Ideas
What does producer surplus
measure?
How does the market price
create producer surplus?
Draw a graph which shows
producer surplus.
Notes, definitions, examples, diagrams, formulas
AP/IB Economics
Chapter 4: Equilibrium and Chapter 7: Market Efficiency
Guided Outline Mankiw 77-86 and 147-154
Main Ideas
What is true when a market
reaches equilibrium?
If the price of a good is set
above the market price, what
happens? How does the
market find equilibrium again?
If the price of a good is set
below the market price, what
happens? How does the
market find equilibrium again?
Notes, definitions, examples, diagrams, formulas
Main Ideas
Notes, definitions, examples, diagrams, formulas
Graph what happens to price
and quantity when:
Supply only increases:
Demand only decreases:
When is a market “allocatively
efficient”?
Draw a market diagram which
shows that total surplus is
maximized.
Check your understanding: Take the interactive Chapter 4 and 7 quizzes on Mankiw’s website.
The Determinants of Demand
Price = Movement Along the Curve
The law of demand: There is a negative
correlation between price and quantity
demanded. As prices rise, quantity demanded
falls. As prices fall, quantity demanded rises.
The Underlying Conditions of Demand
1. Population
2. Income:
normal goods
inferior goods
3. Related goods:
substitutes
compliments
4. Advertising / Consumer Information
5. Tastes / Preferences
price
price
6. Expectations of future prices
contraction
Change
in price
extension
Shift
left
0
Shift
right
quantity
Change in
quantity
demanded
An increase or decrease in the quantity
demanded means a movement along the
demand curve caused by a change in price
If the quantity demanded increases, it is
called an extension of demand.
If the quantity demanded decreases, it is
called a contraction of demand.
D1
0
D
D2
quantity
An increase or decrease in demand means a
shift of the whole demand curve caused by a
change in anything other than price: one of
the underlying conditions of demand.
An increase in demand means that at each and
every price, more is demanded than before.
This is indicated by a shift of the whole
demand curve right.
An decrease in demand means that at each
and every price, less is demanded than
before. This is indicated by a shift of the
whole demand curve left.
The Determinants of Supply
Price = Movement Along the Curve
1.
2.
3.
4.
5.
6.
7.
Intervention:
taxes
subsidies
regulations
Number of suppliers in the market
Supply shocks
Expectations of future prices
Cost of factors of production
Technology
Supply goods:
joint
competitive
price
The law of supply: There is a positive
correlation between price and quantity
supplied. As prices rise, quantity supplied
rises. As prices fall, quantity supplied falls.
The Underlying Conditions of Supply
extension
Change
in price
S1
S
S2
contraction
Shift
left
0
Shift
right
quantity
Change in
quantity
supplied
An increase or decrease in the quantity
supplied means a movement along the supply
curve caused by a change in price
If the quantity supplied increases, it is called
an extension of supply.
If the quantity supplied decreases, it is called
a contraction of supply.
0
quantity
An increase or decrease in supply means a
shift of the whole supply curve caused by a
change in anything other than price: one of
the underlying conditions of supply.
An increase in supply means that at each and
every price, more is supplied than before.
This is indicated by a shift of the whole
supply curve right.
An decrease in supply means that at each and
every price, less is supplied than before. This
is indicated by a shift of the whole supply
curve left.
AP/IB Economics
Chapter 6: Controls on Prices
Guided Outline Mankiw 113-123
Main Ideas
Why might particular groups
pressure the government for
price controls?
What is the goal of a price
ceiling? What does an
effective/binding price ceiling
actually cause? Explain,
including a diagram.
What mechanisms/solutions
may develop in response to a
price ceiling?
Notes, definitions, examples, diagrams, formulas
Main Ideas
What happened with price
ceilings in the petrol market?
In the rent market?
What is the goal of a price
floor? What does an
effective/binding price floor
actually cause? Explain,
including a diagram.
What mechanisms/solutions
may develop in response to a
price floor?
What happens with a price
floor in the wage market?
Notes, definitions, examples, diagrams, formulas