LAS PLUMAS HIGH SCHOOL
2380 Las Plumas Ave.
Oroville, Ca 95966
History and Social Sciences Department
Advanced Placement Micro Economics
Mr. Matt Kermen, Instructor
mkermen@ouhsd.org
530-538-2310 ext. 296
UNIT II, THE MARKET ECONOMY
UNIT IIA: THE MARKET ECONOMY
AP Content Summary
II.
The nature and functions of product markets
A.
Supply and demand (15-20%)
1. Market equilibrium
2. Determinants of supply and demand
3. Price and quantity controls
4. Elasticity
(a)
Price, income, and cross-price elasticities of demand
(b)
Price elasticity of supply
5. Consumer surplus, producer surplus, and market efficiency
6. Tax incidence and deadweight loss
B. Theory of consumer choice (5-10%)
1. Total utility and marginal utility
2. Utility maximization: equalizing marginal utility per dollar
TOPIC I: DEMAND
OBJECTIVES: You must be able to
1.
2.
3.
4.
5.
6.
explain the role of price in a market economy
define and illustrate demand through schedules and graphs.
distinguish between change(s) in demand and change(s) in quantity demanded.
explain the inverse relationship between price and quantity demanded.
identify and explain the variable which causes a change in demand.
illustrate and explain the changes in quantity demanded given a price change.
READ: Chapter 4, The Market Forces of Supply and Demand
KNOW THE FOLLOWING TERMS
market
demand curve
law of demand
substitutes
inferior good
competitive market
quantity demanded
complement
normal good
complements
KEY CONCEPTUAL QUESTIONS
1. Why is there an inverse relationship between price and quantity demanded, other things being
constant?
2. Distinguish between a change in demand and a change in quantity demanded with a given demand
curve. (Use graphs to aid you)
3. What causes a change in demand?
TOPIC II: SUPPLY
OBJECTIVES: You must be able to:
1.
2.
3.
4.
5.
6.
explain the role of price in a market economy.
define and illustrate supply through schedules and graphs.
distinguish between change(s) in supply and change(s) in quantity supplied.
explain the direct relationship between price and quantity supplied.
identify and explain the variables that cause a change in supply.
illustrate and explain the changes in quantity supplied given a price change.
READ: Chapter 4, The Market Forces of Supply and Demand
law of supply
quantity supplied
KNOW THE FOLLOWING TERMS
supply curve
supply schedule
KEY CONCEPTUAL QUESTIONS
1.
2.
3,
Why is there a direct relationship between price and quantity supplied, other things being
constant?
Distinguish between a change in supply and a change in quantity supplied with a given supply
curve. (Use graphs to aid you)
What causes a change in supply?
TOPIC III: EQUILIBRIUM
OBJECTIVES: You must be able to:
1.
2.
3.
4.
5.
6.
7.
explain the role of price in a market economy.
define and illustrate equilibrium.
define and illustrate surpluses and shortages.
define affects of surpluses and shortages on prices and quantities.
predict the changes in price and quantities given changes in demand and/or supply.
interpret and/or compute equilibrium price and quantities from graphs, mathematics equations,
and/or data.
interpret market conditions given novel data.
READ: Chapter 4, The Market Forces of Supply and Demand
KNOW THE FOLLOWING TERMS
equilibrium price
equilibrium quantity
shortage
law of supply and demand
equilibrium
surplus
KEY CONCEPTUAL QUESTIONS
1.
2.
Why will the market-clearing (equilibrium) price be set at the intersection of supply and demand-and not at a higher or lower price?
How do market prices and equilibrium quantities respond to
a.
b.
c.
d.
e.
f.
change in demand?
change in supply?
simultaneous increases in supply and demand?
simultaneous decreases in supply and demand?
an increase in demand and a decrease in supply?
decrease in demand and an increase in supply?
TOPIC IV: Elasticity and it’s Application
OBJECTIVES: You must be able to:
1.
2.
define the price elasticity of demand and the income elasticity of demand.
list and explain the four determinants of the price elasticity of demand.
READ: Chapter 5, Elasticity and it’s Application
elasticity
total revenue
cross-price elasticity of demand
1.
2.
3.
4.
KNOW THE FOLLOWING TERMS
price elasticity of demand
income elasticity of demand
price elasticity of supply
KEY CONCEPTUAL QUESTIONS
If elasticity is greater than 1, is demand elastic or inelastic?
If elasticity equals o, is demand perfectly elastic or perfectly inelastic?
If demand is elastic, how will an increase in price change total revenue? Explain.
What do we call a good whose income elasticity is less than 0?
TOPIC V: The Role of Government
Ceilings, Floors and Taxes
OBJECTIVES: You must be able to:
1.
2.
4.
5.
define and explain the effects of price ceilings and price supports.
identify areas and potential areas of market failure.
illustrate and explain the affects of a tentative government policy.
analyze the effects of taxation and subsidies in an individual market
READ: Chapter 6, Supply Demand, and Government Policies
KNOW THE FOLLOWING TERMS
Tax incidence
price floor
price ceiling
KEY CONCEPTUAL QUESTIONS
2.
3.
4.
5.
6,
What is the function of price and to what extent does it provide those functions in an efficient and
equitable manner?
What is an effective price ceiling? What is an effective price floor? Why are they created and
what are the effects of each?
What are "black markets"? Describe the operations.
How does a tax or subsidy affect a market? What determines the distribution of the tax burden
(or subsidy benefit)?
Assume the fast food industry is an example of a competitive market currently in equilibrium. (i)
Draw a market supply and demand graph to show the current equilibrium and; (2) illustrate and
explain the immediate results of imposing a price ceiling on fast food good
TOPIC VI: The Theory of Consumer Choice
OBJECTIVES: You must be able to:
1.
2.
3.
4.
5.
List how a budget constraint represents the choices a consumer can afford.
Evaluate how indifference curves can be used to represent a consumer’s preferences.
Evaluate how a consumer’s optimal choices are determined.
Identify how a consumer responds to changes in income and changes in prices.
Illustrate how to decompose the impact of a price change into an income effect and a substitution
effect.
6. Identify how to apply the theory of consumer choice to three questions about household behavior.
READ: Chapter 21, The Theory of Consumer Choice
KNOW THE FOLLOWING TERMS
budget constraint
indifference curve
marginal rate of substitution
inferior good
substitution effect
perfect substitutes
perfect complements
normal good
income effect
Giffen Good
KEY CONCEPTUAL QUESTIONS
1.
2.
3.
4.
5.
6.
7.
What is the Theory of Consumer Choice?
What are the four properties of the Indifference Curve?
What are perfect substitutes and perfect complements?
How do changes in income and price affect the consumer’s choices?
Do all demand curves slope downward?
How do wages affect labor supply?
How do interest rates affect household ssaving?
AP Micro Economics: U2- Leftist Activities
Record these questions on the left hand side of your notes, adjacent to the answer.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
What are the assumptions of the market economy?
What is the relationship between price and quantity demanded?
Why does Qd increase, when price decreases?
What is the difference between a change in demand and a change in qd?
What causes demand to change?
What is the relationship between price and quantity supplied?
Why does Qs increase, when price increases?
What causes supply to change?
What is meant by equilibrium?
What is a shortage?
What happens to price and quantities when a shortage exist
What is a surplus?
What happens to price and quantities when a surplus exists?
What are secondary effects?
How do government policies affect markets?
What is a price ceiling?
What are the results of a price ceiling?
What are black markets?
What is a price floor?
What are the results of a price floor?
What are the effects on a market given governmental taxes and subsidies?
Leftist Graph Activities
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Illustrate a demand curve
Differentiate on the demand curve a change in demand from a change in Qd
Illustrate a supply curve
Differentiate on the supply curve a change in the supply from a change in Qs
Illustrate a supply and demand model in equilibrium
Illustrate a supply and demand model with a price floor
Illustrate a supply and demand model with a price ceiling.
Illustrate the laws of supply and demand
Show a supply and demand model where price increases but quantities remain indeterminate
Show a supply and demand model where price decreases but quantities remain indeterminate
Show a supply and demand model where price remains indeterminate but quantities increase
Show a supply and demand model where price remains indeterminate but quantities decrease.
Show a supply and demand model where government creates a tax on the supplier
Show a supply and demand model where government creates a subsidy for the supplier
Illustrate on a supply and demand graph the consumer and producer surplus
Unit II: PRE-TEST QUESTIONS
1.
If the demand for apples increases, we
predict that
A.
B.
C.
D.
Use the following graph to answer questions 6-7
more apples will be sold at lower prices
fewer apples will be sold at lower prices
more apples will be sold at higher prices
fewer apples will be sold at higher prices
2.
If we observe that fewer jogging shoes are
sold at lower prices, then we an expect that
A.
B.
C.
D.
market demand has decreased
market supply has decreased
market demand has increased.
market supply has increased.
3.
An increase in the price of a good, cetris
paribus, will cause which of the following to occur?
A.
B.
Decrease in demand
Decrease in demand
C.
Increase in demand
D.
Decrease in quantity
demanded
Decrease in quantity
demanded
E.
Increase in supply
Increase in quantity
supplied
Increase in quantity
supplied
Increase in supply
Increase in quantity
supplied
4.
If the supply of peanuts increases, then we
expect which of the following?
A.
B.
C.
D.
E.
The supply of peanut butter, that uses
peanuts as an input, will decrease.
The demand for popcorn (a substitute) will
increase.
The demand for peanuts will increase
The quantity of peanuts purchased will
decrease
None of the events above will occur.
5.
When the supply of a good decreases, we
can expect to observe
6.
If the current market (asking) price for the
good is $8.00 then we could expect which of the
following to happen?
A.
B.
C.
D.
E.
7.
The graph above indicates that the
equilibrium price and quantity would be:
A
B
C
D
B.
C.
D.
E.
a movement up along the original supply
curve
a rightward shift of the supply curve
a movement up along the original demand
curve
a leftward shift of the demand curve
a movement downward along the original
supply curve
Price
$6
$6
$8
$8
Quantity
3
5
2
5
8.
If demand increase and supply decreases we
can expect that
A.
B.
A.
Demand would increase, raising the
equilibrium price
Supply would increase, raising the
equilibrium price
A surplus would cause the pressure on the
price to decrease
A shortage would cause the pressure on the
price to decrease
Black markets and scalping would occur,
raising the price to $8.00
C.
D.
an increase in price, but the quantity to be
indeterminate
a decrease in price but the quantity to be
indeterminate
price will be indeterminate but with an
increase in equilibrium quantities
price will e indeterminate but with a
decrease in equilibrium quantities.
9. Assume you have the following price and quantity
schedules
Price
$2.50
$3.00
$4.00
$4.50
Quantity 1
14
13
12
11
Quantity 2
4
5
6
6.5
Quantity 3
8
10
12
13
12.
Assume that the cost of playing a round of
golf increases. Which of the following is likely to
occur in the market price for golf balls?
A.
B.
C.
Which of the following is true concerning the price
and quantity schedules described above?
A.
B.
C.
D.
Quantity 1 is a demand schedule; Quantity 2
and 3 are supply schedules
Quantity 2 is a demand schedule: Quantity 1
and 3 are supply schedules
Quantity 2 and 3 are demand schedules;
Quantity 1 is a supply schedule
Quantity 1 and 3 are demand schedules;
Quantity 2 is a supply schedule
10.
If there is a shortage of a good in an
unregulated market, then which of the following will
occur to the price, quantity demanded and quantity
supplied for the good?
D.
Decrease, because the supply of balls would
decrease
Increase, because the demand for balls
would increase
Decrease, because the demand for balls
would decrease
Increase, because the supply of balls would
decrease
13
Which of the following statements refers to
a change in quantity demanded?
A.
B.
C.
D.
Since our competitors raised their prices our
sales have doubled.
It has been an unusually warm winter; our
sales of wool scarves are down from last
year.
We decided to cut prices and the result is an
increase in our sales.
Since the tax cut, car sales have increases by
10% nationwide.
A.
Price

Qd

Qs

14.
An increase in the price of jet fuel is most
likely to cause which of the following?
B



C



A.
B.
C.
D.
D



11.
Which of the following causes a definite
increase in the price of a good?
A.
B.
C.
D.
An increase in both demand and supply
A decrease in both demand and supply
An increase in the demand combined with a
decrease in supply
A decrease in the demand combined with an
increase in the supply
Demand for airplane trips to increase
Demand for airplane trips to decrease
Supply of airplane trips to increase
Supply of airplane trips to decrease
Use the following graphs and answers to respond to
questions 15-17
Use the following answers for questions 18-19
A
B
C.
D.
E.
Equilibrium
Price
Increase
Increase
Indeterminate
Decrease
Indeterminate
Equilibrium
Quantity
Increase
Indeterminate
Increase
Indeterminate
Decrease
18. Which of the following will most likely occur in
the bicycle market if there is an increase the wages of
bicycle workers while the price of gas increases?
(E)
None of the above
15. Assume that coffee and cream are
complements. Which of the graphs illustrate the
effects on the cream market if there was a freeze in
Brazil that destroyed 1/3rd of the coffee bean harvest?
16.
Assume that a month ago Daphne Retailers
could sell 200 shirts at $30 per shirt, but that this
month the company can sell 300 shirts at $25.00.
Which of the graphs explains the change in price and
quantity sold?
17.
Assume that in the city of Cedar Rapids
there is an increase in the availability of bicycle paths
while there is a simultaneous decrease in the price of
bicycle helmets, knee-pads, and bicycle-carriers.
Which of the following graphs would explain the
changes in the market for bicycles?
19. Which of the following will most likely to occur
in the soda (pop) vending market if the cost of sugar
decreases and there is an increase in the price of fruit
drinks?
20.
Which of the following will most likely
occur in the movie theatres if a popular and thrilling
“chick flick” becomes a hit and there is a
simultaneous decrease in the price of concessions
(soda, popcorn, candy, glue, etc)?
Use the following graph for the next three questions ,
which depicts the demand curves for oranges. For all
questions begin at D. Use answers A-E to determine
what would happen to the demand for oranges.
Use the following answers and the graph below to
answer questions 21-23
A.
A shift from D to D2
B.
A shift from D to D1
C.
A movement from A to B
D.
A movement from B to A
E.
No changes
21
There is an increase in the demand for
processed orange juice.
22.
There is an increase in the price of oranges.
23.
There is an increase in the price of fertilizer
for orange trees.
Use the following graph for questions 24-26, which
depicts supply curves for VCR's (Video-recorders).
For all questions begin at S. Use answers A-E to
determine what would happen to the supply for
VCR's
Graphical & Data Analyses (GDA): For each set of
graph(s) or table(s), write a story or script, that
interprets and analyzes the graphs. In the script, (1)
describe the graphs and the information that they
provide; (2) describe the current economic situation;
(3) analyze and draw inferences concerning the
graphs and the situation. Minimum of five sentences
per each graph and/or table
1Graph A
A.
B.
C.
D.
E.
A shift from S to S2
A shift from S to S1
A movement from A to B
A movement from B to A
No changes
24.
A change in technology reduces the cost of
producing VCRs
25.
Retailers notice an increase in the quantity
supplied of VCR's
26.
Consumers change their preferences for
Compact Disk
2 Graph B
3 Graph C
Use the supply and demand graph below to answer questions 2830. . In the graph, B is the current equilibrium level of output of
the product, and A is the optimal level of output from society’s
perspective. S is the original supply curve without a tax, and S1
is the new supply curve.
4 Graph D
5 Graph E
5 Table-1
Price per Pound
Quantity demanded
Quantity supplied
$0.50
16
1
$1.00
13
3
$1.50
10
5
$2.00
7
7
$2.50
4
9
$3.00
1
11