UnofficialAP MicroeconomicsUnit 2 of 6

AP Microeconomics Unit 2: Supply and Demand

Elasticity, surplus and the effects of government intervention.

Unit overview

Supply and demand model how prices are set in competitive markets. Demand slopes downward because of income and substitution effects; supply slopes upward because higher prices cover rising marginal costs. Equilibrium is where quantity demanded equals quantity supplied.

A change in price moves along a curve; a change in a determinant such as income, the price of a related good, input costs or expectations shifts the whole curve. Elasticity measures responsiveness, $E_d = \frac{\%\Delta Q_d}{\%\Delta P}$ , and decides how total revenue reacts to price changes. Consumer and producer surplus measure gains from trade, and price controls or taxes create deadweight loss.

Key topics

Demand and supply determinants: What shifts each curve and what only moves along it.
Market equilibrium: Simultaneous shifts and their effects on price and quantity.
Elasticity: Price, income and cross-price elasticity; total revenue test.
Surplus and government intervention: Price ceilings, floors, taxes and deadweight loss.

Worked example

Price rises 10% and quantity demanded falls 25%. Find the price elasticity of demand (absolute value).

$E_d = \dfrac{25\%}{10\%}$ .
$E_d = 2.5$ , so demand is elastic and total revenue falls.

Answer: $E_d = 2.5$

Common mistakes

Shifting the demand curve when the good's own price changes.
Saying a binding price ceiling is set above equilibrium; it must be below to bind.
Predicting both price and quantity when two curves shift and the size of the shifts is unknown; one of them is indeterminate.

Exam tips

Draw a correctly labelled graph even when the question only asks for an explanation.
Use the total revenue test: if demand is elastic, price and revenue move in opposite directions.

See the AP Microeconomics exam format and every unit on the course page.