Download AP Microeconomics Unit II Review – Definition and

Unit II – Definition and Application Questions
Mr. Stewart’s AP Microeconomics Class
Fall Semester 2016
*For AP Review
Concept/Topic/Term:
Define Each Topic:
Microeconomics and the Circular
Flow Model
Microeconomics: The interactions between
individuals and businesses
Application Questions:
Circular Flow: Individuals and Businesses
interact in two distinct markets:

Product Markets – we are the
consumers (buyers) and
businesses are the producers
(sellers)

Factor/Resource Markets – we
are the producers (sellers) and
businesses are the consumers
(buyers)
Demand:
 Demand
 Quantity Demanded
 Law of Demand
 Demand Curve
 Determinants of Demand
Demand – the desire and ability to consume
Which of the following situations best illustrates the law of
demand?
Quantity Demanded – specific quantity
demanded at a specific price (moves
ALONG the demand curve, and only
changes in response to price)
A.) As real incomes of United States citizens
have decreased over the past year, the
demand for housing has also decreased.
B.) Recent decreases in the price of imported
wine have led to an increase in the
consumption of domestic wine.
C.) In the past several months, as the price of
compact disc players has decreased, the
quantity of compact disc players sold had
increased.
D.) The increase in the price of quality health
foods has increased the revenues of firms
producing these goods.
E.) As the demand for computers has
increased, the number of workers in the
computer industry has increased.
Law of Demand – Ceteris paribus, if PRICE
INCREASES, then QUANTITY
DEMANDED DECREASES (and vice
versa) *Price and Quantity have an
INVERSE RELATIONSHIP
Demand Curve – Demonstrates the inverse
relationship between price and quantity
demanded (law of demand), slopes DOWN
AND TO THE RIGHT, due to the
INCOME AND SUBSTITUTION
EFFECTS!!!! (As price increases people
look for cheaper alternatives, and as price
increases people can’t afford as much)
Non-Price Determinants of Demand –
SHIFT THE ENTIRE DEMAND CURVE.
This SHIFT represents either an
INCREASE (outward/rightward) shift or a
DECREASE (inward/leftward) shift in
DEMAND. An Increase in Demand
corresponds to higher prices and higher
quantity, and a DECREASE in DEMAND
corresponds to lower prices and lower
quantity. (PRICE DOES NOT AFFECT
DEMAND OR SHIFT THE CURVE, IT
ONLY EFFECTS QUANTITY
DEMANDED ALONG THE CURVE)

Income

Taste and Preferences

Substitute Goods

Complimentary Goods

# of Buyers

Consumer Information Available

Future Price Expectations
The demand curve for a normal good slopes down for which of
the following reasons?
I.
An increase in the price of the good induces
consumers to purchase substitute products.
II. An increase in the price of the good reduces consumer’s
purchasing power.
III. An increase in the price of the good increases
consumers’ utility from consuming that good.
a.
b.
c.
d.
I only
II only
III only
I and II only
e.
I and III only
Concept/Topic/Term:
Definition Questions:
Application Questions:
The American Heart Association has just issued a report warning
consumers about the negative health effects of eating beef.
Which of the following changes in the beef market is most likely
to occur as a result?
A.) The supply curve will shift to the left,
increasing the price of beef.
B.) The demand curve will shift to the left,
decreasing the price of beef.
C.) The demand curve will shift to the right,
increasing the price of beef.
D.) Neither the supply nor the demand curve
will shift; only quantity will increase as
price decreases.
E.) Neither the supply nor the demand curve
will shift; only quantity will decrease as
price increases.
Which of the following events will cause the demand curve for
hamburgers to shift to the right?
a.
b.
c.
d.
e.
An increase in the price of
pizza, a substitute for
hamburgers.
An increase in the price of
French fries, a compliment to
hamburgers.
An increase in the price of
hamburgers.
A decrease in the price of
hamburgers.
A decrease in the cost of
producing hamburgers.
Which of the following will decrease the demand for beef?
A.) An increase in the price of pork, if pork and beef are
substitute goods
B.) An increase in the price of potatoes, if potatoes and
beef are complimentary goods
C.) A decrease in the cost of transporting beef to
consumers
D.) An increase in the income levels of most consumers,
if beef is a normal good
E.) Research showing beef is better for your health than
chicken
Compliments and Substitutes
Compliments and Substitutes – These are
one of the non-price determinants of
demand, meaning they will SHIFT the
ENTIRE DEMAND CURVE. Compliments
are things that go together and the
INCREASE (decrease) in the PRICE OF
ONE, will results in a DECREASE
(increase) in the entire DEMAND FOR
THE OTHER!!!
If an increase in the price of good X causes
a drop in demand for good Y, good Y is
A.)
B.)
C.)
D.)
E.)
An inferior good
A luxury good
A necessary good
A substitute good for
X
A compliment to
good X
Assume that popcorn and movie attendance are compliments and
that Salty Concession grows corn suitable for popping. Mr.
Concession will most likely sell a greater quantity of popping
corn at a higher price if which of the following occurs?
A.) The wages of farm workers and movie
theater employees increase.
B.) A technological improvement results in
less expensive and more efficient
harvesting of corn.
C.) The introduction of new fat-free potato
chips provides new competition in the
snack-food market.
D.) The release of three summer movies sets
records for movie attendance.
E.) New government regulations force movie
theaters to hire more guards at each
theater.
Concept/Topic/Term:
Definition Questions:
If the demand for good Y increases as the
price of good X decreases, it can be
concluded that:
a.
X and Y are
substitute goods
b. X and Y are
complimentary goods
c.
X is an inferior good
and Y is a superior
good
d. X is a superior good
and Y is an inferior
good
e.
Both X and Y are
inferior goods
If the increase in the price of one good
decreases demand for another, then the two
goods are
A.)
B.)
C.)
D.)
E.)
Income and Substitution Effects
Inferior goods
Luxury goods
Normal goods
Substitute goods
Complementary
goods
Income and Substitution Effects – As the
price of a good rises, people have to spend a
larger portion of their incomes on that good
(assuming their incomes stay the same),
people will then look for substitutes, or
cheaper alternatives. This is the reason the
demand curve slopes DOWNWARD.
Application Questions:
The demand curve for cars is downward sloping because an
increase in the price of cars leads to
A.) The increased use of other modes of
transportation.
B.) A fall in the expected future price of cars.
C.) A decrease in the number of cars available
for purchase.
D.) A rise in the prices of gasoline and other
oil based products.
E.) A change in consumers’ tastes in cars.
Which of the following is true of the substitution effect of an
increase in the price of a normal good?
A.)
B.)
C.)
D.)
E.)
It works to offset the income effect
It works to reinforce the income effect
It is less than the income effect
It causes an increase in the quantity
demanded for the good
It causes an increase in the demand for the
good
The demand curve for a normal good slopes down for which of
the following reasons?
I. An increase in the price of the good induces consumers to
purchase substitute products.
II. An increase in the price of the good reduces consumer’s
purchasing power.
III. An increase in the price of the good increases
consumers’ utility from consuming that good.
a. I only
b. II only
c. III only
d. I and II only
e. I and III only
Types of Goods
 Normal Goods
 Inferior Goods
 Luxury Goods
The types of goods refer to how consumers
change their habits when their INCOMES
CHANGE:

Normal Goods = Income
INCREASES, purchases also
INCREASE (I make more, I buy
MORE)

Inferior Goods = Income
INCREASES, purchases
DECREASE (I make more, I
buy LESS)

Luxury Goods = Income
INCREASES, I spend a higher
percentage of my income on that
thing
If the demand for potatoes increases whenever a person’s income
increases, then potatoes are an example of
A.)
B.)
C.)
D.)
E.)
An inferior good
A free good
A Giffen good
A normal good
A public good
Suppose that a family buys all its clothing from a discount store
and treats these items as inferior goods. Under such
circumstances, this family’s consumption of discount store
clothing will necessarily
A.) Increase when a family member wins the state lottery.
B.) Increase when a family member gets a raise in pay at
work.
C.) Remain unchanged when its income rises or falls due
to events beyond the family’s control.
D.) Decrease when a family member becomes
unemployed.
E.) Decrease when a family member experiences an
increase in income.
Concept/Topic/Term:
Definition Questions:
Application Questions:
If bologna is an inferior good, which of the following must be
true?
A.) The demand curve for bologna is vertical.
B.) The demand curve for bologna is horizontal.
C.) An increase in the price of bologna will decrease the
supply of bologna.
D.) An increase in consumer income will decrease
demand for bologna.
E.) A decrease in consumer income will decrease the
supply of bologna.
Supply:
 Supply
 Quantity Supplied
 Law of Supply
 The Supply Curve
 Determinants of Supply
Supply – the desire and ability to produce
(sell)
If the government imposes a tax on the production of cars, which
of the following will occur in the market for cars?
Quantity Supplied – specific quantity
supplied at a specific price (moves ALONG
the supply curve, and only changes in
response to price)
Law of Supply – Ceteris paribus, if PRICE
INCREASES, then QUANTITYT
SUPPLIED INCREASES (and vice versa)
*Price and Quantity have an DIRECT
RELATIONSHIP
A.) There will be a movement to the right
along the supply curve.
B.) There will be a movement to the right
along the demand.
C.) The supply curve will shift to the right.
D.) The supply curve will shift to the left.
E.) The demand curve will shift to the right.
The supply curve for automobiles will shift left in response to
Supply Curve – Demonstrates the direct
relationship between price and quantity
supplied (law of supply), slopes UP AND
TO THE RIGHT!!!!
a.
b.
c.
Non-Price Determinants of Supply – SHIFT
THE ENTIRE Supply CURVE. This SHIFT
represents either an INCREASE
(outward/rightward) shift or a DECREASE
(inward/leftward) shift in SUPPLY. An
INCREASE in SUPPLY corresponds to
higher quantity and lower prices, and a
DECREASE in SUPPLY corresponds to
lower quantity and higher prices. (PRICE
DOES NOT AFFECT SUPPLY OR SHIFT
THE CURVE, IT ONLY EFFECTS
QUANTITY SUPPLIED ALONG THE
CURVE)

Production Costs

Changes in technology

Taxes and Subsidies

# of Sellers

Future Price Expectations

Time Needed for Production

Costs of goods using the same
resource
d.
e.
An increase in the efficiency of robot
technology.
An increase in wages in the automobile
industry.
A decrease in the number of consumers
purchasing automobiles.
A decrease in interest rates for automobile
loans.
A decrease in consumers’ incomes.
A leftward shift in the supply of corn would result from
A.)
B.)
C.)
D.)
E.)
A decrease in the price of corn.
A decrease in the price of farm machinery.
An increase in the demand for corn bread.
An increase in the labor costs of producing corn.
An increase in the consumers’ incomes.
An improvement in production technology for a certain good
leads to
A.)
B.)
C.)
D.)
E.)
An increase in the demand for the good.
An increase in the supply of the good.
An increase in the price of the good.
A shortage of the good.
A surplus of the good
A leftward shift in the supply curve of watches could be caused
by:
A.) An increase in the price of watches
B.) An increase in wages paid to workers who produce
watches
C.) An improvement in the technology associated with
watchmaking
D.) A decrease in the price of parts used in the production
of watches
E.) An increase in population
If growing corn becomes more profitable than growing wheat,
which of the following will occur?
A.)
B.)
C.)
D.)
E.)
The supply of corn will decrease
The price of wheat will decrease
The price of corn will decrease
The demand for wheat will increase
The demand for corn will increase
Concept/Topic/Term:
Market Equilibrium
 Buyers and Non-Buyers,
Sellers and Non-Sellers
 Surplus and Shortages
Definition Questions:
Application Questions:
Market Equilibrium – Is the point at which
the supply curve and demand curve meet
and intersect, it represents the perfect price
and quantity at which both buyers and
sellers are SATISFIED, and also where
QD=QS
Market Equilibrium splits the demand curve
and the supply curve in half, where those
ABOVE equilibrium on the demand curve
are BUYERS (they all receive some
benefit/consumer surplus) and all those
below are NON-BUYERS (the price was
too high, or they found substitutes), and
where those BELOW equilibrium on the
supply curve are the SELLERS (they
receive some benefit/producer surplus from
selling), and all of those above equilibrium
are NON-SELLERS (their costs of
production are too high at the equilibrium
price to make any profit
Which of the following would cause the equilibrium price of
good X to increase?
A.) Producers of good X find a new
technology that reduces the cost of
producing good X
B.) The price of an essential input in the
production of good X increases
C.) Goods X and Y are compliments, and the
government imposes a tax on good Y
D.) Good X is a normal good, and the
government increases income taxes by 3%
E.) Good X is an inferior good, and the
government decreases income taxes by
10%
Anytime price is ABOVE equilibrium, this
will cause a SURPLUS (too much supply
and not enough demand) and market forces
will push the price down, and anytime price
is BELOW equilibrium, this will cause a
SHORTAGE (too much demand and not
enough supply) and market forces will push
price up
Supply and Demand Together
***See your Unit II Rules to Remember***

Numbers 3 and 4
Consumer and Producer Surplus
Consumer Surplus – Is the benefit (utility)
received from everyone who bought (all the
BUYERS), it is everyone who paid less
(market price) than they would have been
WILLING to pay (basically everyone who
WOULD have paid more, they all think
they got a great deal)
Producer Surplus – is the benefit (profit)
received by the producers (basically anyone
who SOLD), it is all of the PRODUCERS
who would have been WILLING to SELL
at a LOWER price, but got the benefit of
selling at the market (equilibrium) price
Consumer surplus is defined as:
A.) Opportunity cost minus total revenue
B.) Total revenue minus opportunity cost
C.) The difference between the resource
costs and the price the consumers pay
D.) The difference between the value that
the consumers place on a good and the price
they pay
E.) The sum of the external costs and
benefits
The difference between the price a
consumer would be willing to pay for a
cone of ice cream and the actual market
price that she pays giver a measure of her:
A.) Consumer surplus
B.) Producer surplus
C.) Marginal utility
D.) Marginal cost
E.) Ability to pay
Which of the following best illustrates the concept of consumer
surplus?
A.) A thirsty athlete pays $0.85 for a cold
drink when she would gladly paid $1.50
for the drink.
B.) An individual who is willing to accept a
job at $7.50 per hour is offered $7.00 per
hour.
C.) An individual pays the sale price of $15.00
for the same shirt that the individual
refused to purchase earlier at $18.00.
D.) An individual finds that the price of
artichokes, a food she dislikes, has been
reduced by 50 percent.
E.) A wood-carver has a marginal cost of
$5.00 for a unit of output, but sells that
unit at $6.00.
Concept/Topic/Term:
Total/Economic Surplus or Gains
from Trade
Definition Questions:
Application Questions:
Total/Economic Surplus or Gains from
Trade – Refers to the total benefit received
from adding together BOTH consumer
surplus and producer surplus. It is assumed
that markets are both allocatively and
productively efficient, and therefore all total
surplus and gains from trade are received by
society (both the buyers and the sellers). In
the case of imperfect competition (like
monopolies), or market interference (like
government price controls) then some of the
total surplus is lost (which is what we call
DEADWEIGHT LOSS = loss to society)
When the market is in equilibrium, the total economic surplus is
equal to area
A.
B.
C.
D.
E.
Elasticity of Demand:
 Elastic
 Inelastic
 Unit (Unitary) Elastic
 Cross-Price Elasticity
Elasticity (of demand) – How does your
behavior change in response to a change in
price:

Elastic – Behavior does/will
change

Inelastic – Behavior does
not/cannot change
*Things that affect elasticity are whether or
not the item is essential/non-essential, how
many substitutes there are (more substitutes
the more elastic), and how much time I have
to make a decision (shorter time frame the
more inelastic, the more time, the more time
I have to change my behavior, or the more
elastic)
*Elasticity is calculated by taking the
change in quantity divided by the change in
price. The closer the number is to ZERO the
more INELASTIC (with zero being
perfectly inelastic), if the number is
GREATER THAN 1, than it is ELASTIC
(doesn’t matter if it’s positive or negative),
and if it is EXACTLY 1, then it is
considered UNIT (Unitary) elastic.
*Elasticity also effects the SLOPE of the
supply and demand curves. For both curves,
the more ELASTIC the more
HORIZONTAL the curve (a small price
change has a large quantity change), and the
more INELASTIC, the more VERTICAL
the slope of the curve (even a large price
change results in only a small quantity
change)
*Cross-Price elasticity is simply how the
elasticity of one good affects the elasticity
of another (substitutes and compliments)
f+k
f+g+i+k
g+h+i+j
f+g+h+i+j+k
f+g+h+i+j+k+l+m
To alleviate a financial crisis, a university increases student fees.
This action will increase university revenues if the price
elasticity of demand for university education is:
a.
b.
c.
d.
e.
Inelastic
Unit elastic
Elastic
Equal to the price elasticity of supply
Equal to one
The price of an airline ticket is typically lower if a traveler buys
the ticket several weeks before the flight’s departure date rather
than on the day of the departure. This pricing strategy is based on
the assumption that:
A.) Travelers are not aware of how airline prices change
across time
B.) Travelers do not have alternative modes of
transportation
C.) Travelers will pay any price to travel as the departure
date approaches
D.) The marginal cost of the last few seats on an airplane
is higher than that for the first few seats
E.) Traveler’s demand comes less elastic as the departure
date approaches
Assume that demand for bottled water is relatively price elastic.
An increase in supply of bottled water will result in which of the
following?
A.) A decrease in price, leading to an increase in total
revenue
B.) A decrease in price, leading to a decrease in total
revenue
C.) An excess supply of bottled water
D.) An excess demand of bottled water
E.) A relatively small decrease in price and no change in
equilibrium quantity
Concept/Topic/Term:
Definition Questions:
Application Questions:
Assume that the price of good X decreases form $10 to $9 per
unit and that the quantity demanded of good X increases from 25
to 30 units. In this price range, the demand for good X is:
A.)
B.)
C.)
D.)
E.)
Elasticity of Supply
Elasticity of supply:







How producers react to changes
in price
Elastic = producers can/will
change their production
Inelastic = producers can’t/won’t
change their production
***All producers would like to
be more elastic, however,
changing production in the shortrun is limited to changing labor
Short-Run versus Long-Run
(time perspective)
Fixed versus variable costs
Businesses/Producers would
love to be more elastic (be able
to CHANGE THEIR
PRODUCTION), but because in
the short-run at least ONE factor
is FIXED (like the size of my
store/restaurant), producers are
usually somewhat inelastic
(can’t change), and the only
thing they CAN CHANGE in the
short-run is LABOR.
Inelastic
Elastic
Unit elastic
Perfectly inelastic
Perfectly elastic
Which of the following must be true if the revenues of wheat
farmers increase when the price of wheat increases?
a.
b.
c.
d.
The supply of wheat is price elastic.
The supply of wheat is income elastic.
The supply of wheat is income inelastic.
The demand for wheat is price elastic.
e.
The demand for wheat is price inelastic.
If a store raises its prices by 20 percent and its total revenue
increases by 10 percent, the demand it faces in this price range
must be
A.) Inelastic
B.) Elastic
C.) Unit elastic
D.) Perfectly elastic
E.)Perfectly Inelastic
Assume that the price elasticity of demand for good X is constant
and equal to 0.5 and the price elasticity of demand for good Y is
constant and equal to -2. Assume that goods X and Y have
identical upward-sloping elastic supply curves. If a per-unit
excise tax of the same amount is levied on good X and on good
Y, which of the following would be true?
A.) The percentage decrease in the quantity of
good X demanded would be greater than
the percentage decrease in the quantity of
good Y demanded
B.) The tax share paid by consumers of good
X would be relatively higher than that paid
by consumers of good Y
C.) The tax share paid by consumers of good
Y would be relatively higher than that paid
by consumers of good X
D.) The tax share paid by sellers of good Y
would be relatively lower than that paid by
the sellers of good X
E.) The tax share paid by sellers of goods X
and Y would be the same