Download Unit 2B Overview

Unit IIB – Nature and Functions of Product Markets (5-10% of AP Microeconomics exam)
Objectives:
 NCEE Content Standard 7 – Markets exist when buyers and sellers interact. This interaction
determines market prices and thereby allocates scarce goods and services.
 NCEE Content Standard 8 – Prices send signals and provide incentives to buyers and sellers. When
supply or demand changes, market prices adjust, affecting incentives.
 NCEE Content Standard 9 – Competition among sellers lowers costs and prices, and encourages
producers to produce more of what consumers are willing and able to buy. Competition among
buyers increases prices and allocates goods and services to those people who are willing and able to
pay the most for them.
Vocabulary: (Big Topics are in bold)
Welfare Economics
Willingness to pay
Cost
Producer Surplus
Equity
Deadweight Loss
Incidence of Tax
Elasticity
Utility
Total Utility
Marginal Utility
Constrained Utility Maximization
Normal Good
Inferior Good
Substitution Effect
Price Ceiling
Consumer Surplus
Efficiency
Excise Tax
Budget Constraint
Marginal Utility Diminishing
Utility Maximizing Rule
Income Effect
Price Floor
Numbers and Formulas:
MUx/Px = MUy/Py
Visuals:
Consumption Possibility Frontier
Supply and Demand Model
 Consumer and Producer Surplus
 Deadweight Loss
 Taxes and Elasticity
 Price Controls
AP Microeconomics Activity Book (Answers to Unit 1 and Unit 2 m/c sample questions for Unit 2B)
Unit 1:
32. C
33. D
Unit 2:
1. E
5. D
6. C
9. D
11. A
12. E
14. A
16. B
18. B
22. D
23. A
Unit IIB Calendar:
Monday
7
Tuesday
Wednesday
8
Budgets
14
Choice cont.
Choice cont.
Hwk: AP Micro
Activities 2-2
Hwk: Read
Module 49
Taxes
Thursday
9
Budgets cont.
Friday
10
Choice Theory
11
No School
Hwk: Read
Hwk: Unit 2B RP
Module 51 and 46 due Tuesday,
(p.458-460 only)
11/22
15
16
17
Surplus
Surplus cont.
Taxes
Hwk: AP Micro
Hwk: Read
Activities 1-4, 1-6, Module 50
2-9
21
22
23
Price Controls
No School
No School
Hwk: Read
Hwk: AP Micro
Module 8 and AP
Activity 2-7
Micro Activity 2-6
28
29
Price Controls
Unit 2B Test
30
24
December 1
18
25
No School
2
Hwk: Review for
Test
What should you know at the end of this unit?
 The income effect, the substitution effect and the law of diminishing marginal utility can explain why a
demand curve is downward sloping.
 The law of diminishing marginal utility states that as more of a good or service is consumed in a given period
of time, the additional satisfaction declines. Utility Maximizing Rule: MUx/Px = MUy/Py
 Consumer surplus equals buyers’ willingness to pay for a good minus the amount they actually pay for it; and
it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by
finding the area below the demand curve and above the price.
 Producer surplus equals the amount sellers receive for their goods minus their costs of production; and it
measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding
the area below the price and above the supply curve.
 An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient.
The equilibrium of supply and demand maximizes the sum of consumer and producer surplus. Markets do not
allocate resources efficiently in the presence of market failures such as market power or externalities as well as
price controls and taxes.
 A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and
producer surplus usually exceeds the revenue raised by the government. The fall in total surplus (CS, PS and
Tax Revenue) is called the deadweight loss of the tax.
 A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the
market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this
sense, buyers and sellers share the tax burden.
 The incidence of a tax depends on the price elasticities of supply and demand. The burden tends to fall on the
side of the market that is less elastic because that side of the market can respond less easily to the tax by
changing the quantity bought or sold. Because the elasticities of supply and demand how much market
participants respond to market conditions, larger elasticities imply larger deadweight losses.

A price ceiling is a legal maximum on the price of a good or service. If the price ceiling is below the
equilibrium price, the quantity demanded exceeds quantity supplied, resulting in a shortage.

A price floor is a legal minimum on the price of a good or service. If the price floor is above the
equilibrium price, the quantity supplied exceeds the quantity demanded, resulting in a surplus.