AP Microeconomics (section 9)

If price goes up for a product, consumers will buy less of that product and more of another substitute product-with a possibly cheaper price (and vice versa)

the change in quantity of a good demanded that results from a change in the overall purchasing power of the consumer's income due to a change in the price of that good.

Income increases, then the demand of the consumer with a higher purchasing power increases (demand curve shifts up/right)
Income decreases, the demand of the consumer with a less purchasing power will decrease (demand curve shifts down/left)

Income increases, quantity demanded decreases because the good is INFERIOR (snob value-wants to receive a better product)
Income decreases, quantity demanded increases because the inferior good becomes MORE VALUABLE (snob value deteriorates- can't afford to be choosy)

INFERIOR GOOD
u-shaped curve facing the positive y-axis (straight budget line at maximum quantity point)

"SNOB VALUE"- straight line at minimum quantity point
c-shaped curve/ u-shaped curve facing away from the positive y-axis

ratio (% change in quantity/% change in price) as we move along the demand curve. (NEVER NEGATIVE)

% change in quantity= change in quantity/initial quantity before change
% change in price= change in price/initial price before change
OR MIDPOINT METHOD

[(Q2-Q1)/(Q1+Q2)/2]/[(P2-P1)/(P1+P2)/2]

quantity demanded does not respond at all to the changes in price (PRICE CHANGES QUANTITY DOES NOT)
VERTICAL LINE

sensitive to price change
Any price increase will cause the quantity demanded to drop to zero
HORIZONTAL LINE

Price elasticity of demand > 1
Downwards sloping (at a greater angle than unit-elastic and inelastic)

Price elasticity < 1
Downwards sloping (to a lesser degree)

Price elasticity = 1
Downwards sloping (at a greater angle than inelastic, but less than elastic)

the total value of sales of a good or service
= P*Q

After a price increase, fewer units are sold, which tends to LOWER revenue

After a price increase, each unit sold sells at a higher price, which tends to RAISE revenue

Point on line where elasticity is equal to 1, unit-elastic.
Point on line that is greater than 1, elastic.
Point on line that is less than 1, inelastic.

The curve is u-shaped faced downwards towards the positive x axis (INELASTIC=RIGHT, UNIT ELASTIC= MIDDLE, ELASTIC= LEFT)

SPLAT
many vs little Substitutes, large vs small Proportion of income/budget, Luxury vs necessity, Addictive, a lot vs a little Time

shows how sensitive a product is to a change in price of ANOTHER good
=(% change in quantity of good A demanded)/(% change in price of good B)

NEGATIVE= complements
POSITIVE= substitutes
0=N.R.

shows how sensitive a product is to a CHANGE IN INCOME
=(% change in quantity)/(% change in income)

NEGATIVE= inferior good
POSITIVE= normal good
0=N.R.

Elasticity of supply shows how sensitive producers are to a change in price (based on time limitations- producers need time to produce more)
=(% change in quantity supplied)/(% change in price)

Changes in the price of the good have no effect on the quantity supplied
VERTICAL LINE

If quantity supplied is zero below some price and infinite above that price.
HORIZONTAL LINE

the maximum price at which he or she would buy for a good that they desire or need

net gain to an individual buyer from the purchase of a good
the difference between the buyer's willingness to pay and the price paid

(Total consumer surplus is the sum of individual consumer surpluses of all the buyers of a good in a market)

refers to both individual and total consumer surplus (Top area of triangle on graph)

Fall in price increases consumer surplus
Rise in price decreases consumer surplus
REALLOCATING CONSUMPTION LOWERS CONSUMER SURPLUS

the lowest price at which he or she is willing to sell a good

net gain to an individual seller from selling a good
difference between the price received and the SELLER'S COST

(Total producer surplus- sum of the individual producer surpluses of all the sellers of a good in a market)

refers to both individual and total producer surplus (bottom area of triangle on graph)

Rise in price increases producer surplus
Decrease in price decreases producer surplus (positive correlation)
REALLOCATING SALES LOWERS PRODUCER SURPLUS

The sum of consumer and producer surplus
Consumer surplus and producer surplus' borders meet at equilibrium price and quantity (demand and supply curves meet)

rises more than in proportion to income (unfair to the high-income tax payers)

rises less than in proportion to income (unfair to the low-income tax payers)

tax on sales of a particular good or service
the demand or supply curve, depending on the scenario, will shift the same amount that excise tax imposes

the decrease in total surplus resulting from the tax (and surplus or shortage from price floors and ceilings), minus the tax revenues generated.

the change in total utility generated by consuming ONE ADDITIONAL UNIT of that good or service.

shows relationship between marginal utility and how it depends on the quantity of a good or service consumed.
(downwards sloping-diminishing marginal utility)

each successive unit of a good or service consumed adds less to total utility than does the previous unit.

limits the cost of a consumer's consumption bundle to no more than the consumer's income.

additional utility from spending one more dollar on that good or service.
Marginal utility per one unit divided by the change in price from one unit to the next.

a measure of personal satisfaction

in order to maximize utility, a consumer must equate the marginal utility per dollar spent on each good and service
MUc/Pc=MUc/Pc