AP Econ Section 2 Review - Sunny Hills High School

curves slope downward, mearfng that as price decreases,
rhe quantiry demanded increases.
3. A movement along the demand curve occurs when
the price changes ald causes a change in the quantity
demanded. When economists talk of changes in
demand, they mean shifts of the demand curve-a
change in the quantity demanded at any given
price. An increase in demand causes a rightward shift
of the demand curve. A decrease in demand causes a
leftward shift.
4. There are five main factors that shift the demand curve:
r A change in the prices ofrelated goods, such as substitutes
or complernents
r A change in income: when income rises, the demand
For normal goods increases and the demand for inferior
goods decreases
. A change in tastes
r A change in expectations
r A change in the number of consumers
5. The cupply schedule shows the quantity supplied at
each price and is represented graphically by a supply
curve. Supply curves usually slope upward.
6. A movernent along dre supply curve occurs when the
price changes and causes a change in the quantity supplied.
Vhen economists talt ofchanges in supply, they
mean shifts of the supply curve-a change in the quantity
supplied at any given price. An increase in supply
causes a rightward shift ofthe supply curve. A decrease
in supply causes a lefrward shift.
7. There are five main factors that shift the supply curve:
r A change in input prices
r A chalge in the prices ofrelated goods and services
r A change in technology
r A chalge in expectations
r A change in the nunber ofproducers
8. The supply and demand model is based on the principle
that the price in a market moves to its equilibrium
price, or market-clearing price, the price at which the
quantity demanded is equal to the quantiry supplied.
This quantiry is the equilibriurn quantity. when the
price is above its market-clearing level there is a surplus
that pushes the price down. When the price is
below its market-clearing level, there is a shortage that
pushes the price up.
9. An increase in demand increases both the equilibrium
price and the equilibrium quantity; a decrease in demand
has the opposite effect. An increase in supply reduces the
equilibrium price and increases the equilibrium quantity;
a decrease in supply has the opposite effect.
10. Shifts ofthe demand curve and the supply curve can
happen simultaneously. \Vhen they shift in opposite directions,
the change in price is predictable but the
change in quantity is not. When they shift in the sa.me
direction, the change in quantity is predictable but the
change in price is not. In general, the curve that shifts
the greater distance has a greater effect on the changes
in price and quantity.
11. Even when a market is efficient, governments often
intervene to pursue greater faimess or to please a
powerful interest group. Interventions carl take the
form ofprice controls or quantity controls, both
ofwhich generate predictable and undesirable side eF
fects, consisting ofvarious forms ofinefficiency and illegal
activity.
12. A price ceiling, a, maximum market price below the
equilibrium price, benefits successful buyers but creates
persistent shortages. Because the price is maintained
below the equilibrium price, the quantiry demanded is
increased and the quantity supplied is decreased compared
to the equilibrium quantity. This leads to predictable
problems including iaefficient allocation to
consumers, wasted resources, and inefticiendy low
quality. It also encourages illegal activity as people tum
to black markets to get the good. Because of these
problems, price ceilings have generally lost favor as an
economic poliry tool, Bur some govemments condnue
to impose them either because they dorit understand
the effects or because the Price ceilings benefit some influential
gtoup.
13. A price floor, a minimum market price above the equilibrium
price, benefits successfirl sellers but creates a
persistent surplus: because the price is maintained
above the equilibrium price, the quantity demanded is
decreased and the quantiry supplied is increased compared
to the equiLibrium quantity. This leads to predictable
problems: inefficiencies in the form of
inefficient allocation of sales among sellers, wasted
resources, and inefticiendy high quality. ft also encourages
illegal activity and black markets. The most
well known kind ofprice floor is the "'i"i"'u- wage,
but price floors are also commonly applied to agricultural
products,
14. Quantity conrrols, or quotas, limit the quantiry ofa
good that can be bought or sold. The govemment issues
licenses to individuals, the right to sell a given quantiry
ofthe good, The owner ofa license eams a quota rent,
earnings that accrue fiom ownership ofthe right to sell
the good. It is equal to the difference between the demand
price at the quota amount, what consumers afe
willing to pay for that amount, and the supply price at
the quota amount, what suppliers are willing to arcept
for that amount. Economists say that a quota drives a
wedge between the demand price and the supply price;
this wedge is equal to the quota rent. By limiting mutually
beneficial transactions, quanriry controls generate
inefficienry. Like price controls, quantity controls lead
to deadweight loss and encourage ill egal acnviqt.
Summary 95