Jason Majewski - Quia



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 Consumer Surplus

Cost Producer Surplus Efficiency

Equity Deadweight Loss Excise Tax

Incidence of Tax Elasticity Budget Constraint

Utility Total Utility Marginal Utility Diminishing Marginal Utility Constrained Utility Maximization Utility Maximizing Rule

Normal Good Inferior Good Income Effect

Substitution Effect Price Ceiling 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 14. A

5. D 16. B

6. C 18. B

9. D 22. D

11. A 23. A

12. E

Unit IIB Calendar:

|Monday |Tuesday |Wednesday |Thursday |Friday |

|14 |15 |16 |17 |18 |

| | |Unit 2A Test |Budgets |Choice Theory |

| | | | | |

| | | |Hwk: Read Module 51 and 46 | |

| | | |(p.458-460 only) | |

|21 |22 |23 |24 |25 |

|Choice cont. |Choice cont. |Surplus |Surplus cont. |Taxes |

| | | | | |

|Hwk: AP Micro Activity 2-2 |Hwk: Read Module 49 |Hwk: AP Micro Activities |Hwk: Read Module 50 |Hwk: Economic Notebook due |

| | |1-4, 1-6, 2-9 | |on Monday |

|28 |29 |30 |31 |November 1 |

|Taxes cont. |Price Controls |Price Controls |Unit 2B Test | |

| | | | | |

|Hwk: Read Module 8 and AP |Hwk: AP Micro Activity 2-7 |Hwk: Build your Human | | |

|Micro Activity 2-6 | |Capital | | |

AP Microeconomics Resource Manual (answers to Unit 2B activities)

Activity 2-2

1. Polo Shirt Marginal Utility = 60, 40, 30, 20, 15, 10; Steaks Marginal Utility = 20, 16, 15, 14, 13, 12

2. Total Utility increases at a decreasing rate and Marginal Utility decreases

3a. Total Utility increases at a decreasing rate

3b. eventually decreases

4a. It means she receives 3 in additional utility for each dollar spent on that fourth unit.

4b. 55 = (1G)(5) + (5F)(10)

4c. No, because the MU per $1 from gas (+12) is greater than the MU per $1 from food (+1)

4d. (1) buy more units of G and fewer units of F (2) buy more units of F and fewer units of G

4e. 3, 4, 395

5. A

6. A

7. D

8. C

9. A

10. B

11. Consumer surplus is an indication that consumers are able to buy the product at a price which is lower than the price they are willing to pay. Consumers will buy more of a product when its price drops below the marginal utility of additional units. Because the lower price creates consumer surplus for these additional units, consumers will purchase more of the product.

12. You will buy fewer burgers because they are relatively more expensive than chicken sandwiches.

13. Because the price of burgers increased, chicken sandwiches are relatively less expensive. Therefore, you substitute chicken sandwiches for burgers and buy more chicken sandwiches and fewer burgers.

14. The increase in the price of burgers is the same as if you had a decrease in real income or purchasing power. Therefore, you would buy fewer burgers.

Activity 1-4

1. 150, 50, quantity demanded, 250, quantity demanded

2. Left, smaller, lower, increase, decreased

3. Right, larger, higher, increase

4. B

5. C

6. C

7. 11.25 million

8a. Decrease, Consumers will buy fewer units because of the higher price, and the consumer surplus of the units they buy will be smaller.

8b. Consumers will buy more units because of the lower price, and the consumer surplus of the units they buy will be larger.

Activity 1-6

1. 200, 250, quantity supplied, 150, quantity supplied

2. Left, smaller, higher, increase

3. Right, larger, lower, decrease

4. A

5. D

6. My friend does not understand the difference between a change in supply and a change in quantity supplied.

7. 20 million

8a. Increase, producers are putting more units on the market and receiving a higher price.

8b. Decrease, producers are putting fewer units on the market and receiving a lower price.

Activity 2-6

3. 0.10, 0.05

4. 0.05, 0.10

5. More

6. Less

8. 0.15, 0.00

9. 0.00, 0.15

10. Inelastic

11. Elastic

12. Elastic

13. Inelastic

14. The demand for these goods is relatively inelastic. No good substitutes are available for people who are heavily dependent on these goods. Because the demand for these goods is inelastic, taxes on them generate a lot of tax revenue for government.

Activity 2-7

1. 50

2a. 120

2b. 120

3a. 160

3b. 60

3c. Shortage, 100

4a. 60

4b. 210

4c. Surplus, 150

4d. Consumer surplus decreases

4e. society is worse off

4f. Producers gain who are able to sell their product at the price floor.

Activity 2-9

1. Equilibrium quantity is where the diminishing marginal benefit (the demand curve) intersects the increasing marginal cost (the supply curve) and this occurs at the quantity of five hamburgers and a price of $6.

2. Consumer Surplus = Marginal Benefit – Price Paid; Producer Surplus = Price Received – Marginal Cost

3. Consumer Surplus + Producer Surplus = $20

4. Consumer Surplus + Producer Surpllus = $18; Since total welfare fell from 20 to 18, a deadweight loss of $2 has been created.

7. Consumer Surplus = 5000, Producer Surplus = 5000

8. A price ceiling is a maximum price set below the equilibrium price. This will create a permanent shortage of textbooks because, at the price ceiling, there are 150 textbooks demanded and only 50 supplied.

9. CS = 6250, PS = 1250, DWL = 2500

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.

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