Jason Majewski - Quia



Unit II – Nature and Functions of Product Markets

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 in bold)

Law of Demand Quantity Demanded Demand

Demand Schedule Demand Curve Determinants of Demand

Normal Goods Inferior Goods Substitute Goods

Complementary Goods Law of Supply Quantity Supplied

Supply Supply Schedule Supply Curve

Determinants of Supply Market Equilibrium Surplus

Shortage Disequilibrium Elasticity

Total Revenue Test Perfectly Inelastic Inelastic

Unit Elastic Elastic Perfectly Elastic

Determinants of Elasticity

Numbers and Formulas:

Price Elasticity of Demand

Cross Price Elasticity

Income Elasticity of Demand

Price Elasticity of Supply

Visuals:

Supply/Demand Model and manipulations

AP Microeconomics Activity Book (answers to Unit 1 and 2 M/C sample questions for Unit 2A)

Unit 1:

4. C

6. B

8. B

30. E

31. B

Unit 2:

2. D 10. A

3. A 13. C

4. D 15. E

7. C 17. E

8. E 19. A

Unit IIA Calendar:

|Monday |Tuesday |Wednesday |Thursday |Friday |

|September 23 |24 |25 |26 |27 |

| | | | |Markets |

| | | | | |

| | | | |Hwk: Read Module 7 |

|30 |October 1 |2 |3 |4 |

|No School |Markets |Determinants |Determinants |Determinants |

| | | | | |

| |Hwk: AP Micro Activity 1-8 |Hwk: Read Module 6 | |Hwk: AP Micro Activities |

| |and Read Module 5 | | |1-5, 1-7, 1-9 |

|7 |8 |9 |10 |11 |

|S&D Model |Markets Interact |No School |Elasticity |Elasticity |

| | | | | |

|Hwk: AP Micro Activity 2-1 |Hwk: Read Module 46 | |Hwk: Read Modules 47-48 |Hwk: AP Micro Activities |

| |(p.461-464 only) | | |2-3, 2-4, 2-5 |

|14 |15 |16 |17 |18 |

|No School |Elasticity |Unit 2A Test | | |

| | | | | |

| |Hwk: Build your Human | | | |

| |Capital! | | | |

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

Activity 1-8

1. $0.25, 200

2. 150, 250, Surplus of 100, Decrease, $0.25, 200, 200, Price, Quantity Demanded, Increased, 50, Quantity Supplied, Decreased, 50

3. 250, 150, Shortage of 100, Increase, $0.25, 200, 200, Quantity Demanded, Decreased, 50, Quantity Supplied, Increased, 50

4.

a. True. The point on the demand and supply curves is the same, so the quantity demanded equals the quantity supplied at the equilibrium price. Quantities refer to points on the graph.

b. False, Demand refers to the entire demand curve and supply refers to the entire supply curve. The two curves are different, therefore supply does not equal demand. At the equilibrium price, the quantity demanded equals the quantity supplied.

5. $0.30, 150, Underlying conditions, Supply, Increased, Decreased, Decreased, Decreased

6. $0.25, 100, Underlying Conditions, Demand, Decreased, Decreased

Activity 1-5

1. Less, Change in Demand, Left, A

2. More, Change in Demand, Right, C

3. Less, Change in Demand, Left, A

4. Less, Change in Demand, Left, A

5. Less, Change in Quantity Demanded, No Shift, B

6. More, Change in Demand, Right, C

7. More, Change in Demand, Right, C

8. More, Change in Demand, Right, C

9. Headline #6 10. Headline #7 and #8 11. Headline #2 12. Headline #1 13. Headline #3 and #4

Activity 1-7

1. More, Change in Supply, Right, C

2. More Change in Supply, Right, C

3. More, Change in Quantity Supplied, No Shift, B

4. Less, Change in Supply, Left, A

5. More, Change in Supply, Right, C

6. Less, Change in Supply, Left, A

7. Less, Change in Quantity Supplied, No Shift, B

8. More, Change in Supply, Right, C

9. Headlines #1, #4, #5 10. Headline #2 11. Headline #4 and #6 12. Headline #8

Activity 1-9

1. B 2. C 3. A 4. B 5. D 6. C 7. Rises, Falls, A hurricane destroyed the apples 8. Rises, Rises, Washington farmers grow more apples because the price is higher. To do this, they must buy more land. 9. Rises, Rises, Consumers substitute Washington apples for Connecticut apples. 10. Rises, Rises, Consumers substitute pears for apples 11. Rises, Falls, Apples are used to bake pies. Higher priced apples increase the cost of producing pies

Activity 2-1

1. Demand: No Change, Decrease, Decrease, Decrease Supply: Increase, No Change, No Change, No Change Equilibrium Price: Decrease, Decrease, Decrease, Decrease Equilibrium Quantity: Increase, Decrease, Decrease, Decrease

2. Demand: Decrease, Increase, Decrease, Decrease Supply: No Change, No Change, No Change, No Change Equilibrium Price: Decrease, Increase, Decrease, Decrease Equilibrium Quantity: Decrease, Increase, Decrease, Decrease

3.

a. An Increase in the annual income of many pajottians and lower interest rates on loans to buy houses

b. Increase, Higher

c. Increase, Increase

Activity 2-3

1. Percentage change in number of items stocked/percentage change in pay

2. Less than, More than

3. -0.18

4. -1.22

5. -0.05

6. -0.05

7. The unit change in Q in response to a given dollar change in P will the same all along a downward sloping, straight line demand curve because the curve has constant slope. You saw above that each $1 increase in P results in a 20-unit decrease in Q, no matter where you are on the demand curve. However, elasticity is quite different. How large a percentage change in P results from a $1 increase in P depends on where you are on the demand curve. If the initial P is a small value (like $1), then a $1 increase is a larger percentage change in P. If the initial P is a large value like ($5), then a $1 increase is a smaller percentage change in P. The same is true for a 20 unit decrease in Q. If the initial Q is large (like 180), then you have a smaller percentage change in Q. But if the initial Q is small (like 100), then you have a large percentage change in Q. You will find that the value of Ed varies all along the length of the downward sloping, linear demand curve. At a higher price, a given percentage change in P results in a larger percentage in Q. At a low price, that same percentage change in P results in a smaller percentage change in Q. If the demand curve is a downward sloping straight line, the upper half of the demand curve is elastic, the lower half is inelastic, and the midpoint is unitary elastic.

8. Horizontal curve

9. Vertical curve

10. +0.6, -0.4, Normal, Inferior

11. +0.75, -0.50, +0.00, Substitute, Complementary, Unrelated

12. +1.6, +1.0, +0.6

Activity 2-4

1. B, Substitute

2. No, Inelastic

3. 3, 1, 2, Rationale: the smaller the number of substitute goods, the less elastic is the demand for that good. Insulin has no substitutes. There are more substitutes for Granny Smith apples than for running shoes because Granny Smith is a particular type of apple, and running shoes include all running shoes. This is why the demand for Granny Smith apples is most elastic.

4. More

5. A, Larger

6. 3, 1, 2, Rationale: Autos take the largest proportion of income, then clothing, then chewing gum.

7. Large

8. Inelastic

9. More

10. Demand is more inelastic for items that are necessities and more elastic for items that are durable or luxuries. The longer the time frame, the more elastic is the demand for a good or a service.

11. Negative

12. Positive, Negative

Activity 2-5

1.

a. Inelastic, Rise

b. Unit elastic, Not change

c. Elastic, Fall

d. Elastic, Rise

e. Inelastic, Fall

f. Unit elastic, Not change

2.

a. 150

b. 102

c. TR decreased when P increased over this price range.

d. Elastic

What you should know at the end of this unit?

• According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand slopes downward. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.

• Demand and supply together set the price of a good and quantity sold.

• In addition to price, other non-price determinants impact how much consumers want to buy and how much producers want to sell, shifting the demand and supply curves.

• When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise.

• The price elasticity of demand measures how much quantity demanded responds to changes in the price. The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.

• The price elasticity of demand is anywhere in the range from perfectly inelastic, meaning quantity demanded is unaffected by the price and the demand curve is a vertical line, to perfectly elastic, meaning there is a unique price at which consumers will buy as much or as little as they are offered and the demand curve is a horizontal line.

• If the price elasticity of demand is greater than 1, demand is elastic; if it is less than 1, demand is inelastic; if it is exactly 1, demand is unit-elastic. If price elasticity of demand is elastic, total revenue falls when the price increases and rises when the price decreases. If price elasticity of demand is inelastic, total revenue rises when the price increases and falls when the price decreases.

• The price elasticity of demand depends on the following determinants: whether there are close substitutes, the necessity of the good, price to budget percentage and the time horizon.

• Cross price elasticity of demand measures the effect of a change in one good’s price on the quantity of another good demanded. The income elasticity of demand is the percent change in income. The price elasticity of supply is the percent change in the quantity of a good supplied divided by the percent change in the price.

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