AP Economics - Micro

Test #1 Review

The Law of Demand

Inverse relationship between price and quantity demanded

• P↓ Qd ↑
• P↑ Qd ↓

What changes demand? (5 Shifters of Demand)

1. Tastes and preferences
2. Number of consumers
3. Price of related goods- Substitutes and complements
4. Income
5. Future expectations

The Law of Supply

Direct relationship between price and quantity supplied

• P↑ Qs ↑
• P↓ Qs ↓

What changes supply? (5 Shifters of Supply)

1. Prices/availability of inputs (resources)
2. Number of producers
3. Technology
4. Government action: taxes & subsidies
5. Expectations of future profit

Production Possibilities Curve/Frontier (PPF)

• The PPF is a diagram that shows the combinations of two goods that are possible for a society to produce at full employment.

• We can use the PPF model to answer questions like:

  • How much can we produce?
  • What will it cost us to change our mix of production?
  • Does it make sense to import the goods from somewhere else?

Identify the three shifters of the PPF

1. Change in resource quantity or quality
2. Change in Technology
3. Change in Trade (Doesn’t change the amount they can produce, but it does change the amount they can consume)

Three types of PPF: Constant (The same every for every change), Decreasing, and Increasing