AP Economics Exam Review Project – Terms 17-24

1. AP Economics Exam Review Project – Terms 17-24 By: George Daoud B7

2. #17- Substitute vs. Complimentary Goods • Substitute- Goods which, as a result of changed conditions, may replace each other in use or consumption. • Ex. Classic examples of substitute goods include margarineand butter, tea and coffee. One good can be substituted for another, the demandfor the two kinds of good will be bound together by the fact that customers can trade off one good for the other if it becomes advantageous to do so. • Complimentary- A good with a negative cross elasticity of demand. This means a good's demand is increased when the price of another good is decreased. • Ex. An example of this would be the demand for hotdogs and hotdog buns. If the price of hotdog buns were to decrease by some amount, this would result in a higher quantity of hotdogs demanded.

3. #18- Law of Supply • A law stating that, all other things unchanged, an increase in price results in an increase in quantity supplied. • Ex. This means that producers are willing to offer more products for sale on the market at higher prices by increasing production as a way of increasing profits. • If ten people want to buy an apple, and there's only one apple, the sale will be based on the level of demand for the apple. The supply function requires more apples, which generates more production to meet demand.

4. #19- Supply Curve (Schedule) • A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied. Firms will produce additional output as long as the cost of producing an extra unit of output is less than the price they will receive. • Ex. The price of oranges increases, the quantity supplied of oranges then increases. This kind of behavior on the part of sellers is in accordance with the law of supply.

5. #20- Determinates of Supply 1) Technology changes -Technology aids a producer in minimizing his cost of production; mass production is possible with technology.2) Resource supplies -The producer also has to pay for other resources such as raw materials and labor. If his money is short on supplying a certain number of products because of an increase in resource supplies, then he has to reduce his supply. 3) Tax/ Subsidy -A producer aims to minimize his profit, but an increase in tax will only increase his expenses, decreasing his capacity to buy resource supplies and forcing him to reduce his supply. 4) Price of other goods produced -A producer may not only produce on product but other products as well. A producer's money is limited and if he increases his supply in one product, he would have to decrease his supply in the other product, not unless his sales increase.

6. #21- Market Equilibrium vs. Market Disequilibrium • ME- A situation in which the supply of an item is exactly equal to its demand. Since there is neither surplus nor shortage in the market, price tends to remain stable in this situation. • Ex. When the supply and demand curves intersect, the market is in equilibrium. • MD-  This is when the demand and supply curve is not crossing. This can mean supply is less than demand or vice versa. In a market where supply is less than demand the price of goods and services eventually will go up until demand is less and the market is in equilibrium. In a market where there is an oversupply of goods and services the price eventually will go down until demand curve cross the supply curve. • Ex. The inherent tendency to change occurs because a surplus causes the price to decline and a shortage causes the price to rise.

7. #22- Shortage vs. Surplus • A shortage exists at a market price when the quantity demanded exceeds the quantity supplied. • Ex. Excess demand for a product • A surplus exists at a market price when the quantity supplied exceeds the quantity demanded. • Ex. Excess supply for a product

8. #23- Consumer Surplus vs. Producer Surplus • CS- The difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay. • Ex. Man wants to buy an apple, stand sells for 35 cents, he’s willing to buy at 50 cents, consumer surplus is 15 cents. • PS- The difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price. • Ex. Man values CD at $2, his friend values it at $10. The man sells it to his friend for $5, and gains a consumer surplus of $3.

9. #24-Elasticity (Elastic vs. Inelastic) • Elastic- Atype of demand that will rise or fall depending on the price of the good. • Ex. If the price of candy is around $1, most people will buy the candy and it will be high in demand. However, if that same candy bar's price rose up to $4, most people would not buy the candy. • Inelastic- People will buy goods with an inelastic demand no matter what the price is. • Ex. People complain about gas prices, yet they still buy it because they need it, even if it $3 or $4 a gallon.