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📉 Unit 2 · Supply and Demand 🏠 Unit Hub 🗂 Flashcards 🗺 Cheat Sheet ⭐ Essentials 🎨 Visual Review 📝 MC Practice ✎ FRQ Practice

AP Microeconomics Unit 2 Essentials

The must-know terms and big ideas for Unit 2: Supply and Demand. Every vocabulary word and concept you need to master.

← Back to Unit 2 hub
Big Idea 1
Elasticity measures how sensitive markets are to change
Elasticity standardizes responsiveness as a percentage ratio so it can be compared across goods of very different prices. Whether demand or supply is elastic or inelastic determines what happens to total revenue when price changes, and — critically — who bears the burden of a tax.
Elasticity Responsiveness Total Revenue
Big Idea 2
The competitive equilibrium maximizes total surplus
Consumer surplus and producer surplus together measure the total gains from trade in a market. Total surplus is maximized exactly where supply meets demand — any quantity above or below that point leaves gains from trade on the table.
Surplus Allocative Efficiency Equilibrium
Big Idea 3
Any policy that moves quantity away from equilibrium creates deadweight loss
Price ceilings, price floors, and excise taxes all push quantity away from the efficient, surplus-maximizing level. The resulting deadweight loss is the unavoidable cost of intervention — even when the intervention has a worthy goal, like protecting renters or raising tax revenue.
Deadweight Loss Price Controls Taxes
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Price elasticity of demand
The percentage change in quantity demanded divided by the percentage change in price; measures how responsive buyers are to a price change.
Elasticity
Elastic demand
Elasticity coefficient greater than 1 in absolute value — quantity demanded is highly responsive to price changes.
Elasticity
Inelastic demand
Elasticity coefficient less than 1 in absolute value — quantity demanded is not very responsive to price changes.
Elasticity
Unit elastic
Elasticity coefficient equal to exactly 1 — the percentage change in quantity demanded equals the percentage change in price.
Elasticity
Determinants of elasticity
Factors that make demand or supply more or less elastic: availability of substitutes, necessity vs. luxury, time horizon, and share of budget.
Elasticity
Total revenue test
A method of inferring elasticity from how total revenue (price × quantity) changes when price changes — revenue and price move in opposite directions when demand is elastic, same direction when inelastic.
Elasticity
Cross-price elasticity of demand
Measures how the quantity demanded of one good responds to a price change in another good; positive values indicate substitutes, negative values indicate complements.
Elasticity
Income elasticity of demand
Measures how quantity demanded responds to a change in income; positive values indicate a normal good, negative values indicate an inferior good.
Elasticity
Price elasticity of supply
The percentage change in quantity supplied divided by the percentage change in price; measures how responsive sellers are to a price change.
Elasticity
Consumer surplus
The difference between what consumers are willing to pay and what they actually pay; the area below the demand curve and above the price line.
Surplus & Efficiency
Producer surplus
The difference between what producers actually receive and the minimum they would accept; the area above the supply curve and below the price line.
Surplus & Efficiency
Total surplus
The sum of consumer and producer surplus; maximized at the competitive market equilibrium.
Surplus & Efficiency
Allocative efficiency
A condition where resources are allocated so that total surplus is maximized; occurs where marginal benefit equals marginal cost.
Surplus & Efficiency
Deadweight loss
The reduction in total surplus that results from a market producing at a quantity other than the efficient, equilibrium quantity.
Surplus & Efficiency
Price ceiling
A legal maximum price; if set below equilibrium, it is binding and causes a persistent shortage.
Price Controls
Price floor
A legal minimum price; if set above equilibrium, it is binding and causes a persistent surplus.
Price Controls
Binding price control
A price ceiling or floor that actually changes market behavior because it is set on the "wrong" side of equilibrium; non-binding controls have no effect.
Price Controls
Excise tax
A per-unit tax on the production or sale of a specific good; shifts the supply curve up by the amount of the tax.
Taxes & Subsidies
Tax incidence
The division of a tax's burden between buyers and sellers; the relatively more inelastic side of the market bears a larger share.
Taxes & Subsidies
Subsidy
A per-unit payment to producers (or buyers) that effectively shifts supply down (or demand up), increasing quantity above the efficient level and creating deadweight loss.
Taxes & Subsidies