AP MICROECONOMICS UNIT #2

INTRODUCTION TO MARKETS

GEORGIA PERFORMANCE STANDARDS IN THIS UNIT

Microeconomic Concepts

SSEMI2 The student will explain how the Law of Demand, the Law of Supply, prices, and profits

work to determine production and distribution in a market economy.

a. Define the Law of Supply and the Law of Demand.

b. Describe the role of buyers and sellers in determining market clearing price.

c. Illustrate on a graph how supply and demand determine equilibrium price and quantity.

d. Explain how prices serve as incentives in a market economy.

SSEMI3 The student will explain how markets, prices, and competition influence

economic behavior.

a. Identify and illustrate on a graph factors that cause changes in market supply and demand.

b. Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.

c. Define price elasticity of demand and supply.

International Economics

SSEIN1 The student will explain why individuals, businesses, and governments

trade goods and services.

c. Explain the difference between balance of trade and balance of payments.

SSEIN2 The student will explain why countries sometimes erect trade barriers and

sometimes advocate free trade.

a. Define trade barriers as tariffs, quotas, embargoes, standards, and subsidies.

b. Identify costs and benefits of trade barriers over time.

c. List specific examples of trade barriers.

e. Evaluate arguments for and against free trade.

SSEIN3 The student will explain how changes in exchange rates can have an

impact on the purchasing power of individuals in the United States and in other

countries.

a. Define exchange rate as the price of one nation’s currency in terms of another nation’s currency.

b. Locate information on exchange rates.

c. Interpret exchange rate tables.

d. Explain why, when exchange rates change, some groups benefit and others lose.

COLLEGE BOARD STANDARDS IN THIS UNIT

II. The Nature and Functions of Product Markets (55–70%)

A. Supply and demand (15–20%)

1.Market equilibrium

2.Determinants of supply and demand

3.Price and quantity controls

4.Elasticity

a.Price, income, and cross-price elasticities of demand

b.Price elasticity of supply

5.Consumer surplus, producer surplus, and allocative efficiency

6.Tax incidence and deadweight loss

B. Theory of consumer choice (5–10%)

1.Total utility and marginal utility

2.Utility maximization: equalizing marginal utility per dollar

3.Individual and market demand curves

4.Income and substitution effects

I. Basic Economic Concepts ...... (8–14%)

C. Comparative advantage, absolute advantage, specialization, and trade

READING ASSIGNMENTS

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  1. Chapter 3: pp. 44-50.
  2. Chapter 3: pp. 50-53.
  3. Chapter 3: pp. 53-61.
  4. Chapter 18: pp. 339-348.
  5. Chapter 18: pp. 348-352.
  6. Chapter 18: pp. 352-356.
  7. Chapter 19: pp. 359-369.
  8. Chapter 29: pp. 570-578.
  9. Chapter 35: pp. 682-693.
  10. Chapter 36: pp. 696-700.
  11. Chapter 36: pp. 700-714.

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LECTURES

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  1. Introduction to Markets and Demand.
  2. Supply.
  3. Equilibrium and Changes in Equilibrium.
  4. Elasticity of Demand and Supply.
  5. Cross Elasticity and Income Elasticity.
  6. Consumer surplus, producer surplus, total surplus.
  7. Utility.
  8. Implications of taxation.
  9. Implications of international trade.
  10. Exchange rates.

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TEXTBOOK STUDY QUESTIONS

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  1. Chapter 3: 3, 6, 8, 9, 14.
  2. Chapter 18: 2, 3, 4, 5, 8, 9, 10, 15.
  3. Chapter 17: 1, 4, 7, 13.
  4. Chapter 29: 7, 9.
  5. Chapter 35: 6, 7.
  6. Chapter 36: 2, 3, 7, 10.

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UNIT GRAPHS

See handout

REFLECTION PAPERS

See handout

QUIZZES

  1. Demand. (5)6. Consumer/Producer/Total Surplus.(10)
  2. Supply. (6)7. Total/Marginal Utility and max. (11)
  3. Equilibrium. (7)8. Implications of Taxation. (12)
  4. Price Elasticity of Demand. (8)9. Implications of International Trade. (13)
  5. Cross/Income Elasticity. (9) 10. Exchange rates. (14)

TEST PRACTICE

  1. Sample Multiple Choice.
  2. Sample Free Response.

TESTS

Unit Test #2

OBJECTIVES

  1. Distinguish between individual demand and market demand.
  2. Distinguish between individual supply and market supply.
  3. Distinguish between a change in demand and a change in quantity demanded.
  4. Distinguish between a change in supply and a change in quantity supplied.
  5. Discuss how prices ration scarce resources and goods.
  6. Discuss the impact of taxes on market activity.
  7. Discuss the impact of tariffs and quotas on market activity.
  8. Analyze the workings of exchange rates.

VOCABULARY

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Markets

Demand

Quantity demanded

Law of demand

Determinants of demand

Substitute good

Complimentary good

Normal good

Inferior good

Supply

Quantity supplied

Law of supply

Determinants of supply

Equilibrium

Surplus

Shortage

Rationing fun. of prices

Price ceiling

Price floor

Elasticity of demand

Elastic demand

Inelastic demand

Unit elastic demand

Total revenue

Elasticity of supply

Market period

Short-run

Long-run

Utility

Total utility

Marginal utility

Law of dim. Marg. Util.

Utility maximizing rule

Consumer surplus

Producer surplus

Total surplus

Tax

Tax incidence

Deadweight loss

Laffter Curve

World price

Domestic price

Export supply curve

Import demand curve

Tariff

Revenue tariff

Protective tariff

Import quota

Non tariff barrier

Balance of payments

Balance of trade

Trade deficit

Trade surplus

Current account

Capital/financial acct.

Exchange rates

Flexible exchange rates

Fixed exchange rates

Gold standard

Devaluation

IMF

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GRAPH/CHART/APPLICATION SKILLS

  1. Interpret and analyze supply and demand graphs including all changes, price ceilings and floors, etc.
  2. Compute and classify elasticities of supply and demand using the midpoint formula.
  3. Compute total revenue and use it to test for elasticity.
  4. Compute total and marginal utility from a chart and from a graph.
  5. Use the utility-maximizing rule to analyze expenditures.
  6. Compute consumer, producer, and total surplus from a graph.
  7. Interpret and analyze supply and demand graphs with taxes.
  8. Interpret and analyze supply and demand graphs with world prices on them and also tariffs and import quotas.
  9. Interpret and analyze exchange rate graphs.

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