UNIT II: THE MARKET ECONOMY

AP Content Summary
II.I. Basic Economic Concepts (8-12 %)
A. Scarcity, choice, and opportunity cost
B. Production Possibilities Curve
C. Comparative Advantage, Absolute Advantage, Specialization, Exchange
D. Demand, Supply, and Market Equilibrium
E. Macroeconomic issues: business cycle, unemployment, inflation, growth

Straight from the horse’s mouth:

“A well-planned AP course requires an analysis of the determinants of supply and demand and the ways in which changes in these determinants affect equilibrium price and output. In particular, the course helps students make the important distinction between movements along the curves and shifts in the curves. The course also emphasizes the impact of government policies such as price floors and ceilings, excise taxes, tariffs, and quotas on the free market price and quantity exchanged. The concepts of consumer surplus and producer surplus should also be introduced. Students are expected to comprehend and apply the concepts of price, cross-price, income elasticities of demand, and the price elasticity of supply.”

Primary and Supporting Concepts:

Module(Krugman) / Chapter (McConnell) / Concepts
5 / 3 / Demand (D)
-Determinants of Demand
-Change in Demand versus Change in Quantity Demanded (QD)
-Law of Demand
6 / 3 / Supply (S)
-Determinants of Supply
-Change in Supply versus Change in Quantity Supplied (QS)
-Law of Supply
6, 7, 8, 9 / 3 / Equilibrium (E)
-Laws of Supply and Demand (relationships)
-Shortages and Surplus (Law of Market Forces)
-Ceilings and Floors

Topic 1:

Demand:

Read McConnell pages 53-59

Objectives:

1. Explain the role of price in a market economy

2. Define and illustrate demand through schedules and graphs.

3. Distinguish between change in demand and change in quantity demanded.

4. Explain the inverse relationship between price and quantity demanded.

5. Identify and explain the variable which causes a change in demand.

6. Illustrate and explain the changes in quantity demanded given a price change.

Concepts to memorize:

MarketDemand Schedule

Law of DemandDemand

Diminishing Marginal UtilityIncome Effect

Substitution EffectDemand Curve

Normal GoodsInferior Goods

Substitute GoodsComplimentary Goods

Change in D versus Change in QD

Key Conceptual Questions:

  1. What is the difference between demand and quantity demanded?
  2. What is the difference between change in demand and change in quantity demanded? (use graphs to aid you)
  3. What determinants cause a change in demand?

Topic 2:

Supply

Read McConnell pages 59-62

Objectives:

1. Explain the role of price in a market economy.

2. Define and illustrate supply through schedules and graphs.

3. Distinguish between change(s) in supply and change(s) in quantity supplied.

4. Explain the direct relationship between price and quantity supplied.

5. Identify and explain the variables that cause a change in supply.

6. Illustrate and explain the changes in quantity supplied given a price change.

Concepts to memorize:

Quantity SuppliedLaw of SupplySupply

Supply ScheduleSupply CurveMarket Supply

SubstitutionComplement in Production

Change in Price of a SubstituteChange in Price of a Complement

Productivity

Key Conceptual Questions:

  1. What is the difference between supply and quantity supplied?
  2. What is the difference between change in supply and change in quantity supplied? (use graphs to aid you)
  3. What determinants cause a change in supply?

Topic 3:

Equilibrium and Market Efficiency

Read McConnell pages 62-82

Objectives:

1. Explain the role of price in a market economy.

2. Explain the concept of equilibrium price and quantity.

3. Illustrate graphically equilibrium price and quantity.

4. Explain and graph the effects of changes in demand and supply on equilibrium price and quantity, including simultaneous changes in demand and supply.

5. Define and illustrate surpluses and shortages.

6. Define affects of surpluses and shortages on prices and quantities.

7. Interpret and/or compute equilibrium price and quantities from graphs, mathematics equations, and/or data.

8. Define price ceilings and price floors, and provide examples.

9. Graph and explain the consequences of government-set prices.

Concepts to memorize:

Market EquilibriumEquilibrium PriceEquilibrium Quantity

Surplus/Excessive SupplyShortage/Excessive Demand

Marginal benefitMarginal Cost

Market EfficiencyObstacles to Efficiency

Price CeilingPrice FloorSubsidies

Rent CeilingProduction Quota Minimum Wage Law

Black MarketSearch Activity

Key Conceptual Questions:

1. Why will the market-clearing (equilibrium) price be set at the intersection of supply and demand-- and not at a higher or lower price?

2. How do market prices and equilibrium quantities respond to

  1. change in demand?
  2. change in supply?
  3. simultaneous increases in supply and demand?
  4. simultaneous decreases in supply and demand?
  5. an increase in demand and a decrease in supply?
  6. decrease in demand and an increase in supply?

3. What is the function of price and to what extent does it provide those functions in an efficient and equitable manner?

4. What is an effective price ceiling? What is an effective price floor? Why are they created and what are the effects of each?

5. Assume the fast food industry is an example of a competitive market currently in equilibrium. (i) Draw a market supply and demand graph to show the current equilibrium and; (2) illustrate and explain the immediate results of imposing a price ceiling on fast food good

6. What are black markets? Why do these occur?

7. How can wage rates, interest rates and exchanges rates be analyzed within the supply and demand framework?

8. What happens when prices are set by law above or below the market equilibrium level?