AP Micro Unit 5 Practice Quiz

The law of demand establishes an inverse relationship between price and quantity demanded. When prices rise, consumers buy less, and when prices fall, they buy more.

Non-price factors, such as changes in consumer tastes or preferences, can shift the entire demand curve. In contrast, a change in the price of the good results in movement along the curve.

Market equilibrium occurs when the quantity that consumers want to buy equals the quantity that producers want to sell. At this point, there is no inherent force driving the price up or down.

A shortage occurs when the current price is set too low, leading to a higher quantity demanded than what is supplied. This imbalance typically exerts upward pressure on prices until equilibrium is restored.

An increase in supply shifts the supply curve to the right. This shift typically results in a lower equilibrium price while increasing the equilibrium quantity available in the market.

Elasticity of demand is largely influenced by the share of income consumers spend on the good. When a product takes up a significant portion of a consumer's budget, demand tends to be more sensitive to price changes.

When demand is inelastic, consumers do not reduce quantity significantly in response to price increases. Therefore, most of the tax burden falls on consumers, resulting in higher prices even with a modest drop in quantity demanded.

Consumer surplus is the benefit consumers receive when they pay less than what they are willing to pay for a good. It quantifies the net gain to consumers from engaging in market transactions.

With elastic demand, consumers respond significantly to price increases by reducing their purchase quantities. The resulting decline in total quantity sold outweighs the benefit of higher prices, thus reducing total revenue.

Price discrimination involves charging varying prices for the same product to different consumers based on differences in their willingness or ability to pay. This strategy helps firms capture more consumer surplus.

A binding price ceiling set below the equilibrium price prevents the market price from rising to its efficient level. This leads to an excess of demand over supply, resulting in a shortage.

A production subsidy lowers the cost of production for firms, encouraging them to produce more. This increase in supply lowers the equilibrium price and results in a higher quantity traded in the market.

Deadweight loss measures the loss of economic efficiency when a market is not operating at optimal equilibrium. This loss arises from distortions such as taxes, subsidies, or price controls that hinder the market from maximizing total surplus.

Market efficiency is best achieved when prices and quantities are allowed to adjust according to supply and demand forces. Removing barriers to entry and reducing excessive regulations allow markets to function more freely and efficiently.

Technological improvements reduce production costs and enhance efficiency, allowing firms to produce more at every price level. This increased production is represented by a rightward shift in the supply curve, leading to lower prices and a higher quantity of goods available.

When supply is highly elastic, producers can easily alter production in response to tax-induced price changes. Consumers, with inelastic demand, do not reduce consumption significantly, so they end up shouldering most of the tax burden.

Cross-price elasticity measures how the quantity demanded of one good changes in response to a change in the price of another good. A positive value indicates that an increase in the price of one good leads to an increase in the demand for the other, thus identifying them as substitutes.

When both demand and supply contract, the equilibrium quantity unambiguously falls. However, the change in equilibrium price depends on the relative magnitude of the shifts in supply and demand, making it indeterminate without further information.

A binding price floor set above equilibrium increases the market price, but it also leads to excess supply that cannot be sold. This unsold inventory can reduce overall producer surplus, even though the price per unit is higher.

Increasing returns to scale imply that as a firm expands production, its long-run average cost declines due to enhanced efficiency. This cost advantage can lead to a natural monopoly, where one firm can serve the entire market more efficiently than multiple competing firms.