AP Microeconomics · AP Microeconomics CED Unit 2: Supply and Demand · 16 min read
1. Determinants of Supply and Demand★☆☆☆☆⏱ 3 min
Supply and demand is the foundational model of microeconomics that describes how interactions between buyers (demand) and sellers (supply) determine the quantity of a good exchanged and its market price. 20-30% of your total AP Micro exam score comes from questions that directly test these concepts.
Only non-price factors shift the entire supply or demand curve. Price changes only cause movement along the existing curve, not a shift of the curve itself.
2. Market Equilibrium and Disequilibrium★★☆☆☆⏱ 4 min
Disequilibrium occurs when market price deviates from $P^*$, creating natural pressure for price to adjust back to equilibrium:
**Surplus**: Price > $P^*$, so $Q_s > Q_d$. Sellers cut prices to clear excess inventory, pushing price down to equilibrium.
**Shortage**: Price < $P^*$, so $Q_d > Q_s$. Buyers bid up prices to access scarce goods, pushing price up to equilibrium.
3. Elasticity (PED, PES, YED, XED)★★★☆☆⏱ 5 min
Elasticity is a unit-free measure of how responsive one economic variable is to a change in another, allowing comparison of sensitivity across unrelated goods. The AP Micro exam tests four core elasticity types, each with specific interpretation rules:
**Price Elasticity of Demand (PED)**: Measures responsiveness of quantity demanded to price change. Formula: $PED = \frac{\% \Delta Q_d}{\% \Delta P}$. PED is always negative; use absolute value for classification: $|PED|>1$ = elastic, $|PED|=1$ = unit elastic, $|PED|<1$ = inelastic.
**Price Elasticity of Supply (PES)**: Measures responsiveness of quantity supplied to price change. Formula: $PES = \frac{\% \Delta Q_s}{\% \Delta P}$. PES is always positive, uses same classification as PED.
**Income Elasticity of Demand (YED)**: Measures responsiveness of quantity demanded to consumer income change. Formula: $YED = \frac{\% \Delta Q_d}{\% \Delta Y}$. Sign matters: $YED>0$ = normal good ($YED>1$ = luxury, $0<YED<1$ = necessity), $YED<0$ = inferior good.
**Cross-Price Elasticity of Demand (XED)**: Measures responsiveness of Good A quantity demanded to Good B price change. Formula: $XED = \frac{\% \Delta Q_{d,A}}{\% \Delta P_B}$. Sign matters: $XED>0$ = substitutes, $XED<0$ = complements, $XED=0$ = unrelated goods.
4. Government Intervention: Price Controls and Taxes★★★★☆⏱ 3 min
Government intervention in free markets distorts equilibrium, reduces total surplus, and creates deadweight loss (lost value from transactions that no longer occur due to policy). The AP Micro exam commonly tests price ceilings, price floors, and per-unit taxes.
A per-unit tax creates a wedge between the price buyers pay ($P_b$) and the price sellers receive ($P_s$), where $P_b = P_s + t$ ($t$ = tax amount). *Tax incidence* (the economic burden of the tax) depends only on the relative elasticity of supply and demand, regardless of who the tax is legally levied on. The consumer burden share is:
Producer burden share is $\frac{|PED|}{PES + |PED|}$.
5. Consumer and Producer Surplus★★★☆☆⏱ 3 min
Total welfare in a market is measured as the sum of consumer and producer surplus, which is maximized at free market equilibrium. Any government intervention that reduces traded quantity creates deadweight loss, which is the total reduction in surplus from blocked transactions.
Total surplus equals $CS + PS$.
Common Pitfalls
Why: Students mix up 'quantity demanded/supplied' (movement along the curve) with 'demand/supply' (the entire curve).
Why: Students forget the binding condition for price controls.
Why: Students forget the law of demand makes PED inherently negative.
Why: Students confuse legal incidence (who pays the government) with economic incidence (who bears the cost).
Why: Students forget only completed transactions generate surplus.