Unit #2: Supply and Demand
UNIT #2: SUPPLY AND DEMAND
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The Nature and Functions of Product Markets
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 elasticity, including
calculating price, cross-price, income elasticities of demand, and the price elasticity
The next area covered in the course is the theory of consumer choice. Students
should gain an understanding of the basic postulates underlying consumer choice:
utility, the law of diminishing marginal utility, and utility-maximizing conditions, and
their application in consumer decision-making and in explaining the law of demand.
By examining the demand side of the product market, students learn how incomes,
prices, and tastes affect consumer purchases. Here it is important that students
understand how to derive an individual’s demand curve, how individual and market
demand curves are related, and how the income and substitution effects explain the shape of the demand curve.