AP Microeconomics

Unit II: The Nature and Function of Product Markets

13-20% of AP Micro Exam

Unit II Exam: October 16/17

What is a Product Market? • Market: any structure that allows buyers and sellers to exchange any type of goods, services

• Product market: goods and services produced by businesses are sold to households.

• Households use the income they receive from the sale of resources to purchase commodities.

• Households demand goods and supply resources.

• The money they spend is returned to the businesses as revenue.

• Businesses supply goods and demand resources.

Resource Allocation (Distribution)• Society’s scarce resources are allocated among their many possible

uses.• Markets use prices as signals to allocate resources to their highest

valued uses.• Consumers will pay higher prices for goods they value more highly• Producers will devote more resources to the production of goods with

higher prices.• Workers will provide more hours of labor to jobs that pay more.• Principle applies to product market and resource market.• Markets DO NOT exist in isolation of other markets• Example: Rapid rise in price of gasoline

AP EconomicsOctober 1, 2014

1. Review Activity 2-1: Resource Allocation 2. Lesson 2-2: Marginal Utility and the Law of Demand3. HW: Activity 2-2

Marginal Utility and the Law of Demand• What is Law of Demand?• Why is it downsloping?• Why does a person buy more of a good when its price is reduced?• Utility: The total satisfaction received from consuming a good or service.• Total Utility: Sum of satisfaction or benefit (measured in dollars) that an

individual gains from consuming a given amount of goods or services• This is subjective!• Marginal Utility: The maximum gain (in dollars) from an increase in the

consumption of a good or service.• ∆ in total utility when an extra unit is consumed.• Total utility is sum of the marginal utilities of given units.• If total utility increases, then marginal utility from the extra unit is

positive, and vice versa.• Activity 2-2.1• Diminishing Marginal Utility (the increase in total utility is less with

each extra unit consumed) : Consumer will only buy MORE of a good if its price is reduced: Law of Demand