Review AP Micro Unit 2 to build the supply and demand model from the ground up, covering demand and supply curves, all three elasticity types, market equilibrium, surplus analysis, and the effects of government intervention and international trade. This unit accounts for 20-25% of the AP exam and underpins every unit that follows.
Use the topic guides, key terms, and practice questions available for this unit to work through graphs, calculations, and surplus analysis before your exam.
Unit 2 introduces the supply and demand model, the most important analytical tool in AP Microeconomics. Every topic in this unit connects to a graph you must be able to draw, label, and interpret correctly on the exam.
The demand curve slopes downward because of the income effect, substitution effect, and diminishing marginal utility. The supply curve slopes upward because higher prices make production more profitable. A change in own-price moves you along the curve; a change in any other determinant shifts the entire curve.
Elasticity measures responsiveness using percentage changes. Price elasticity of demand (PED) links to the total revenue test. Price elasticity of supply (PES) depends on time and production flexibility. Income elasticity classifies goods as normal or inferior; cross-price elasticity identifies substitutes and complements.
At equilibrium, consumer surplus and producer surplus together equal total economic surplus, which is maximized in a competitive market. Price ceilings, price floors, taxes, subsidies, tariffs, and quotas all shift who captures surplus and create deadweight loss triangles you must calculate from graphs.
Every unit after Unit 2 modifies or challenges the competitive supply and demand model. Perfect competition in Unit 3, imperfect competition in Unit 4, factor markets in Unit 5, and externalities in Unit 6 all rely on the surplus framework and graph skills you build here. Getting Unit 2 right is the foundation for everything else in AP Micro.
The law of demand, downward-sloping demand curves, income and substitution effects, demand shifters, and horizontal summation to get market demand.
The law of supply, upward-sloping supply curves, determinants that shift supply, and horizontal summation to get market supply.
PED formula, midpoint method, elastic vs. inelastic vs. unit elastic demand, the total revenue test, and determinants of elasticity.
PES formula, elastic vs. inelastic supply, perfectly elastic and perfectly inelastic cases, and how time horizon affects producer responsiveness.
Income elasticity of demand to classify normal and inferior goods, and cross-price elasticity to identify substitutes and complements.
Equilibrium price and quantity, consumer surplus and producer surplus as triangle areas, total economic surplus, and allocative efficiency.
Shortages and surpluses, how supply and demand shifts change equilibrium price and quantity, and double-shift indeterminate cases.
Binding price ceilings and floors, per-unit taxes and subsidies, tax incidence based on elasticity, and deadweight loss calculations.
Autarky vs. world price, imports and exports, tariff effects on price and surplus, quota effects, and deadweight loss from trade restrictions.
Review Supply and Demand with the main concepts, examples, and AP tasks connected to Unit 2 – Supply and Demand.
Review Determinants of Supply and Demand with the main concepts, examples, and AP tasks connected to Unit 2 – Supply and Demand.
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Review Market Disequilibrium and Changes in Equilibrium with attention to how the concept appears in AP-style source and evidence questions.
Review Price Elasticity of Supply with attention to how the concept appears in AP-style source and evidence questions.
Review International Trade and Public Policy with attention to how the concept appears in AP-style source and evidence questions.
Review Market Equilibrium and Consumer and Producer Surplus with attention to how the concept appears in AP-style source and evidence questions.
The law of demand states that a rise in a good's own price causes quantity demanded to fall, all else equal. This inverse relationship produces a downward-sloping demand curve explained by the income effect (higher price reduces real purchasing power), the substitution effect (the good becomes relatively more expensive than alternatives), and diminishing marginal utility (each additional unit provides less satisfaction). A change in own-price is a movement along the curve. Any other change shifts the entire curve left or right.
| Change | Effect on demand curve |
|---|---|
| Own price rises | Movement along curve (no shift) |
| Income rises, normal good | Rightward shift |
| Income rises, inferior good | Leftward shift |
| Price of substitute rises | Rightward shift |
| Price of complement rises | Leftward shift |
The law of supply states that a rise in a good's own price causes quantity supplied to increase, producing an upward-sloping supply curve. Producers respond to higher prices because they cover higher marginal costs and make production more profitable. A change in own-price is a movement along the supply curve. Changes in input costs, technology, number of sellers, producer expectations, and government taxes or subsidies shift the entire supply curve.
| Change | Effect on supply curve |
|---|---|
| Own price rises | Movement along curve (no shift) |
| Input costs fall | Rightward shift |
| Technology improves | Rightward shift |
| Per-unit tax imposed | Leftward shift |
| Number of sellers increases | Rightward shift |
Price elasticity of demand (PED) equals the percentage change in quantity demanded divided by the percentage change in price. Because of the law of demand the value is negative, but you interpret the magnitude. When |PED| > 1 demand is elastic; when |PED| < 1 it is inelastic; when |PED| = 1 it is unit elastic. Elasticity varies along a linear demand curve and is not the same as slope. The total revenue test links PED to revenue: a price increase raises total revenue when demand is inelastic and lowers it when demand is elastic. Price elasticity of supply (PES) uses the same formula structure but for quantity supplied. PES depends on how quickly producers can adjust output, which is why supply is more elastic in the long run than the short run.
| Elasticity range | Label | Total revenue when price rises |
|---|---|---|
| |PED| > 1 | Elastic | Falls |
| |PED| = 1 | Unit elastic | Unchanged |
| |PED| < 1 | Inelastic | Rises |
| PED = 0 | Perfectly inelastic | Rises proportionally |
| PED = infinity | Perfectly elastic | Falls to zero |
Income elasticity of demand (Ey) equals the percentage change in quantity demanded divided by the percentage change in income. A positive Ey means the good is normal; a negative Ey means it is inferior. Among normal goods, Ey > 1 indicates a luxury and 0 < Ey < 1 indicates a necessity. Cross-price elasticity of demand (Exy) equals the percentage change in quantity demanded of good X divided by the percentage change in the price of good Y. A positive Exy means the goods are substitutes; a negative Exy means they are complements. The sign is the key piece of information on the exam.
| Elasticity type | Formula | Positive sign means | Negative sign means |
|---|---|---|---|
| Income elasticity (Ey) | %ΔQd / %ΔIncome | Normal good | Inferior good |
| Cross-price elasticity (Exy) | %ΔQd(X) / %ΔP(Y) | Substitutes | Complements |
Equilibrium is the price and quantity where quantity demanded equals quantity supplied, so the market clears with no shortage or surplus. Consumer surplus is the area below the demand curve and above the equilibrium price, representing the gain to buyers who were willing to pay more than they had to. Producer surplus is the area above the supply curve and below the equilibrium price, representing the gain to sellers who were willing to accept less than they received. Total economic surplus equals consumer surplus plus producer surplus and is maximized at the competitive equilibrium, making the market allocatively efficient.
A shortage occurs when price is below equilibrium so quantity demanded exceeds quantity supplied; market forces push price up. A surplus occurs when price is above equilibrium so quantity supplied exceeds quantity demanded; market forces push price down. When supply or demand shifts, the equilibrium price and quantity change, and consumer surplus, producer surplus, and total surplus change with them. When both curves shift simultaneously (a double shift), the direction of change for either price or quantity may be indeterminate depending on the relative magnitudes of the shifts.
| Shift | Equilibrium price | Equilibrium quantity |
|---|---|---|
| Demand increases only | Rises | Rises |
| Demand decreases only | Falls | Falls |
| Supply increases only | Falls | Rises |
| Supply decreases only | Rises | Falls |
| Both increase equally | Unchanged | Rises |
A binding price ceiling is set below equilibrium, creating a shortage and reducing total surplus. A binding price floor is set above equilibrium, creating a surplus and reducing total surplus. Both create deadweight loss. A per-unit tax drives a wedge between the price buyers pay and the price sellers receive, reducing quantity traded and creating deadweight loss. Tax incidence (who bears the burden) depends on relative elasticities: the less elastic side bears more of the tax. A per-unit subsidy works in reverse, lowering the price buyers pay and raising the price sellers receive, but the government bears a cost equal to the subsidy times quantity.
| Intervention | Price effect on buyers | Quantity traded | Creates deadweight loss? |
|---|---|---|---|
| Binding price ceiling | Below equilibrium | Falls | Yes |
| Binding price floor | Above equilibrium | Falls | Yes |
| Per-unit tax | Rises | Falls | Yes |
| Per-unit subsidy | Falls | Rises | Yes |
When a country opens to trade, the domestic price moves to the world price. If the world price is below the autarky price, the country imports: consumers gain surplus, domestic producers lose surplus, and total surplus rises. If the world price is above the autarky price, the country exports: producers gain surplus, consumers lose surplus, and total surplus rises. A tariff raises the domestic price above the world price, reducing imports, generating government revenue, and creating two deadweight loss triangles. A quota limits import quantity, raises the domestic price similarly to a tariff, but transfers the revenue equivalent to quota holders rather than the government.
| Policy | Domestic price | Imports | Government revenue | Deadweight loss |
|---|---|---|---|---|
| Free trade (import) | World price | Positive | None | None |
| Tariff | Above world price | Reduced | Yes | Yes |
| Quota | Above world price | Reduced | No (quota rent) | Yes |
Try AP-style multiple-choice questions and written prompts after you review the notes.
| Term | Definition |
|---|---|
| Demand Curve | A downward-sloping graph showing the inverse relationship between a good's own price and quantity demanded, derived by horizontally summing individual demand curves. |
| Supply Curve | An upward-sloping graph showing the positive relationship between a good's own price and quantity supplied, derived by horizontally summing individual supply curves. |
| Equilibrium Price | The price at which quantity demanded equals quantity supplied so the market clears with no shortage or surplus. |
| Consumer Surplus | The triangle area below the demand curve and above the market price, representing the net benefit buyers receive from purchasing at a price lower than their willingness to pay. |
| Deadweight Loss | The triangle of total surplus lost when a tax, price control, or trade restriction moves quantity traded away from the competitive equilibrium. |
| Inelastic Demand | Demand where |PED| < 1; quantity demanded responds weakly to price changes, so a price increase raises total revenue. |
| Total Revenue | Price multiplied by quantity sold; its response to a price change depends on whether demand is elastic, inelastic, or unit elastic. |
| Income Elasticity of Demand | Percentage change in quantity demanded divided by percentage change in income; positive for normal goods and negative for inferior goods. |
| Cross-Price Elasticity of Demand | Percentage change in quantity demanded of good X divided by percentage change in the price of good Y; positive indicates substitutes, negative indicates complements. |
| Tax Incidence | The distribution of a tax burden between buyers and sellers; the less price-elastic side bears the larger share regardless of who is legally taxed. |
| Price Ceilings | A government-imposed maximum price set below equilibrium; creates a shortage and deadweight loss. |
| Price Floors | A government-imposed minimum price set above equilibrium; creates a surplus and deadweight loss. Minimum wage is a common real-world example. |
| world price | The international market price for a good; if below the domestic autarky price the country imports, if above it exports. |
| protectionism | Government policies such as tariffs and quotas that raise the domestic price above the world price to protect domestic producers at the expense of consumer surplus and total surplus. |
| Allocative Efficiency | Achieved at competitive equilibrium where price equals marginal cost and total economic surplus is maximized with no deadweight loss. |
Only a change in the good's own price moves you along the curve. Income changes, related goods prices, expectations, and other determinants shift the entire curve. Drawing a new curve when you should only move along the existing one is one of the most penalized graph errors.
Elasticity is not slope. On a linear demand curve, slope is constant but elasticity changes at every point, ranging from perfectly elastic at the top to perfectly inelastic at the bottom. A steeper curve is not automatically more inelastic.
For income elasticity and cross-price elasticity, the sign carries the key information. A negative income elasticity means inferior good; a positive cross-price elasticity means substitutes. Reporting only the magnitude without the sign loses the classification.
After a tax, price ceiling, or tariff, the surplus areas change shape. Students often shade the old triangles instead of recalculating the new areas. Always redraw the graph with the new price and quantity before shading.
Both raise the domestic price and reduce imports, but a tariff generates government revenue while a quota transfers an equivalent amount to quota license holders. On a welfare analysis graph the deadweight loss triangles are the same shape, but the middle rectangle goes to different parties.
AP Micro consistently requires you to draw fully labeled supply and demand graphs. You must label axes, curves, equilibrium price and quantity, and any surplus areas or policy effects such as tax wedges, deadweight loss triangles, and tariff revenue rectangles. A graph with missing labels receives partial credit at best.
Expect to calculate elasticity coefficients using the midpoint formula, compute consumer and producer surplus as triangle areas using the formula (1/2) x base x height, and determine changes in surplus after a policy shift. These calculation tasks appear in both multiple-choice and free-response questions and require reading values directly off a graph or table.
Many questions ask you to explain how a specific real-world event, such as a change in input costs, a new government tax, or a shift in consumer income, affects equilibrium price, quantity, and the distribution of surplus. Strong responses name the specific curve that shifts, the direction of the shift, and the resulting change in each surplus measure, rather than giving a general description.
Open the individual guides for Unit 2 when you want a closer review of one topic.
browse guidesPractice free-response reasoning and compare your answer with scoring guidance.
practice FRQsWatch past review streams filtered to Unit 2 when you want a video walkthrough.
open videosUse unit cheatsheets for a quick visual review after you work through the notes.
open cheatsheetsEstimate your broader AP score goal after you review the course and exam format.
open calculatorAP Micro Unit 2 covers 9 topics built around the supply and demand model: Demand (2.1), Supply (2.2), Price Elasticity of Demand (2.3), Price Elasticity of Supply (2.4), Other Elasticities (2.5), Market Equilibrium and Consumer and Producer Surplus (2.6), Market Disequilibrium and Changes in Equilibrium (2.7), The Effects of Government Intervention in Markets (2.8), and International Trade and Public Policy (2.9). These topics move from the basics of how supply and demand curves work, through elasticity, all the way to how government policies like taxes, subsidies, and trade restrictions shift market outcomes. See AP Micro Unit 2 for topic-by-topic breakdowns.
AP Micro Unit 2 makes up 20-25% of the AP exam, making it one of the highest-weighted units on the test. The unit covers supply and demand, price elasticity of demand and supply, market equilibrium, consumer and producer surplus, and the effects of government intervention and international trade. Because this unit carries so much weight, a strong grasp of how supply and demand curves shift, how to calculate and interpret elasticity, and how to identify changes in surplus is essential for a high score.
The AP Micro Unit 2 progress check includes both MCQ and FRQ parts that draw directly from this unit's 9 topics. The MCQ section tests your ability to read and shift supply and demand graphs, calculate price elasticity of demand and supply, identify market equilibrium, and analyze consumer surplus and producer surplus. The FRQ part typically asks you to draw a correctly labeled market diagram, show the effects of a shift in supply or demand, and explain changes in equilibrium price and quantity. Government intervention topics, like price ceilings, price floors, taxes, and subsidies from 2.8, are common FRQ targets on the progress check. Practice with these exact topic areas at AP Micro Unit 2 to get comfortable with the question formats before the real thing.
AP Micro Unit 2 FRQs almost always ask you to draw and label a supply and demand diagram, identify the market equilibrium, and explain how a specific change, like a tax, subsidy, price ceiling, or shift in demand, affects price, quantity, and surplus. The key skill is connecting a written scenario to a correctly labeled graph. To practice effectively, focus on these steps: - Draw supply and demand graphs from scratch for each topic in 2.6 through 2.9. - Practice showing consumer surplus and producer surplus as shaded areas on your diagram. - Work through government intervention scenarios (taxes, subsidies, price controls) from Topic 2.8 and explain deadweight loss. - For elasticity FRQs (Topics 2.3-2.5), practice writing out the formula and interpreting what the coefficient means. Find practice FRQs matched to these topics at AP Micro Unit 2.
The best place to find AP Micro Unit 2 practice questions, including multiple-choice and FRQ-style problems, is AP Micro Unit 2. That page has resources organized by topic, so you can target supply and demand, price elasticity of demand, market equilibrium, consumer surplus, and government intervention separately or run a full unit practice test. For MCQ practice, focus on questions that ask you to identify the direction of a curve shift, read off equilibrium price and quantity, or interpret an elasticity coefficient. Those formats show up most on the real exam and on the Unit 2 progress check.
Start with the supply and demand model in Topics 2.1 and 2.2 before moving on to anything else. Every other topic in this unit builds on your ability to draw, shift, and read those curves correctly. Here's a study plan that works: 1. **Build the graph habit first.** Practice drawing supply and demand diagrams from memory, labeling axes, equilibrium price, and equilibrium quantity every time. 2. **Nail elasticity formulas.** Price elasticity of demand (Topic 2.3) and price elasticity of supply (Topic 2.4) require you to calculate a coefficient and interpret it. Write out the formula and do several practice calculations. 3. **Add surplus to your diagrams.** Once you can draw equilibrium, shade in consumer surplus and producer surplus (Topic 2.6). This skill comes up in both MCQs and FRQs. 4. **Work through government interventions.** Taxes, subsidies, price ceilings, and price floors from Topic 2.8 are high-frequency exam topics. For each one, practice showing the before-and-after on a graph and identifying deadweight loss. 5. **Finish with international trade.** Topic 2.9 applies the same surplus analysis to trade scenarios with tariffs and quotas. Since this unit is 20-25% of the exam, time spent here pays off more than almost anywhere else. Use AP Micro Unit 2 to find topic-specific practice as you go.