Demand
The law of demand, downward-sloping demand curves, income and substitution effects, demand shifters, and horizontal summation to get market demand.
AP Microeconomics Unit 2 Review: Supply and Demand
- 20–25% of AP multiple choice
- 9 topics
- AP exam review verified for 2027
Supply and demand describes how buyers and sellers interact in competitive markets to determine price and quantity. When supply or demand shifts, equilibrium changes, surplus is redistributed, and government policies like taxes or tariffs can create deadweight loss by moving the market away from the efficient outcome.
Fiveable's AP Microeconomics Unit 2 review covers 11 topics, with guided practice questions for the unit.
AP Microeconomics unit 2 topics
Supply
The law of supply, upward-sloping supply curves, determinants that shift supply, and horizontal summation to get market supply.
Price Elasticity of Demand
PED formula, midpoint method, elastic vs. inelastic vs. unit elastic demand, the total revenue test, and determinants of elasticity.
Price Elasticity of Supply
PES formula, elastic vs. inelastic supply, perfectly elastic and perfectly inelastic cases, and how time horizon affects producer responsiveness.
Other Elasticities
Income elasticity of demand to classify normal and inferior goods, and cross-price elasticity to identify substitutes and complements.
Market Equilibrium and Consumer and Producer Surplus
Equilibrium price and quantity, consumer surplus and producer surplus as triangle areas, total economic surplus, and allocative efficiency.
Market Disequilibrium and Changes in Equilibrium
Shortages and surpluses, how supply and demand shifts change equilibrium price and quantity, and double-shift indeterminate cases.
The Effects of Government Intervention in Markets
Binding price ceilings and floors, per-unit taxes and subsidies, tax incidence based on elasticity, and deadweight loss calculations.
International Trade and Public Policy
Autarky vs. world price, imports and exports, tariff effects on price and surplus, quota effects, and deadweight loss from trade restrictions.
Supply and Demand
Review Supply and Demand with the main concepts, examples, and AP tasks connected to Unit 2 – Supply and Demand.
Determinants of Supply and Demand
Review Determinants of Supply and Demand with the main concepts, examples, and AP tasks connected to Unit 2 – Supply and Demand.
Practice AP Microeconomics unit 2 questions
Try AP-style questions on unit 2, then use the review notes below for anything you miss.
AP Microeconomics unit 2 practice test
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Unit 2 review notes
2.1
Demand: the law, the curve, and the shifters
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.
- Movement along demand: Caused only by a change in the good's own price; quantity demanded changes but demand itself does not shift.
- Demand shifters (TRIBE): Tastes, Related goods prices, Income, Buyer expectations, and number of buyers in the market all shift the demand curve.
- Normal vs. inferior good: Demand for a normal good rises when income rises; demand for an inferior good falls when income rises.
- Substitutes vs. complements: A price increase for a substitute raises demand for the original good; a price increase for a complement lowers demand for the original good.
- Market demand curve: Derived by horizontal summation of all individual demand curves at each price level.
If the price of coffee rises, what happens to the demand curve for tea? What happens to the quantity demanded of coffee?
| 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 |
2.2
Supply: the law, the curve, and the shifters
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.
- Movement along supply: Caused only by a change in the good's own price; quantity supplied changes but supply itself does not shift.
- Supply shifters: Input costs, technology improvements, number of sellers, producer price expectations, and taxes or subsidies all shift supply.
- Rightward shift: Represents an increase in supply: producers offer more at every price, e.g., lower input costs or better technology.
- Leftward shift: Represents a decrease in supply: producers offer less at every price, e.g., higher input costs or a new per-unit tax.
- Market supply curve: Derived by horizontal summation of all individual supply curves; upward-sloping in aggregate.
A new tax on production inputs is imposed. Draw and explain what happens to the 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 |
2.3
Price elasticity of demand and supply
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.
- PED formula: (%ΔQd) / (%ΔP); use the midpoint method for arc elasticity between two points.
- Total revenue test: If price rises and total revenue rises, demand is inelastic. If price rises and total revenue falls, demand is elastic.
- Determinants of PED: Availability of substitutes, necessity vs. luxury, share of budget, and time horizon all affect how elastic demand is.
- PES formula: (%ΔQs) / (%ΔP); elastic supply (PES > 1) means producers respond strongly to price changes.
- Time and PES: Supply is more inelastic in the short run because producers cannot quickly adjust capacity; more elastic in the long run.
A 10% price increase causes quantity demanded to fall by 6%. Is demand elastic or inelastic? What happens to total revenue?
| 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 |
2.5
Income elasticity and cross-price elasticity
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.
- Income elasticity formula: Ey = (%ΔQd) / (%ΔIncome); sign determines normal (positive) or inferior (negative).
- Cross-price elasticity formula: Exy = (%ΔQd of X) / (%ΔP of Y); positive = substitutes, negative = complements.
- Luxury good: Normal good with Ey > 1; demand rises faster than income, e.g., designer goods.
- Inferior good: Ey < 0; consumers buy less as income rises, e.g., generic store-brand products for some consumers.
- Unrelated goods: Cross-price elasticity near zero; price of one good has no meaningful effect on demand for the other.
The price of butter rises 5% and quantity demanded of margarine rises 8%. Calculate Exy and classify the relationship.
| 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 |
2.6
Market equilibrium and consumer and producer surplus
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.
- Equilibrium price: The price at which Qd = Qs; the market clears and there is no tendency for price to change.
- Consumer surplus: Triangle area between the demand curve and the market price; measures net benefit to buyers.
- Producer surplus: Triangle area between the market price and the supply curve; measures net benefit to sellers.
- Total economic surplus: Consumer surplus plus producer surplus; maximized at competitive equilibrium in the absence of market failures.
- Allocative efficiency: Achieved when price equals marginal cost and total surplus is maximized; no deadweight loss exists.
On a supply and demand graph, shade and label the consumer surplus and producer surplus triangles at equilibrium. Write the formula for the area of each triangle.
2.7
Disequilibrium and changes in equilibrium
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.
- Shortage: Qd > Qs at the current price; price is below equilibrium and will rise toward it.
- Surplus (excess supply): Qs > Qd at the current price; price is above equilibrium and will fall toward it.
- Demand shift effect: A rightward demand shift raises both equilibrium price and quantity; consumer and producer surplus both change.
- Supply shift effect: A rightward supply shift lowers equilibrium price and raises equilibrium quantity; surplus areas change accordingly.
- Double shift: When both supply and demand shift, one of the two equilibrium outcomes (price or quantity) is indeterminate without knowing relative magnitudes.
Demand increases and supply decreases simultaneously. What happens to equilibrium price? What happens to equilibrium quantity?
| 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 |
2.8
Government intervention: price controls, taxes, and subsidies
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.
- Binding price ceiling: Set below equilibrium price; causes a shortage, lowers producer surplus, may raise consumer surplus for those who get the good, creates deadweight loss.
- Binding price floor: Set above equilibrium price; causes a surplus, raises producer surplus for units sold, lowers consumer surplus, creates deadweight loss.
- Tax wedge: The difference between the price buyers pay and the price sellers receive after a per-unit tax; equals the tax amount.
- Tax incidence: The less price-elastic side of the market bears a larger share of the tax burden.
- Deadweight loss: The triangle of lost total surplus caused by any intervention that moves quantity away from the competitive equilibrium.
Draw a supply and demand graph with a per-unit tax. Label the price buyers pay, the price sellers receive, the tax revenue rectangle, and the deadweight loss triangle.
| 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 |
2.9
International trade: tariffs and quotas
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.
- Autarky price: The domestic equilibrium price before trade; the benchmark for comparing gains and losses from opening to trade.
- World price: The international market price; if below autarky price the country imports, if above it exports.
- Tariff: A per-unit tax on imports that raises the domestic price, reduces imports, generates government revenue, and creates deadweight loss.
- Quota: A quantity limit on imports that raises the domestic price like a tariff but transfers the revenue equivalent to quota license holders, not the government.
- Protectionism: Government policies such as tariffs and quotas that shield domestic producers from foreign competition at the cost of consumer surplus and total surplus.
The world price of steel is below the domestic autarky price. Draw the trade graph, identify imports, and show what happens to consumer surplus, producer surplus, and total surplus when a tariff is imposed.
| 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 |
Key terms
| 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. |
How to review unit 2
Topics students miss most
Miss rates come from Fiveable multiple-choice practice.
Common unit 2 mistakes
Confusing a shift with a movement
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.
Treating slope and elasticity as the same thing
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.
Forgetting the sign when interpreting elasticity
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.
Mislabeling surplus triangles after a policy change
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.
Assuming a tariff and a quota have identical effects
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.
How this unit shows up on the AP exam
Graph drawing and labeling
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.
Calculation tasks from graphs and tables
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.
Explain and predict tasks using supply and demand logic
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.
More ways to review
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Open the individual guides for Unit 2 when you want a closer review of one topic.
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Cram archive videos
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Official unit cheatsheet
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get printablesFrequently Asked Questions
What's on the AP Micro Unit 2 progress check (MCQ and FRQ)?
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.
How do I practice AP Micro Unit 2 FRQs?
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.
Where can I find AP Micro Unit 2 practice questions?
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.
How should I study AP Micro Unit 2?
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.