# Supply and Demand

> AP Microeconomics · Unit 2: Supply and Demand
> Source: https://www.owlsprep.com/study/ap-microeconomics-u2-overview/
> Weight: 20-25% of total AP Microeconomics exam score

This unit introduces the core competitive market model that underpins all of microeconomics. You will learn how buyer and seller behavior shapes prices, and how policy and shocks impact market outcomes, a foundation for all subsequent AP Micro topics.

**Prerequisites:** [Unit 1: Basic Economic Concepts](https://www.owlsprep.com/study/ap-microeconomics-u1-overview/)

## Learning objectives

- Explain how individual consumer and firm behavior combines to shape market supply and demand curves
- Calculate and interpret different elasticity measures to predict how markets respond to changes
- Analyze how government intervention alters equilibrium prices, quantities, and social welfare
- Evaluate the distribution of welfare gains and losses from free trade and trade restrictions

## Unit at a Glance

This unit builds step-by-step from basic definitions to applied policy analysis. We start by separating buyer (demand) and seller (supply) behavior to understand what drives each curve, then combine them to explain how market prices and quantities are determined. Next, we explore elasticity, which measures how responsive buyers and sellers are to changes in prices, a critical tool for predicting market outcomes after shocks or policy changes. We then extend the model to measure social welfare, analyze the impacts of common government interventions, and end with applications to international trade policy.

Below are the 8 sub-topics that make up this unit:
- [Demand](https://www.owlsprep.com/study/ap-microeconomics-u2-demand/) — Learn the law of demand, determinants of demand, and how to identify shifts vs. movements along the demand curve.
- [Supply](https://www.owlsprep.com/study/ap-microeconomics-u2-supply/) — Cover the law of supply, determinants of supply, and how to interpret shifts vs. movements along the supply curve.
- [Price Elasticity of Demand](https://www.owlsprep.com/study/ap-microeconomics-u2-price-elasticity-of-demand/) — Calculate and interpret price elasticity of demand, and its relationship to total revenue for firms.
- [Other Elasticities](https://www.owlsprep.com/study/ap-microeconomics-u2-other-elasticities/) — Learn price elasticity of supply, income elasticity, and cross-price elasticity of demand.
- [Market Equilibrium, Disequilibrium, and Changes in Equilibrium](https://www.owlsprep.com/study/ap-microeconomics-u2-market-equilibrium-disequilibrium-and-changes/) — Combine supply and demand to find equilibrium, and predict how shifts change equilibrium price and quantity.
- [Consumer and Producer Surplus](https://www.owlsprep.com/study/ap-microeconomics-u2-consumer-and-producer-surplus/) — Measure consumer and producer welfare, and calculate total surplus in competitive markets.
- [Government Intervention: Price Controls and Taxes](https://www.owlsprep.com/study/ap-microeconomics-u2-government-intervention-price-controls-and/) — Analyze how price ceilings, price floors, and taxes impact market outcomes and social welfare.
- [International Trade and Public Policy](https://www.owlsprep.com/study/ap-microeconomics-u2-international-trade-and-public-policy/) — Evaluate the welfare effects of free trade and trade barriers like tariffs and quotas.

## Common pitfalls

- **Wrong:** Confusing a shift in the demand/supply curve with a movement along the curve.
  - Why it fails: Only changes to the non-price determinants of demand/supply cause curves to shift; price changes only cause movements along existing curves.
  - Correct: Always check what is driving the change: price changes cause movements, all other factors cause shifts.
- **Wrong:** Equating the slope of a linear demand curve to its elasticity.
  - Why it fails: Elasticity is percentage change, which varies along a linear demand curve, even with a constant slope.
  - Correct: Calculate elasticity for each interval or point separately, do not rely on slope alone.
- **Wrong:** Assuming all market intervention makes consumers better off.
  - Why it fails: Many policies create unintended consequences like shortages, surpluses, and deadweight loss that harm some groups.
  - Correct: Always analyze both winners and losers when evaluating government policy in markets.

## Cheatsheet

| Concept | Key Formula / Rule |
| --- | --- |
| Price Elasticity of Demand | $E_d = \frac{\% \Delta Q_d}{\% \Delta P}$ |
| Total Revenue Test | If $E_d > 1$: price and TR move opposite; If $E_d < 1$: price and TR move same direction |
| Cross-Price Elasticity | Complements have negative $E_{xy}$; substitutes have positive $E_{xy}$ |
| Consumer Surplus | Area below the demand curve, above the market price |
| Producer Surplus | Area above the supply curve, below the market price |
| Tax Incidence | The more inelastic side of the market bears the majority of the tax burden |
| Tariff Welfare Effect | Tariffs raise government revenue but create net deadweight loss for the economy |

## What's next

Start your study of this unit with the first sub-topic on Demand to build your foundational knowledge of buyer behavior. Once you complete all 8 sub-topics in this unit, you will move on to the next unit covering production, costs, and perfect competition, where you will deepen your understanding of firm behavior in competitive markets.

- [Demand](https://www.owlsprep.com/study/ap-microeconomics-u2-demand/)
- [Unit 3: Production, Cost, and the Perfect Competition Model](https://www.owlsprep.com/study/ap-microeconomics-u3-overview/)
- [Supply](https://www.owlsprep.com/study/ap-microeconomics-u2-supply/)

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