AP Microeconomics — Advanced Analysis & Graphing

Front

Why is a perfectly competitive firm's demand curve perfectly elastic (horizontal) while the market demand is downward sloping?

Back

The individual firm is a 'price taker.' Because its output is infinitesimally small relative to the total market, it can sell as much as it wants at the market price. If it raises its price even slightly, quantity demanded drops to zero. However, the market demand curve slopes downward because consumers only buy more if the price for the industry drops.

Front

Total Revenue Test for Elasticity: When does a price decrease lead to lower Total Revenue?

Back

This occurs when demand is **Inelastic** (Ed < 1). In the inelastic range, the percentage change in Quantity Demanded is smaller than the percentage change in Price. Therefore, the loss in revenue per unit (lower price) outweighs the gain in revenue from selling additional units, causing Total Revenue (P x Q) to fall.

Front

Income Elasticity of Demand (YED) for Inferior Goods

Back

For inferior goods, YED is **negative**. This means that as consumer income increases, the demand for the good decreases (e.g., instant noodles or used cars). Conversely, as income falls, demand for inferior goods rises. This distinguishes them from normal goods, which have a positive YED.

Front

Cross-Price Elasticity of Demand (XED): Substitutes vs. Complements

Back

XED measures the responsiveness of quantity demanded of Good A to a price change in Good B. If XED > 0, the goods are **Substitutes** (price of B goes up, demand for A goes up). If XED < 0, the goods are **Complements** (price of B goes up, demand for A goes down because they are used together).

Front

Shut-Down Rule (Short Run vs. Long Run)

Back

A firm should shut down in the **short run** if Price (P) < Average Variable Cost (AVC). It cannot cover variable costs. In the **long run**, a firm should exit if P < Average Total Cost (ATC), as all costs are variable and the firm suffers continuous losses.