AP Microeconomics, AP exams

Unit 2: Supply and Demand

Unit 2 develops the supply and demand model, elasticity, and the welfare effects of government intervention. Consumer and producer surplus and deadweight loss are introduced here and reused in every later unit. Elasticity calculations and interpretations are among the most reliably tested skills in the course.

Position: 2 of 6 units
Topics covered: 7 topics in this guide

What is covered

Topics inside this unit.

These topics describe the scope students most often review for this part of AP Microeconomics. Treat them as a study checklist rather than an exhaustive list of what a single exam form can sample.

Demand and supply: The law of demand and supply, the determinants that shift each curve, and movement along versus shifts.
Price elasticity of demand: Calculating and interpreting elasticity, elastic and inelastic ranges, and the relationship to total revenue.
Other elasticities: Price elasticity of supply, income elasticity distinguishing normal from inferior goods, and cross-price elasticity for substitutes and complements.
Market equilibrium and changes: Surpluses and shortages, simultaneous shifts, and predicting which of price or quantity is indeterminate.
Consumer and producer surplus: Measuring welfare on the graph, total surplus at efficient equilibrium, and deadweight loss when quantity deviates.
Government intervention in markets: Binding price ceilings and floors, per-unit taxes and subsidies, and how elasticity determines tax incidence.
International trade and public policy: World price, imports and exports, and the welfare effects of tariffs and quotas.

Study tips

How to practice Supply and Demand.

Section-specific guidance that follows from how this material is usually tested.

Shade surplus and deadweight loss areas on practice graphs until identifying them is instant.
Practice simultaneous-shift questions and state clearly which variable is indeterminate.
Connect tax incidence to relative elasticity rather than memorizing which side pays more.

Where this fits

Unit 2: Supply and Demand is 2 of 6 units in the AP Microeconomics guide. Use the full guide to balance it against everything else you have to review.

Back to the AP Microeconomics guide Official exam information

Sample Supply and Demand questions

Practice questions, not yet expert-reviewed

Original practice questions written to the published framework for this section. No expert has reviewed them, and they are not taken from any official exam. Try each one before you open the answer.

Question 1Foundational
Consumer incomes rise in the market for a normal good, with all other factors unchanged. What happens to equilibrium price and equilibrium quantity?
1. ABoth price and quantity rise
2. BPrice rises and quantity falls
3. CPrice falls and quantity rises
4. DBoth price and quantity fall
Show answer
Answer: A. Both price and quantity rise
Higher income increases demand for a normal good, shifting the demand curve right and moving equilibrium up along the unchanged supply curve. Price rising while quantity falls is the tempting distractor, but that pattern requires a decrease in supply rather than an increase in demand.
Key insight: When only demand shifts, price and quantity move in the same direction; when only supply shifts, they move in opposite directions.
Question 2Foundational
When the price of a good rises from 10 dollars to 11 dollars, quantity demanded falls from 100 units to 80 units. Using the initial values as the base, what is the absolute value of the price elasticity of demand?
1. A2
2. B0.5
3. C1
4. D20
Show answer
Answer: A. 2
Quantity demanded falls 20 percent while price rises 10 percent, and 20 divided by 10 gives an elasticity of 2, which means demand is elastic over this range. The value 0.5 is the tempting distractor because it inverts the ratio, dividing the percentage change in price by the percentage change in quantity.
Key insight: Percentage change in quantity always goes on top, so elasticity greater than 1 means buyers respond more than proportionally.
Question 3Intermediate
A per-unit excise tax is placed on a good whose demand is far less elastic than its supply. Which side of the market bears the larger share of the tax burden?
1. AConsumers
2. BProducers
3. CThe two sides split it equally
4. DNeither side, because the government collects it
Show answer
Answer: A. Consumers
The side less able to change its behavior absorbs more of the tax, and inelastic demand means buyers keep purchasing even as the price rises. Answering that the government bears it is the tempting distractor because the government collects the revenue, but who writes the check has nothing to do with who bears the economic burden.
Key insight: Tax incidence falls more heavily on the more inelastic side, because that side has the fewest alternatives.
Question 4Intermediate
A government sets a binding price ceiling below the equilibrium price in a competitive market. What is the immediate consequence in that market?
1. AA shortage, because quantity demanded exceeds quantity supplied
2. BA surplus, because quantity supplied exceeds quantity demanded
3. CNo change, because markets always return to equilibrium
4. DThe equilibrium price falls to the ceiling and the market clears
Show answer
Answer: A. A shortage, because quantity demanded exceeds quantity supplied
Holding price below equilibrium encourages buyers and discourages sellers, so the quantity demanded exceeds the quantity supplied and a persistent shortage results. A surplus is the tempting distractor, but surpluses come from binding price floors set above equilibrium, such as an effective minimum wage.
Key insight: Ceilings sit below equilibrium and create shortages; floors sit above equilibrium and create surpluses.
Question 5Advanced
In the market for a normal good, consumer incomes rise at the same time that the price of a key production input increases. What can be predicted about the new equilibrium?
1. APrice rises, but the change in quantity cannot be determined
2. BQuantity rises, but the change in price cannot be determined
3. CBoth price and quantity rise
4. DBoth price and quantity fall
Show answer
Answer: A. Price rises, but the change in quantity cannot be determined
Rising income shifts demand right and a costlier input shifts supply left, and both changes push price upward, so price definitely rises. Quantity is indeterminate because the demand shift raises it while the supply shift lowers it, and the net result depends on which shift is larger.
Key insight: When both curves shift, one variable is always determinate and the other always depends on relative shift sizes.

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Unit 2: Supply and Demand