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AP®​ MICROECONOMICS
UNIT 2: Product Markets

The study of the nature and functions of product markets falls into four broad areas: supply and demand models, consumer choice, production and costs, and theory of the firm. AP® Microeconomics examines the determinants of supply and demand and the ways in which changes in these determinants affect equilibrium price and output. AP® Microeconomic also emphasizes the impact of government policies, such as price floors and ceilings, excise taxes, tariffs, and quotas on the free-market price and quantity exchanged. The concepts of consumer surplus and producer surplus are examined and AP® Microeconomics also applies the concepts of elasticities of demand and supply.

The nature and function of product markets

The AP® Microeconomics Nature and Function of Product Markets section covers the following topics:

Quick Supply and demand

Price elasticity of demand
Some of the most important decision-makers in a market economy are businesses, consumers and the owners of resources (such as land and capital – or money). The nature and function of product markets concerns itself with how these decision-makers behave. One of the most important economic models in the AP® Microeconomics product markets section of the course is the model of supply and demand. In this section of the AP® Microeconomics, students will study the supply and demand model and learn to apply it as an analytic tool. Free markets are not without their imperfections and this is another area of study for the AP® Microeconomics student. 

The response to price changes varies. Sometimes a small price change change will lead to a relatively large change in the quantity demanded or supplied; and for other goods and services even a large price change may not result in much change in the quantity demanded or supplied. This is the concept of elasticity.  In AP® Microeconomics we define elasticity as a measure of how responsive one variable is to changes in price or any of the variable's determinants. This section of the course examines four types of elasticity. Price elasticity of demand examines how responsive demand is to changes in the price of a good, cross price elasticity of demand examines the responsiveness of demand for a good when the price of a related good changes (complements or substitutes). Income elasticity of demand measures the responsiveness of demand for a good to changes in income. Price elasticity of supply examines the responsiveness of supply to changes in the price of a good.

AP® Microeconomics students will study the different market structures. Industries are organised differently in the real world, and this can have both advantages and limitations from the viewpoint of businesses, consumers and society. The Nature and Function of Product Markets section of the AP® Microeconomics course develops important tools that assist those studying AP® Microeconomics into gaining insights into the mechanisms of the market economy and the different effects of market structures. These tools will then be applied in other areas of the AP® Microeconomics course.