ECON 202 1nd EditionExExam # 2 Study Guide Lectures: 12 - 22Chapter 4: Elasticity- Price Elasticity of Supply – measures the responsiveness of quantity supplied to a changein the price of a goodoES=% ∆ QS% ∆ PoES> 1 then supply is elasticoES< 1 then supply is inelasticChapter 5: Price Controls- Price Ceiling – an artificially imposed maximum price above which price is not permitted to riseo Causes a shortage, because price can’t rise naturally- Price Floor – an artificially imposed minimum price below which price is not permitted tofallo Causes a surplus, because price can’t fall naturallyChapter 6: Efficiency of Markets- Consumer Surplus – measures benefit a consumer receives from participating in a marketo Another way to interpret a demand curve is as a “maximum willingness to pay” curve or a “marginal benefit” curveo Difference between the maximum amount a buyer is willing to pay and the market price of a goodo Can be computed as the area under the demand curve and above the price- Producer Surplus – measures benefit a producer receives from participating in a marketo Another way to interpret a supply curve is an a “willingness to sell” curve or a “marginal cost” curveo Difference between price a producer is willing to sell and the market price of a goodo Can be computed as the area under the price and above the supply curve- Total Surplus – the combination of consumer and producer surpluso Measures social welfare- Deadweight Loss – social welfare that is lost if a market is not producing efficiently- Impact of Taxes – taxes reduce Consumer Surplus and Producer Surpluso Excise tax – a tax per unit of output- Tax Incidence – who bears the burden of a taxo Depends on elasticity- Taxes and Efficiencyo Tax Revenue = tax per unit of output * # of unitso = the difference between the price the buyer pays and the price the seller gets tokeep- Tax Incidence and Elasticityo When price is perfectly elastic: buyers pay the same price and tax incidence occurs on sellerso When price is perfectly inelactic: sellers keep the same price and tax incidence occurs on buyerso When demand is more elastic than supply, sellers bear more of the tax burden and vice versa- Elasticity and Deadweight Loss (DWL)o Deadweight Loss is larger in the market with more elastic demandChapter 7: Market Inefficiencies- Market Failure – situation in which the market left on its own FAILS to allocate resources efficiently- Externalities – the Third Party Problemo Costs and benefits resulting from market activity that affect 3rd partieso Negative Externality – an external cost paid by people other than the buyers and sellers in the market; results in too much of a good being producedo Positive Externality – market activity results in an external benefit on a 3rd partyo Pigorian Taxes and Subsidies – in the presence of Externalities, well-designed taxes or subsidies can reduce inefficiency by internalizing external costs or benefits- Public Goods – the Free Rider Problemo Goods that are both NON-EXCLUDABLE and NON-RIVAL in consumptiono Markets will provide LESS THAN the efficient amount of a public goodChapter 8: Business Costs and Production- Profits = Revenue – Costs- Explicit Costs – out of pocket or monetary costs- Implicit Costs – non-monetary or opportunity costs- Accounting Profit = Total Revenue – Explicit Costs- Economic Profit = Total Revenue – Explicit Costs – Implicit Costs- Implicit Costso Include the opportunity cost of capital – the “average” or “normal” rate of return that money invested in a company could have earned if invested elsewhereo If a company is earning ZERO ECONOMIC PROFIT they are earning an “average” or “normal” rate of economic profit- Short Run – at least 1 input is fixed- Long Run – all inputs are variable- Total Production – total output (Q)- Average Production – total production ÷ number of units of input (for a specific input X)oAverage Production=total production¿ of X or A PX=QX- Marginal Product of Input X – increase in output caused by using one additional unit of input X, other things equal (MPX)oMarginal Production=∆ Output∆ Units of X=∆ Q∆ X- Law of Diminishing Productivity – as more units of a variable input are combined with fixed inputs, the marginal product of the variable input will eventually decline, other things equal.- Total Cost = Total Fixed Cost + Total Variable CostoTC=TFC +TVC- Average or Per Unit CostsoTotalAverage ¿ Cost= ¿Cost¿Output=TFCQ= AFCoAverage VariableCost=Total Variable Cos tOutput=TVCQ=AVCoAverage Total Cost =Total CostOutput=TCQ= ATC- Marginal Cost – additional cost of producing one more unit of outputMarginalCost=∆ TotalCost∆ Output=∆ TC∆ Q=MC- Short Run Cost Curves- Long Run Cost