Econ 142 1st Edition Exam # 2 Study GuideChapter 5Demand curve: represents value or benefit people see in this goodSupply curve: represents costs associated with this goodMarket failure: where the market left to its own decides fails to produce the efficient/correct/best/optimal level of output pg 140-Market failure justifies government intervention in the marketPublic goods: produced and provided by the government pg 155Characterized by:-Rival consumption (most goods, if I consume it, no one else can-burrito)Non-Rival goods-public goods one person consuming it doesn’t prevent another person from consuming the same good-Non-exclusion: most goods if you pay for it you get it, and if you don't pay for it that's-EXCLUSION-Public goods, in may cases you can't keep someone from getting it-That's non-exclusion-I don't fucking like this set up so use it from the fucking bookPunchline-Because of the free-rider problem, there would at some point be no demand-and therefore no supply-so the market would fail with this good-so we take the decision out of the hands of the market-Four Categories of Goods: pg 154 KNOW ITexcludable, non-excludable, rival, non-rivalIs the internet a public good?Externalities: pg 138-A cost or benefit caused by a transaction that is not party of the transaction-A benefit or cost that affects someone who is not directly involved in the production or consumption of a good or service-Spillover effect-Example: Tree. Neighbor buys apple tree, it cost $300. Branches hang over your property. Every Fall, apples drop off. Benefit: free apples.-Neighbor buys tree, costs $300, branches hang over driveway, tree sap all over car, cost: car wash every day.Pollution-Classic example of negative externality-The transaction is the thing causing the pollution (factory, production)-The spillover effect is the polluted air or waterSocial Costs-Private costs+ external costs pg 139-social costs are the full resource costs of an activity including the externalitySupply represents private costs to producersDemand curve represents private benefits to consumersIf there are external costs, we show them as increase in costs. Shift up of supply curve.If you incorporate external costs: right quantity to produce, optimal quantity to produce, is a smaller quantity-What about an external benefits?-An external benefit would work in the other direction-If external costs-shift supply up-External benefits-shifts demand upPrinciples of Microeconomics (third lecture after first exam) Dr. Staihr Feb 18th 2015- Elasticity = responsiveness- when price changes in either direction quantity demanded will change- will it change little or big- What makes a good have a demand that is elastic or inelastic? LIST TO KNOW- Number of substitutes- Luxury or Necessity- theres 5 total will add later.- Chart to know pg 183- Price elasticity = percentage change in quantity demanded/- Calculating elasticity = - (change in quantity demand/average quantity demanded) / (change in price/average price)- Answer to calculating elasticity: Between 0-1 Demand is Inelastic; above 1 Demand is Elastic- Some examples- Tobacco products 0.25 - very inelastic- Gasoline 0.06 - very inelastic- Beer 0.23 - inelastic- DVDs 3.1 - Elastic- Cocaine 0.28 - inelastic- Test example- You work at starbucks Last week lattes sold for $4.50 each and you sold 120 a ay. This week lattes sell for $4.90 and you sell 112 a day. The price elasticity of demand for lattes comes closest to.,.- 8/116 = .069 - 0.069/0.085 - .81 =- .40/4.70 = .085- Answer is 0.81- Any two points on a demand curve you can calculate elasticity- (Change in quantity/average quantity)/(change in price/average price)- If the price increases the quantity is negative and the change of price is positive therefore ...- If the price drops the quantity demanded will increase and the price will drop therefore ….- Using Elasticity- a/b = c- What is a? a = b*c- What is b? a/c = b- % Change in Q demanded /% change in price = Elasticity- i.e. you are going to change the % change in price by 10%- ? % Change in Demanded/ 10 = 1.8- 18 % change in demanded- It’ll be an 18% quantity decrease- If it is a 10% price increase- %Change in Q Demanded/15 = 0.80- % change in Q demanded = 12%- if 15 % price decrease 12 % quantity increase vice versa- If 15% price increase 12% quantity decrease- Example :- You’ve estimated the demand elasticity for your product at 2.4 - ELASTIC- The current quantity demanded is 200 units per day- The current price is $20 per unit- Your boss wants to have a sale, a 5% price decrease- What is your estimate of the additional revenues this sale will produce- what are your current revenues- You know this- %Change in Q Demanded / % change in price = Elasticity- % change in Q demanded / 5 = 2.4- %Change in Q Demanded = 12- Current price will decrease 5%- New Price:(1-.05)$20 = $19 = Price with the price decrease- Current quantity will increase 12% - New Quantity: (1+.12)*200 = 224 at $19 each- Additional revenues produced by the sale: $256- If you want to make more money lower the price- Elasticity is NOT slope- The Elasticity changes as you move along the Demand Curve- The lower part is elastic of the slope, higher part is elastic- Cross Price Elasticity of Demand- Cross price elasticity- What if Good X and Good Y are Substitutes- Cross price elasticity is positive when two goods are substitutes- Price Increase +/+- Price Decrease -/-- Change in price of hot dogs- Change in Q Demanded of Hot Dog buns- If price of hot dogs go up you buy less buns, you buy less- If price of hot dogs go down you buy more hot dogs, you buy more buns- Cross Price elasticity is negative when two goods are complements- If two goods are substitutes Cross-price elasticity is Positive- If two goods are complements Cross-price elasticity is Negative- Pg 185- Elasticity of Supply- Pg 190- When the price changes, the quantity supplied will change..- Will it change a little, or a lot?- How responsive is the supply to a change in the price?- Same FORMULA % change in price quantity supplied/ % change in price- (Change in quantity supplied/average quantity) / (change in price/average price)- The only thing that matters is Time, as more time passes, supply becomes more elastic- Income elasticity of Demand- How does the quantity demanded change when your income changes?- pg 186- Combining Elasticity with what we’ve done before (which is applying a tax) NOT IN BOOK BUT ON EXAM- Find