Econ 1001 1st EditionExam # 2 Study Guide Feb. 12 – March 12 Look at the powerpoints on MyGateway for chapter questions and possible short answerprompts.Chapter 4& 5Demand = Buyers – a relationship between price and the quantity demanded of a certain good or serviceQuantity demanded – total number of units purchased at a certain priceLaw of demand – Common relationship that a higher price leads to lower quantity demanded ALL ELSE EQUAL (ceteris paribus)Demand Curve – a line that shows the relationship between price and quantity demanded of a certain good on a graph with quantity on horizontal axis and price on vertical axisDistribution – Who gets what is produced – there is no way to distribute scarce goods fairly or to everyone’s liking*Water Diamond Paradox - Water is essential but so cheap compared to diamonds that we can live without, yet so expensive.All about scarcity. The more scarce, the more expensive.Supply – a relationship between price and the quantity supplies of a certain goodQuantity of supply – the total number of units of a good or service sold at a certain priceLaw of supply – the common relationship that a higher price is associated with a greater quantity suppliedALL ELSE EQUAL (ceteris paribus)Supply curve – a line that shows the relationship between price and the quantity suppliedEquilibrium – the combination of price and quantity where there is no economic pressure from the surpluses or shortages what would cause price or quantity to shift.GRAPHS REMEMBER:- Labels (Q, P) always P on vertical and Q on Horizontal axis- Demand Graph always downward sloping- Supply graph always upward sloping- Change in quantity demand/supply = movement from 1 curve to a whole other curve(effected by any change that is not price)- Change in demand/supply = movement along a curve up or down (only effected by changes in price)The 4 shocks to equilibrium:1. Increase supply: a. PQ2. Increase demanda. PQ3. Decrease supplya. PQ4. Decrease demanda.  P QPrice controls – government laws to regulate prices *usually not efficientPrice Ceilings –a law that prevents a price form rising above a certain level. If effective, price ceilings will lower prices and lead to shortages. Ex: rent controlPrice Floors – a law that prevents a price from falling below a certain level. If effective, price floors with raise prices and lead to surplus. Ex: minimum wageShortage/excess demand – at the existing price, the quantity demanded exceeds the quantity suppliedSurplus/ excess supply - When at the existing price, quantity supplied exceeds the quantity demandedConsumer Surplus – the benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid.Producer Surplus – The benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to acceptSocial Surplus – the sum of consumer surplus and producer surplusDeadweight loss – the loss in social surplus that occurs when a market produces an inefficient quantityNormal goods – goods where the quantity demanded rises as income risesInferior goods – goods where the quantity demanded falls as income risesSubstitutes – goods that can replace each other to some extent, so that a rise in the price of one good leads to lower quantity consumed of another good, and vice versaEx: Price of cotton increases, so more buy wool or polyester clothing Complements - Goods that are often used together, so that a rise in the price of one good tendsto decrease the quantity consumed of the other good, and vice versaEx: Hot dogs go on sale so more hot dogs are bought, &more hot dog buns are bought too even if they are not on saleUsury laws – laws that impose an upper limit on the interest rate that lenders can changeChapter 7Elasticity of demand – the percentage change in quantity demanded divided by the percentage change in price. Elasticity of supply – The percentage change in quantity supplied divided by the percentage change in priceElasticity of demand/supply = % change in quantity demanded/supplied% change in priceOr (Change in quantity) / (sum of the two quantities/2)(Change in price) / (sum of 2 prices/2)Elastic – the elasticity calculated from the appropriate formula has an absolute value greater than 1. The more elasticity means the more people will change their habits when a price increases or decreases. Market is more elastic with goods that aren’t scarce.Infinite elasticity / perfect elasticity – the extremely elastic situation where quantity changes byan infinite amount in response to even a tiny change in priceInelastic - The elasticity calculated from the appropriate formula has an absolute value less than1. If the market is inelastic, then people do not change their buying habits much when prices increase or decrease. Market is less elastic when goods are scarceZero elasticity – the highly inelastic case in which a percentage chance in the price, no matter how large, results in zero change in the quantity demanded or supplied.Unit elastic – when elasticity = exactly 1 after using the formulaOther elasticities:Income elasticity = % change in quantity Demanded% change in incomeCross-price elasticity of demand - the percentage change in the quantity of good A that is demanded as a result of a percentage chance in the price of good BCross-price elasticity of demand = % change in quantity demanded of good A% change in price of good BElasticity of Labor supply – the percentage change in hours worked divided by the percentage change in wagesElasticity of Labor supply = % Change in quantity of labor supplied% change in wageElasticity of savings – the percentage change in the quantity of savings divided by the percentage change in interest ratesElasticity of savings = % change in quantity of financial savings% change in interest