ECONS 101 - Prera Exam #2 Study Guide Lectures: 9 - 12Lecture 9 (2/24/15):Price Controls: legal restrictions on how high or low a market price may go.- Price Ceiling: requiring a price below equilibrium (Aid Buyers/Consumers)o The maximum price sellers are allowed to charge for a product or service.o If a price ceiling is set below equilibrium – total surplus decreases.- Price Floor: requiring a price about equilibrium (Aid Sellers/Producers)o The minimum price buyers are required to pay for a product or service. Think of minimum wage  employees can receive MORE than the minimum wage but cannot be paid less than where the wage is set.- Price Controls:o Economic efficiency says nothing about equity:o In competitive markets there are: Producers that want a higher price. Consumers that want a lower price.Lecture 10 (2/26/15):Price Control Example:- Consider the following supply and demand expressions:QD = 20 - 4PQS = 8P – 4- At equilibrium QD = QS } Q*. To find the equilibrium price or P*, set QD = QS:20 – 4 = 8P – 4  P* = 2. Then, substitute P* into either expression and solve for Q* (Q* = 12).- Next, to find the initial surplus, two more prices must be found:Choke Price for Demand (PC when QD = 0)QD = 20 – 4P  0 = 20 – 4P  PC = 5Shut-Down Price for Supply (PS when QS = 0)QS = 8P – 4  0 = 8P – 4  PS = 0.5Quotas – Controlling Quantities: A maximum amount that can be legally traded.Where P is the price, QD is the quantity demanded and QS is quantity supplied.o Franchises: You can’t just OWN a Subway  first, you must pay the company to own a store or shop within the franchise.- Wedge: the difference between demand price and supply price.o If demand price is ($6) and the supply price is ($4), then the wedge is ($2).\Lecture 11 (3/3/15):Elasticity: a measure of responsiveness.- Price elasticity of demand (PED)o How responsive is Quantity Demand to changes in the price of the good.o (Should always come out negative, before absolute. Every. Time.)- Cross Price elasticity (CXED)o How responsive is Quantity Demand to changes in the price of a complement or substitute.o (Positive CXED  Substitute ; Negative CXED  Complement)- Income elasticity of demand (IED)o How responsive is Quantity Demand to changes in income.o Normal Vs. Inferior- Price elasticity of supply (PES)o How responsive is Quantity Supply to changes in the price of the good.o Must be positive.Elasticity: How far can it stretch?- Elastic  e > 1- Inelastic  e < 1 - Unit Elastic  e = 1- Perfectly Elastic  e = infiniteo Price is fixed. Quantity can go from zero to infinity. o Situation where the curve is horizontal. - Perfectly Inelastic  e = 0o Quantity is fixed. Prices can go from zero to infinity. Supplied is still the same.o Situation where the curve is vertical.ELASTICITY EQUATION:Elasticity (e) = % Change∈Q% Change∈PTwo ways of measuring % change: (% ∆)DEMAND- Traditional = (Ending−InitialInitial)X 100 %- Midpoint = Ending−Initial(Ending+Initial2)X 100 % (This is the more correct equation. USE IT)Lecture 12 (3/5/15):Price Elasticity of Demand (PED): A measure of a particular portion of the demand curve.- PED is a local measure, calculated using % change.- Slope is a global measure, calculated using change.oPED=% Change∈Qd% Change∈P- Determinants:o Availability of close substitutes:o Timeo Definition of the marketo Luxury vs. necessityo Share of income spent on good- Rules of thumb for PEDo Always negative  consistent with the Law of Demand.o Price cut, initial price is greater than ending. % change P is negative. % change in Q is positive.o Price hike, initial price is lower than ending. % change in P is positive. % change in Q is negative.o When comparing PED across goods, use the absolute value, that is drop the minus sign. Income Elasticity of Demand (IED):- Intuition helps define the sign of the IED based on the direction in Quantity Demanded:o Normal Good: as Income ↑, Quantity Demanded ↑o Inferior Good: as Income ↑, Quantity Demanded ↓o Luxury Good: as Income ↑, Quantity Demanded ↑o Necessity Good: as Income ↑, Quantity Demanded ↑-IED=% Change∈Qd% Change∈IncomePrice Elasticity of Supply (PES):-PES=% Change∈Qs% Change∈P- Determinants of PES:o The ability and willingness of firms to alter the quantity they produce as price changes.o Availability of inputs More available  more elastico The time it takes to shift or change production. Short-term 