Econ 2000 1st EditionExam # 2 Study Guide Lectures: 10 - 21Lecture 10 (February 17th)o What is a price floor?o Legally established minimum priceLecture 11 (February 19th) o What is a price ceiling?o Legally established maximum price- What makes a price floor or a price ceiling binding/effective? o When set above/below price equilibrium, which prevents the market from reaching equilibrium This either causes a shortage or surplus, which creates the need for a secondary rationing deviceSRD- Background check, credit check—problem: bribery (Primary RD is always money)Lecture 12 (February 26th)o What is consumer surplus? (Consumer Profit)o Monetary gain by consumers because they are ableto purchase a product for a price that is less thanthe highest price that they would be willing to payo CS= Value- price paid Value is what you are willing to payo What is producer surplus? (Producer Profit)o The amount that producers benefit by selling at amarket price that is higher than the least that theywould be willing to sell for PS = Price sold for – Costo What is total surplus?o TS= CS + PSo What is dead weight loss? ( allocative inefficiency) o A loss of an economic efficiency that can occur when equilibrium for a good or service is not achievable. Gains lost to the market because the government restricts trade.o What happens to consumer surplus, producer surplus and total surplus when an effective/binding price ceiling or price floor is established? o When price goes up or down due to ceiling or floor, producer surplus will go in the direction of the priceo When price goes up or down due to ceiling or floor, consumer surplus will go inthe opposite direction.o Why does the implementation of an effective/binding price ceiling or a price floor create deadweight loss? While the effective price floor will also increase the price for producers, any benefit gained from that will be minimized by decreased sales caused by decreased demand from consumers due to the increase in price. This translates into a net decrease total economic surplus, otherwise known as deadweight loss.Lecture 14 (March 5th)- Define price elasticity of demand (supply).o D- Tells us how much consumers adjust their buying behavior w/ respect to changes in priceo S- Tells us how much quantity supplied changes with a change in price- What does it mean for demand (supply) to be elastic vs. inelastic? o Inelastic- Change in behavior is very small and insignificanto Elastic- Degree of change is majorly significant NOTE: law of demand: P↓Q↑, P↑Q↓ / Law of Supply P↓Q↓, P↑ Q↑  What factors/determinants will influence price elasticity of demand (supply)?o Demand:1. Level of income (wealthy= inelastic, poor= elastic)2. Strength of preference (strong= I, poor= E)3. Need (I) vs want (E)4. Number of substitutes o Supply TIME- Short run- a period of time in which at least 1 economic resource CANNOT be changed (fixed resource- inelastic)- Long run- a period of time in which ALL economic resources CAN be changed (variable resource- elastic) Formulas: Price elasticity of demand (ED) = % change in quantity demanded/% change in price Price elasticity of supply (ES) = % change in quantity supplied/% change in priceLecture 15 (March 17th)- Relate the concept of elasticity to total revenue. How can firms use this information to price discriminate?o Companies use price discrimination in order to make the most revenue possible from every customer. In order to properly discriminate, they must know if the customer is elastic or inelastic. Companies benefit more from having lower pricesfor those who are elastic, and charging those who are inelastic more. Lecture 16 (March 19th)- Combined with Lecture 14.Lecture 17 (March 24th) What two criteria must hold in order for beneficial price discrimination to occur?1. Firm must be able to distinguish between 2 consumer groups2. Firm must be able to ensure/know that the 2 consumer groups cannot trade the product Define total product and marginal product.o Total product: the total quantity of a good produced in a given periodo Marginal Product: The change in total product that results from a one-unit increase in the quantity of labor employed Change in total quantity/ 1 Define total cost, fixed cost, variable cost, and marginal cost.o Total cost is the cost of all the factors of production used by the firm TC= Variable cost + Fixed Costo Fixed cost is the cost that does not change with production, and is a set cost. For example rent or licensing costs are fixed costso Marginal Cost is the opportunity cost that arises from one unit increase in an activity . MC= Change in TC/ Change in Quantity(aka: 1) Define profit, total revenue and marginal revenue.o Profit: income earned Profit= TR-TCo Total revenue is the price of the good sold multiplied by the quantity TR= Price x quantity soldo Marginal Revenue Change in total revenue per additional unit MR= Change in TR/ Change in QuantityWhat explains the shape of the marginal product and marginal cost curvesThe marginal product curve is 'n' shaped because of the law of diminishing returns. As you add more units of a variable factor, at first, the marginal product rises, (this is because the fixed factor is under-utilised, so adding more units of the variable factor will increase the output from each additional unit). But after a certain point, the marginal product begins to fall, as the fixed factor input becomes diluted amongst workers and so you get less from each additional unit of the variable factor. The marginal cost curve is the inverse of the marginal product curve - hence it is shaped like a 'u' or a 'Nike tick'. This is because if your marginal product is high - then your marginal costs are low.For example, if a firm must pay electricity for the time it takes to produce a unit, if the firm can produce the unit quicker (i.e. has a high marginal product) then the cost of electricity will be lower. Hence the inverse relationship between marginal cost and marginal product. How do you find the profit-maximizing level of output (given a chart of data)?o When MR=MC firms are at their profit-maximizing level Formulas: MR = change in TR/change in Q MC = change in TC/change in Q Total cost = Total fixed costs + Total variable costs Total revenue = Price * Quantity Profit = Total revenue – Total costLecture 18 (March 26th) Define market failure.o Something is