Test 2 Study Guide Lecture and Textbook ECO 2023 Dr McCaleb Table of Contents FORMULAS TO KNOW 38 CHAPTER 5 NOTES 40 ELASTICITIES OF DEMAND AND SUPPLY LECTURE 44 CHAPTER 6 NOTES 51 CHAPTER 8 NOTES 54 EFFICIENCY OF MARKETS LECTURE 56 CHAPTER 7 NOTES 61 PRICE CEILINGS AND PRICE FLOORS LECTURE 63 37 Formulas To Know Review from Midterm 1 Slope of a Line o M Change in Y over change in X o M Y X o M Y2 Y1 X2 X1 Net Benefit NB o NB Total Benefit Total Cost o NB TB TC The optimal amount of any activity o Is when the Marginal Benefit is equal to the Marginal Cost o When MB MC Marginal Benefit MB o MB Change in Total Benefit Change in Quantity o MB TB Q o MB TB2 TB1 Q2 Q1 Marginal Cost MC o MC Change in Total Cost Change in Quantity o MC TC Q o MC TC2 TC1 Q2 Q1 When to increase the amount of an activity Production Possibilities Frontier When to decrease the amount of an activity Production Possibilities Frontier o If Marginal Benefit Marginal Cost o If MB MC o If Marginal Cost Marginal Benefit o If MC MB Labor Force LF o Employed Unemployed o E U Market Equilibrium o When the quantity demanded equals the quantity supplied o Equilibrium QD QS Midterm 2 Price Elasticity of Demand o Elasticity Change in Quantity Demanded Change in Price o QD P Midpoint Method to Calculating the Price Elasticity o Percent Change in Quantity New Quantity Initial Quantity New Quantity Initial Quantity 2 x 100 o Q Q2 Q1 Q2 Q1 2 x 100 o Percent Change in Price New Price Initial Price New Price Initial Price 2 x 100 o P P2 P1 P2 P1 2 x 100 Price elasticity of supply 38 o Elasticity change in quantity supplied change in price o QS P Cross elasticity of demand o Elasticity change in quantity demanded of a good change in the price of one of its substitutes or complements o QD PS C Income elasticity of demand o Elasticity change in quantity demanded change in income o QD I Total Revenue and the Price Elasticity of Demand o Total Revenue TR Total Expenditure TE Price P x Quantity Q o TR PQ or TE PQ o Change in Total Revenue Change in Price Change in Quantity Demanded o TR P Q Consumer Surplus o Consumer Surplus CS Marginal Benefit Price o CS MB P Producer Surplus o Producer Surplus PS Price Marginal Cost o PS P MC Efficient Quantity o When Marginal Benefit Marginal Cost o When MB MC Market Equilibrium o When quantity demanded quantity supplied o Where QD QS o The marginal benefit from a good or service in excess of the price paid for it summed over the o The price of a good in excess of the marginal cost of producing it summed over the quantity Consumer Surplus quantity consumed o CS MB QD Producer Surplus supplied o PS MC QS Total Surplus o The sum of producer surplus and consumer surplus o TS PS CS Deadweight Loss o The Total Surplus of Efficient quantity and price TSE the total surplus of the inefficient quantity and price TSI o TSE TSI 39 40 Chapter 5 Notes Citation Bade Robin and Michael Parkin Foundations of Microeconomics 6th ed Boston Pearson Addison Wesley 2013 Print The Price Elasticity of Demand A measure of the responsiveness of the quantity demanded of a good to change in its price when all other influences on buyers plans remain the same 112 Percentage Change in Price Percentage Change in Price New Price Initial Price Initial Price x 100 Because elasticity compares the percentage change in the quantity demanded with the percentage change in price we need a measure of percentage change that does not depend on the direction of the price change This new method is called the midpoint method Midpoint Method Percentage Change in Price New Price Initial Price New Price Initial Price 2 x 100 Because the average price is the same regardless of whether the price rises or falls the percentage change in price calculated by the midpoint method is the same for a price rise or a price fall It gives the absolute value or magnitude Percentage Change in Quantity Demanded Percentage Change in Quantity New Quantity Initial Quantity New Quantity Initial Quantity 2 x 100 When the percentage change in quantity demanded exceeds the percentage change in price 114 When the percentage change in quantity demanded equals the percentage change in price 114 When the percentage change in quantity demanded is less than the percentage change in price 114 Elastic Demand Unit Elastic Demand Inelastic Demand Perfectly Elastic Demand When the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price 114 Consumers are willing to buy a product at a given price but none at a higher price Perfectly Inelastic Demand When the percentage change in quantity demanded is zero for any percentage change in price 114 41 Consumers are willing to buy the same amount of a product no matter what the price is Availability of Substitutes The demand of a good is elastic if a substitute for it is easy to find The demand for a good is inelastic if a substitute for it is hard to find Luxury Vs Necessity o Necessity has poor substitutes and is therefore inelastic o Luxury has many substitutes and is therefore elastic Narrowness of Definition o Narrow Goods such as a specific brand is elastic because there are substitutes o Broad Goods such as a type of food is inelastic because other foods are not necessarily good o The longer the time has elapsed since the price change the more elastic the demand for the good substitutes for it Time Elapsed Since Price Change is Price Elasticity of Demand Price elasticity of demand percentage change in quantity demanded percentage change in price If the price elasticity of demand is greater than 1 demand is elastic If the price elasticity of demand equals 1 demand is unit elastic If the price elasticity of demand is less than 1 demand is inelastic Elasticity Along a Linear Demand Curve Slope measures responsiveness The slope may be constant but the elasticity will vary Demand is unity elastic at the midpoint of the curve Demand is elastic at all points above the midpoint of the curve Demand is inelastic at all points below the midpoint of the curve Total Revenue The amount spent on a good and received by its seller and equals the price of the good multiplied by the quantity sold 120 When the price changes the total revenue can change in the same direction opposite direction or remain constant Total Revenue Test A method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change with all other influences on the quantity
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