ECON200 Final Exam Study Guide Demand Supply With other things equal Law of demand o quantity demanded of a good falls when price rises o than quantity demanded o quantity demanded quantity supplied is GREATER quantity supplied is LESS than Shortage Surplus with all things equal quantity supplied o Law of supply of a good rises when the price of a good rises Input Prices less and supply decreases o Price of these inputs rises producing is Example Ice cream is made up of sugar cream machines etc If one of those prices rises the cost to produce ice cream would be higher o o Controls on Prices o Price ceiling can be sold legal maximum on the price which a good Not binding Price ceiling is above the equilibrium price Binding Price ceiling is below the equilibrium price meaning there is a SHORTAGE in the market legal minimum on the price which a good o Price floor can be sold Not binding Price floor is below the equilibrium price Binding Price floor is above the equilibrium price meaning there is a SURPLUS in the market o a good which equals an increase in o Normal good income to increase in demand Inferior good a decrease in demand o a good which increase in income leads to Example Poor person usually buys potatoes and rice but once receives more money start buying meat instead of potatoes and rice even though at lower price o Substitutes leads to an increase in demand for the other two goods which increase in price of one Example Pizza and Hamburgers Increase in the price for pizza leads to an increase in demand for burgers at a lower cost o Price elasticity of demand measure of how much quantity DEMANDED of a good responds to change in price of that good Elasticity Equation Q2 Q1 Q1 Q2 2 P2 P1 P1 P2 2 Elastic Inelastic o Total revenue quantity demanded responds A LOT to changes in price 1 quantity demanded responds A LITTLE to changes in price 1 Price x Quantity known as Expenditures If demand is ELASTIC price and total revenue in SAME direction If demand is INELASTIC price and total revenue in OPPOSITE directions If demand is UNIT ELASTIC total revenue CONSISTENT when price changes Equation Percentage change in quantity demanded Percentage change in income o Income elasticity of demand measure of how much quantity demanded of a good responds to change in consumer s income o Cross price elasticity of demand measure of how much quantity demanded of one good responds to change in price of another With substitutes POSITIVE With compliments NEGATIVE Equation Percentage change in quantity demanded good 1 Percentage change in price of good 2 Public Goods and Common Resources Rival in Consumption o Surplus o o In Perfect Competition Excludable Yes o No Tax System Yes Private Goods Statutory incidence Ice cream responsible for payment of tax Contact lenses No Club Goods economic agent who is legally Fire protection Cable TV When tax is levied on BUYERS demand shifts When tax is levied on SELLERS supply shifts DOWNWARDS Common Resources Fish in ocean UPWARD National parks Public Goods Tornado siren National defense final distribution of a burden of a Rainbow property of a good whereby a person can be prevented from using it o property of a good whereby one person s use diminishes other people s use o Economic incidence tax who has less money than before Summary of Incidence goods that are neither excludable nor rival in consumption goods that are rival in consumption but not excludable o Excludability o Rivalry o Public goods o Common resources o With A Price Floor Deadweight Loss Positive Production With all things equal demanders bear more tax o burden when demand is INELASTIC or supply is ELASTIC Social cost is LESS THAN private cost everyone avoiding cost With all things equal suppliers bear more tax burden when demand is ELASTIC or supply is Positive Consumption Externalities INELASTIC total amount spent in retail stores Social value is GREATER THAN total value of land and paid by owners private value Examples technology spillovers new information can help more companies than just arises when a person engages the one who found the in an activity that impacts the well being of information extra taxes paid on an additional dollar Examples vaccinations a bystander and yet neither the individual pays or receives compensation Negative Production Production Private and Social Cost Sales tax o o Property tax o Marginal tax rate of income o Average tax rate o Externality o o Total taxes paid Total income o cost of producing an person government receipts government spending o Private cost a tax that is the same amount for every Social cost is GREATER THAN additional unit of a good or private cost service that is borne by the an excess of government spending over Examples air pollution water producer of that good or service Interdependence and Gains from Trade Consumer Choice Negative Consumption pollution Social cost cost incurred by o an excess of government receipts over producer and everyone else in o Budget Constraint consumption bundles that a Social value is LESS THAN private society combinations of outputs that economy can be given the consumer can afford all the possible outcomes a value o available factors of production and the available consumer can purchase production technology o Production Possibilities Frontier PPF o Externality exists when graph showing o o Lump sum taxes o Budget surplus o Budget deficit Examples loud music second If nothing changes in terms of prices of hand smoke PRIVATE COST SOCIAL COST Trade allows for countries to produce outside of goods then slope stays the SAME and their PPF budget constraint shifts OUTWARDS o Consumption Private and Social Value Straight line means that resources are EQUALLY If price of goods rise budget constraint useful ROTATES o Private value benefit from Country I Country II Decisions Under Uncertainty o Expected Value on repeating the situation many times average value of an event based Calculated by Multiplying each possible outcome by probability that outcome will occur Add the two numbers Example Probability of house with NO fire House wealth without fire probability of house WITH fire house wealth with fire 9 40 000 1 10 000 37 000 o Risk Averse if she or he prefers LESS risky income holding fixed its expected value only about expected wealth person does not care about risk cares o Risk Neutral o Average Revenue Total revenue Quantity sold Firms in Competitive Markets o Marginal Revenue In a perfectly competitive market P MR
View Full Document
Unlocking...