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Law of demand: With other things equal, quantity demanded of a good falls when price risesSurplus: quantity supplied is GREATER than quantity demandedShortage: quantity supplied is LESS than quantity demandedNormal good: a good which equals an increase in income to increase in demandInferior good: a good which increase in income leads to a decrease in demandExample: Poor person usually buys potatoes and rice but once receives more money, start buying meat instead of potatoes and rice even though at lower priceSubstitutes: two goods which increase in price of one leads to an increase in demand for the otherExample: Pizza and Hamburgers: Increase in the price for pizza leads to an increase in demand for burgers at a lower cost.Compliments: two goods which an increase in price of one leads to a decrease in demand for otherExample: Peanut Butter and Jelly: Increase in price of peanut butter will decrease the demand for jelly since they are paired together.Price ceiling: legal maximum on the price which a good can be soldNot binding = Price ceiling is above the equilibrium priceBinding = Price ceiling is below the equilibrium price, meaning there is a SHORTAGE in the marketPrice floor: legal minimum on the price which a good can be soldNot binding = Price floor is below the equilibrium priceBinding = Price floor is above the equilibrium price, meaning there is a SURPLUS in the marketLaw of supply: with all things equal, quantity supplied of a good rises when the price of a good risesInput Prices: Price of these inputs rises, producing is less and supply decreasesExample: Ice cream is made up of: sugar, cream, machines, etc. If one of those prices rises, the cost to produce ice cream would be higherPrice elasticity of demand: measure of how much quantity DEMANDED of a good responds to change in price of that goodEquation: [(Q2-Q1)/((Q1+Q2)/2))][(P2-P1)/((P1+P2)/2))]Elastic: quantity demanded responds A LOT to changes in price (> 1)Inelastic: quantity demanded responds A LITTLE to changes in price (< 1)Total revenue: Price x Quantity (known as Expenditures)If demand is ELASTIC, price and total revenue in SAME directionIf demand is INELASTIC, price and total revenue in OPPOSITE directionsIf demand is UNIT ELASTIC, total revenue CONSISTENT when price changesIncome elasticity of demand: measure of how much quantity demanded of a good responds to change in consumer’s incomeEquation: Percentage change in quantity demandedPercentage change in incomeCross-price elasticity of demand: measure of how much quantity demanded of one good responds to change in price of anotherWith substitutes: POSITIVEWith compliments: NEGATIVEEquation: Percentage change in quantity demanded (good 1)Percentage change in price of good 2Statutory incidence: economic agent who is legally responsible for payment of taxWhen tax is levied on BUYERS, demand shifts DOWNWARDSWhen tax is levied on SELLERS, supply shifts UPWARDEconomic incidence: final distribution of a burden of a tax (who has less money than beforeSummary of Incidence:With all things equal, demanders bear more tax burden when demand is INELASTIC or supply is ELASTICWith all things equal, suppliers bear more tax burden when demand is ELASTIC or supply is INELASTICSales tax: total amount spent in retail storesProperty tax: total value of land and paid by ownersMarginal tax rate: extra taxes paid on an additional dollar of incomeAverage tax rate: Total taxes paidTotal incomeLump-sum taxes: a tax that is the same amount for every personBudget deficit: an excess of government spending over government receiptsBudget surplus: an excess of government receipts over government spendingECON200Final Exam Study GuideDemando Law of demand : With other things equal, quantity demanded of a good falls when price rises o Surplus : quantity supplied is GREATER than quantity demanded o Shortage : quantity supplied is LESS than quantity demanded oooo Normal good : a good which equals an increase in income to increase in demand o Inferior good : a good which increase in income leads toa decrease in demand -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 : two goods which increase in price of one leads to an increase in demand for the other -Example: Pizza and Hamburgers: Increase in the price for pizza leads to an increase in demand for burgers at a lower cost. - Controls on Prices-o Price ceiling : legal maximum on the price which a goodcan be sold- Not binding = Price ceiling is above the equilibrium price - Binding = Price ceiling is below the equilibriumprice, meaning there is a SHORTAGE in the marketo Price floor : legal minimum on the price which a good 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 Supplyo Law of supply : with all things equal, quantity supplied of a good rises when the price of a good riseso Input Prices : Price of these inputs rises, producing is less and supply decreases - 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 -Elasticityo Price elasticity of demand : measure of how much quantity DEMANDED of a good responds to change in price of that good- Equation: [(Q2-Q1)/((Q1+Q2)/2))] [(P2-P1)/((P1+P2)/2))]- Elastic : quantity demanded responds A LOT to changes in price (> 1)- Inelastic : quantity demanded responds A LITTLE to changes in price (< 1)o Total revenue : 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 o Income elasticity of demand : measure of how much quantity demanded of a good responds to change in consumer’s income - Equation: Percentage change in quantity demanded Percentage change in incomeo 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 Tax System o Statutory incidence : economic agent who is


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UMD ECON 200 - Final Exam Study Guide

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