ECON200 MIDTERM EXAM REVIEW Determinants of elasticity luxury goods or goods that are less necessary required are MORE elastic b c if price goes up for these goods less people will buy them A larger market is more inelastic An elastic good should be lower in price Quantity Controls government passes a law saying a certain qty is not allowed to rise over a certain level Firm can t import more than X amount of cards Ex tax cab medallion number is fixed Price ceiling a legal MAXIMUM Prices cannot rise above this price Ex rent control NYC Price floor a legal MINIMUM Prices cannot be below this price Most commonly agricultural products Total surplus want to be maximized Measures the total gains from trades in a market CS PS Producer surplus equal to price a producer receives for his product minus the cost of producing the product Consumer surplus equal to a buyer s willingness to pay minus the amount actually paid Cost the value of everything a seller must give up to produce a good includes cost of all resources and value of sellers time Willingness to pay maximum amount someone is willing to pay for a good The value one places on a particular good does NOT have to be just Allocation of resources how much of a good will be produced which producers produce it and which consumers consume it Expenditure price x quantity Perfectly inelastic demand curve vertical Numerator 0 price elasticity 0 Supply shifts UP Price elasticity of supply measure of how much qty supplied of a good responds to a change in price of that good change in quantity supplied change in price Income elasticity of demand measure of how much qty demanded of a good responds to change in consumer s income change in quantity demanded change in income Cross price elasticity of demand measure of how much the quantity demanded of a good responds to the change in price of another good change quantity demanded of 1st good change price of 2nd good Substitutes have positive cross price Complements have negative cross price Inelastic demand if price elasticity LESS THAN 1 not very responsive to a change in price of a good Demand curve MUST be steep Elasticity is less than 1 when price change causes quantity to change in a small way Price elasticity of demand a measure of how much the quantity demanded of a given good responds to a change in price of that good change in quantity demanded change in price Surplus quantity supplied quantity demanded Change in quantity supplied can ONLY be a result of change in price of a good Change in supply shift on supply curve produce more every price supply shift increase to the RIGHT Produce less every price supply shift decrease to LEFT Law of supply other things being equal when price of a good rises qty supplied rises and when price decreases quantity supplied decreases Welfare economics the study of how the allocation of resources affects economic well being Demand schedule a TABLE that shows the relationship btwn A price of a good and the qty demanded Demand curve a graph of the relationship btwn The price of a good and quantity demanded Inferior good increase in income decrease in demand Decrease in income increase in demand ex public transportation generic prescriptions used goods Income elasticity is NEGATIVE Normal good increase in income increase in demand decrease in income decrease in demand Income elasticity POSITIVE Change in demand relationship between price and wty Has NOT shifted Increase in demand every price people want to buy more and demand curve shifts RIGHT Decrease in demand every price people want to buy LESS demand curve sifts LEFT Change in quantity demanded movement along a demand curve only changing factor change in price of a good Marginal Benefits marginal cost NOT trying to maximize the diff btwen the 2 Small incremental changes to a plan of action Benefit should be greater than cost Sunk cost once u pay something money is gone doesn t have to be MONEY can be TIME etc Thinking at the margin rational decision maker continues to take action if and ONLY if marginal benefit is ATLEAST as large as marginal cost Total benefits total cost MAXIMIZE diff btwn the 2 Substitutes two goods where increase in price of one leads to increase of demand for the other ex coke pepsi coffee tea Complements 2 goods where an increase of price leads to decrease of demand of the other ex DVDs and DVD players Law of demand other things being equal the quantity demanded of a good falls when the price of the good rises Tells us demand curve MUST be negatively sloped snob appeal defies this Market demand schedule a table that shows the relationships btwn the price of a good and the quantity demanded by all buyers
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