Econ200 Exam Guide 1 Chapter 4 Supply Demand determinants of demand price income preference expectations o o o o increase in quantity demanded movement along the demand curve as price changes increase in demand consumer buys more at each price curve shifts right normal good increase in income increases demand substitutes increase in price of good 1 leads to increase in demand of good 2 complements increase in price of good 1 leads to decrease in demand of good 2 inferior good increase in income decreases demand o o o o o o o o negative elasticity of demand positive income elasticity positive elasticity of demand negative income elasticity ex Butter and margarine positive cross price elasticity ex Ketchup and burgers negative cross price elasticity determinants of supply price of goods expenses expectations o o o market supply is the sum of supplies of all sellers sum of individual supply curves horizontally surplus supply is greater than demand excess supply shortage demand is greater than supply excess demand Chapter 5 Elasticity elasticity measures how quantity demanded supplied changes based on a price change necessities have inelastic demand steep demand people get them regardless of price luxuries have elastic demand flat demand people only get them at a certain price price elasticity of demand change in Qd change in P o o o o o greater than 1 elastic less than 1 inelastic equal to 1 unit elastic equal to 0 perfectly elastic undefined perfectly inelastic total revenue P x Q area between demand curve and x axis income elasticity of demand change in Qd change in INCOME o o normal goods positive income elasticity inferior goods negative income elasticity necessities small income elasticity luxuries large income elasticity cross price elasticity of demand change in good 1 price in good 2 substitutes cross price elasticity is positive complements cross price elasticity is negative price elasticity of supply change in Qs change in P supply is elastic if Q responds substantially to P supply is inelastic if Q barely responds to P Chapter 6 Floors Ceilings Taxes price ceiling max price a good can be if equilibrium is ABOVE ceiling there is a shortage of supply binding constraint price floor min price a good can be if equilibrium is BELOW floor there is a surplus of supply binding constraint tax incidence how burden of tax is shared o when sellers are taxed supply curve shifts UP equil P rises Q falls o when buyers are taxes demand curve shifts DOWN equil P Q fall tax burden falls more heavily on curve that is LESS ELASTIC if supply is perfectly elastic flat the full burden fall on demanders if supply is perfectly inelastic vertical the full burden falls on suppliers if demand is perfectly inelastic vertical the full burden falls on demanders if demand is perfectly elastic flat the full burden falls on suppliers o o o o o o o o o o o o Chapter 7 Surplus consumer surplus area above price and below demand curve triangle expenditure area below price and above x axis rectangle producer surplus area below price and above supply curve triangle cost area below supply curve and above x axis trapezoid total surplus CS PS area between supply and demand curves Chapter 8 Tax and Deadweight Loss tax revenue size of tax T x quantity sold Q rectangle deadweight loss fall in surplus due to the tax area between equil Q1 and equil Q2 o the greater the elasticity of supply demand the flatter the curves the greater the deadweight loss as tax grows tax revenue grows climaxes then falls downward parabola
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