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Econ200 Exam Guide #1Chapter 4: Supply & Demand- determinants of demand:o priceo incomeo preferenceo expectations- 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 demando negative elasticity of demando positive income elasticity- inferior good- increase in income decreases demando positive elasticity of demando negative income elasticity- substitutes- increase in price of good 1 leads to increase in demand of good 2o ex. Butter and margarineo positive cross-price elasticity- complements- increase in price of good 1 leads to decrease in demand of good 2o ex. Ketchup and burgerso negative cross-price elasticity- determinants of supply:o price of goodso expenseso expectations- 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 demandChapter 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 Po greater than 1: elastico less than 1: inelastico equal to 1: unit elastico equal to 0: perfectly elastico undefined: perfectly inelastic- total revenue- P x Q (area between demand curve and x-axis)- income elasticity of demand = % change in Qd / % change in INCOMEo normal goods- positive income elasticityo inferior goods- negative income elasticityo necessities- small income elasticityo luxuries- large income elasticity- cross-price elasticity of demand = % change in good 1 / % price in good 2o substitutes- cross-price elasticity is positiveo complements- cross-price elasticity is negative- price elasticity of supply = % change in Qs / % change in Po supply is elastic if Q responds substantially to Po supply is inelastic if Q barely responds to PChapter 6: Floors, Ceilings, & Taxes- price ceiling- max price a good can beo if equilibrium is ABOVE ceiling, there is a shortage of supply (binding constraint)- price floor- min price a good can beo if equilibrium is BELOW floor, there is a surplus of supply (binding constraint)- tax incidence- how burden of tax is sharedo 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 ELASTICo if supply is perfectly elastic (flat) the full burden fall on demanderso if supply is perfectly inelastic (vertical) the full burden falls on supplierso if demand is perfectly inelastic (vertical) the full burden falls on demanderso if demand is perfectly elastic (flat) the full burden falls on suppliersChapter 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


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UMD ECON 200 - Exam Guide #1

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