FSU ECO 2023 - Test 2 Study Guide
Pages 39

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Formulas To KnowChapter 5 NotesElasticities of Demand and Supply LectureChapter 6 NotesChapter 8 NotesEfficiency of Markets LectureChapter 7 NotesPrice Ceilings and Price Floors LectureChapter 10 NotesExternalities LecturePublic Goods and Common Resources LectureTest 2 Study Guide:Lecture and TextbookECO 2023Dr. McCalebTable of Contents:FORMULAS TO KNOW 38 CHAPTER 5 NOTES 41 ELASTICITIES OF DEMAND AND SUPPLY LECTURE 45 CHAPTER 6 NOTES 52 CHAPTER 8 NOTES 55 EFFICIENCY OF MARKETS LECTURE 57 CHAPTER 7 NOTES 62 PRICE CEILINGS AND PRICE FLOORS LECTURE 64 CHAPTER 10 NOTES 67 EXTERNALITIES LECTURE 69 PUBLIC GOODS AND COMMON RESOURCES LECTURE 74 37Formulas To KnowReview from Midterm 1: - Slope of a Line:o M = Change in Y over change in X o M = ΔY/ΔXo M = Y2-Y1/X2-X1- Net Benefit (NB):o NB = Total Benefit – Total Cost o NB = TB - TC- The optimal amount of any activity:o Is when the Marginal Benefit is equal to the Marginal Costo When MB = MC- Marginal Benefit (MB):o MB = Change in Total Benefit/Change in Quantityo MB = ΔTB/ΔQ o MB = (TB2-TB1)/(Q2-Q1)- Marginal Cost (MC):o MC = Change in Total Cost/ Change in Quantityo MC = ΔTC/ΔQ o MC = (TC2-TC1)/(Q2-Q1)- When to increase the amount of an activity (Production Possibilities Frontier):o If Marginal Benefit > Marginal Costo If MB > MC - When to decrease the amount of an activity (Production Possibilities Frontier):o If Marginal Cost > Marginal Benefit o If MC > MB - Labor Force (LF):o = Employed + Unemployedo = E + U- Market Equilibriumo When the quantity demanded equals the quantity supplied. o Equilibrium: QD=QSMidterm 2:- Price Elasticity of Demand:o Elasticity (η) = % Change in Quantity Demanded / % Change in Priceo = %ΔQD / %ΔP-Midpoint Method to Calculating the Price Elasticity:o Percent Change in Quantity = [(New Quantity – Initial Quantity) / ((New Quantity + Initial Quantity) / 2)] x 100o %ΔQ = [(Q2 - Q1) / ((Q2 + Q1) / 2)] x 100o Percent Change in Price = [(New Price – Initial Price) / ((New Price + Initial Price) / 2)] x 100o %ΔP = [(P2 - P1) / ((P2 + P1) / 2)] x 100- Price elasticity of supply:38o Elasticity (η) = % change in quantity supplied / % change in priceo = %ΔQS / %ΔP- Cross elasticity of demand:o Elasticity (η) = % change in quantity demanded of a good / % change in the price of one of its substitutes or complements. o = %ΔQD / %ΔPS/C- Income elasticity of demand:o Elasticity (η) = % change in quantity demanded / % change in incomeo = %ΔQD / %ΔI- Total Revenue and the Price Elasticity of Demando Total Revenue (TR) = Total Expenditure (TE) = Price (P) x Quantity (Q)o TR = PQ or TE = PQ o Change in Total Revenue = Change in Price + Change in Quantity Demandedo ΔTR = ΔP + ΔQ- Consumer Surpluso Consumer Surplus (CS) = Marginal Benefit – Priceo CS = MB - P- Producer Surpluso Producer Surplus (PS) = Price – Marginal Costo PS = P – MC- Efficient Quantityo When Marginal Benefit = Marginal Costo When MB = MC- Market Equilibriumo When quantity demanded = quantity suppliedo Where QD = QS- Consumer Surpluso The marginal benefit from a good or service in excess of the price paid for it, summed over the quantity consumed o CS = MB / QD- Producer Surpluso The price of a good in excess of the marginal cost of producing it, summed over the quantity supplied. o PS = MC / QS- Total Surpluso The sum of producer surplus and consumer surplus. o TS = PS + CS- Deadweight Losso The Total Surplus of Efficient quantity and price (TSE) – the total surplus of the inefficient quantity and price (TSI)o TSE- TSI- Marginal Social Benefit39o The sum of the marginal private benefit and the marginal external benefit. o MSB = MB + MEB- Marginal Social Costo The sum of the marginal private cost and the marginal external cost. o MSC = MC + MEC- Individual Transferrable Quotas (ITQ)o The marginal private cost with the ITQ equals the marginal social cost and the equilibrium with the ITQ is efficiento MC + Price of ITQ = MSC- Private Property Rightso The marginal cost of fishing equals the marginal social cost. o S= MC = MSC40Chapter 5 NotesCitation:Bade, Robin, and Michael Parkin. Foundations of Microeconomics. 6th ed. Boston: Pearson/Addison-Wesley, 2013. Print.The Price Elasticity of DemandA measure of the responsiveness of the quantity demanded of a good to change in its price when all other influences on buyers’ plans remain the same (112). Percentage Change in PricePercentage Change in Price = [(New Price – Initial Price) / Initial Price] x 100Because elasticity compares the percentage change in the quantity demanded with the percentage change in price, we need a measure of percentage change that does not depend on the direction of the price change. This new method is called the midpoint method. Midpoint MethodPercentage Change in Price = [(New Price – Initial Price) / ((New Price + Initial Price) / 2)] x 100Because the average price is the same regardless of whether the price rises or falls, the percentage change in price calculated by the midpoint method is the same for a price rise or a price fall. It gives the absolute value or magnitude. Percentage Change in Quantity DemandedPercentage Change in Quantity = [(New Quantity – Initial Quantity) / (New Quantity + Initial Quantity) / 2)] x 100Elastic DemandWhen the percentage change in quantity demanded exceeds the percentage change in price (114). Unit Elastic DemandWhen the percentage change in quantity demanded equals the percentage change in price (114).Inelastic DemandWhen the percentage change in quantity demanded is less than the percentage change in price (114). Perfectly Elastic DemandWhen the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price (114). Consumers are willing to buy a product at a given price but none at a higher price. Perfectly Inelastic DemandWhen the percentage change in quantity demanded is zero for any percentage change in price (114). 41Consumers are willing to buy the same amount of a product no matter what the price is. Availability of SubstitutesThe demand of a good is elastic if a substitute for it is easy to find. The demand for a good is inelastic if a substitute for it is hard to find. - Luxury Vs. Necessityo Necessity- has poor

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# FSU ECO 2023 - Test 2 Study Guide

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