ECO 2023 Principles of Microeconomics EXAM 2 STUDY GUIDE Chapter 4 Supply and Demand Applications and Extensions 5 Learning Goals 1 Describe the relationship between resource and product markets Chapter heading The Link Between Resource and Product Markets When demand for a product increases what happens to the demand for the resources that make that product When demand for a product decreases what happens to the demand for the resources that make that product Draw a product market and a resource market Graphically illustrate what happens to the demand for the resource when the demand for the product increases Draw a product market and a resource market Graphically illustrate what happens to the demand for the resource when the demand for the product decreases 2 Analyze the impact of government policies for price controls in markets Chapter heading The Economics of Price Controls Key terms Price ceiling Shortage Price floor Surplus Draw a supply and demand graph Identify P and Q Where would you place an effective price ceiling Why would an effective price ceiling be set below equilibrium price Identify a common price ceiling Draw a supply and demand graph Identify P and Q Where would you place an effective price floor Why would an effective price floor be set below above equilibrium price Identify a common price floor What are common secondary effects of price controls 1 2 3 4 5 3 Determine the effects of a tax in a market Chapter heading The Impact of a Tax Note Please see Impact of a Tax1 pdf Impact of a Tax2 pdf and Impact of a Tax3 pdf under the notes tab of Blackboard Key terms Tax incidence Deadweight loss Excess burden of taxation Why does the consumer pay most of the tax when demand is inelastic relative to supply Why does the producer pay most of the tax when supply is inelastic relative to demand 4 Explore the relationship between tax rates and revenues Chapter heading Tax Rates Tax Revenues and the Laffer Curve Key terms Marginal tax rate Laffer curve If the initial tax rate is low why would an increase in the tax rate likely raise tax revenue If the initial tax rate is high why would an increase in the tax rate possibly decrease tax revenue 5 Identify the effects of a subsidy Chapter heading The Impact of a Subsidy Key term Subsidy Why does the consumer receive most of the benefit from a subsidy when demand is inelastic relative to supply Why does the producer receive most of the benefit from a subsidy when supply is inelastic relative to demand ECO 2023 Principles of Microeconomics Chapter 5 Difficult Cases for the Market and the Role of Government 3 Learning Goals 1 Explore the details of efficiency Chapter headings A Closer Look at Economic Efficiency It It s Worth Doing It s Worth Doing Imperfectly Key term Economic efficiency What is the rule you should apply when thinking on the margin Suppose you ve already studied for 4 hours for an exam and you re thinking about whether to study one more hour If you do the expected benefit is a higher exam score The expected cost is an hour of something else you could do e g sleep finish homework for another subject or socialize How should you make the decision whether or not to keep studying 2 Identify factors reduce the efficiency of markets Chapter heading Potential Shortcomings of the Market Factors that cause inefficiencies in a market or cause market failure 1 2 3 4 3 Explain how those factors reduce the efficiency of markets Chapter heading Potential Shortcomings of the Market Key terms External costs External benefits Public goods Free rider Provide an example of a positive externality When a market has a positive externality is the actual market price greater than or less than the efficient price Why When a market has a positive externality is the actual market quantity greater than or less than the efficient quantity Why Provide an example of a negative externality When a market has a negative externality is the actual market price greater than or less than the efficient price Why When a market has a negative externality is the actual market quantity greater than or less than the efficient quantity Why ECO 2023 Principles of Microeconomics Chapter 7 Consumer Choice and Elasticity 6 Learning Goals 1 List the key factors influencing consumer behavior Chapter heading Fundamentals of Consumer Choice Key terms Marginal utility Law of diminishing marginal utility Consumers decide what to buy and how much to buy based upon a lot of different factors that vary over time and circumstance The consumer must decide how to allocate scarce resources to obtain the largest benefit List five key factors that dictate consumer behavior 1 2 3 4 5 2 Apply the concept of marginal utility to determine how a demand curve is derived Chapter heading Marginal Utility Consumer Choice and the Demand Curve of an Individual Key terms Marginal benefit Substitution effect Income effect A consumer s willingness to pay for a good is directly linked to the additional benefit received Since the consumer s marginal benefit falls as more units of the good are obtained the willingness to pay falls Hence the demand curve is downward sloping The substitution and income effects result from a change in the price of a good Together they reinforce the downward sloping shape of the demand curve 3 Define calculate and graph elasticity of demand Chapter heading Elasticity of Demand Key term Price elasticity of demand Write the formula for price elasticity of demand When demand is inelastic which is greater the change in quantity demanded or the change in price When demand is elastic which is greater the change in quantity demanded or the change in price Draw two demand curves For one draw an inelastic demand for the other draw an elastic demand Three primary factors determine elasticity of demand 1 2 3 4 Relate demand elasticity to total revenue Chapter heading How Demand Elasticity and Price Changes Affect Total Expenditures or Revenues on a Product Complete the following sentences When demand is inelastic and price rises total revenue will When demand is inelastic and price falls total revenue will When demand is elastic and price rises total revenue will When demand is elastic and price falls total revenue will When demand is inelastic which part of the equation is larger the change in quantity demanded or the change in price When demand is elastic which part of the equation is larger the change in quantity demanded or the change in price 5 Define and
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