ECON 110 Exam # 2 Study Guide Lectures: 8-14Lecture 8 (September 18)Elasticity measures exactly how responsive the market is to changes in important factors. For example, while a certain brand of shoes is pretty inelastic (if they become too expensive, consumers will simply buy other shoes,) shoes in general are less elastic, because there is not a good substitute. Also, Elasticity would measure the response to higher demand forroses during Valentine’s Day. Surge Pricing: when demand goes up, prices automatically go up. For example, on New Year’s Eve, everybody suddenly wants an UBER car because they don’t want to drive home drunk. And because they are drunk, they are willing to pay more. UBER will in turn raise prices like crazy because there will be a guaranteed surge of business regardless.Elasticity versus Cost Differences: A coffee shop that charges ten cents more per cup to dine-in with coffee than for to-go coffee, is probably more likely adjusting for the cost differencein whether they have to wash a cup. However, Keurig making really expensive K cups is elasticity, because it is a specialized product for their machine that they know that people are willing to pay for regardless.The elasticity equation states that the elasticity of demand will be equivalent to the percent change in quantity, divided by the percent change in price. Price Elasticity of Demand: Ԑd = %∆Quantity = (Q1 – Q2)/((Q1 + Q2)/2)%∆Price (P1 – P2)/((P1+P2)/2)There are three factors in determining elasticity value:1. Time: How long does a household have to adapt to the change in the price?2. Substitutes: Are there any close substitutes for this product; are there many of these substitutes?3. Significance: How large of a proportions of a household’s budget is spent on the product?Lecture 9 (September 23) Cross price elasticity: How the change in price of one good affects the demand for another good.For example, let’s look at Coke vs. Pepsi. The cross price elasticity of Pepsi with respect to Coke is 0.80. The cross price elasticity of Coke with respect to Pepsi is 0.61. Notice that they are different; this implies that a change in price of Coke will not affect demand for Pepsi as much as a change in price of Pepsi would affect demand for Coke. Now the question is, are they strong or weak substitutes? Because the elasticity is less that one, they are weak substitutes. Elasticity notes: - When a product is relatively inelastic, raising prices will increase revenue because demand will not change very much.- For elastic products, lowering prices will raise revenue, because they will increase demand.Market equilibrium reflects the way markets allocate scarce resources. The question of whetherthe market allocation is desirable can be addressed by welfare economics.Auctions: You only bid once, the maximum amount that you're willing to bid. Value determines bidding: how much you value the object. The idea of the auction is to leave no consumer surplus, forcing the customer to bid exactly as much as they are willing to pay, therefore increasing seller surplus. Lecture 10 (September 25) Consumer Surplus Consumer Surplus is the difference between a consumer’s willingness to pay for a product and the market price of the product. On a graph, Consumer Surplus is represented by the area beneath the demand curve and above the market price. Essentially, this is the benefit that buyers receive from a good as perceived by the buyersProducer Surplus Producer Surplus is the area between the supply curve and the market price. The producer surplus will be the area of the triangle between the equilibrium price line, and the supply curve. This represents the difference between what a producer is willing to sell a product for, and the market price. Essentially, this is the benefit that producers receive from selling a good, as perceived by the producers.Total surplus is consumer surplus plus producer surplus, or value of a product to consumers minus the cost of the product for suppliers.The government often influences prices to achieve those goals; this is termed Price Control.Price control has two forms: Price Ceilings and Price Floors. Price ceilings Price Ceilings are a legal maximum price. The impact of a price ceiling depends upon where it is relative to the market price and equilibrium price. If it is set below the equilibrium price, it will alter the number of units made available and traded (this has a binding effect.) Overall, this will cause buyers to increase quantity demanded, while supply will go down, and the result is a shortage. Note: This effect is different from scarcity. It is not a lack of resources that causes the shortage, but price control. Lecture 12 (October 2) Price controls can come in several forms, such as price ceilings, price floors, and taxes.Price floors are a legal minimum price for a product. There are two kinds: non-binding and binding, meaning below and above the equilibrium price line.  When a price floor is below the equilibrium price, it is non- binding, because the price can still remain at equilibrium. When the price floor is above the equilibrium price, it is binding because it forces the price higher than normal. In the end, it will cause consumers to have to pay higher prices for goods. Price controls disrupt the market by disrupting the process of allocating resources efficiently to those who place the highest value on a good or service.Taxes are levies on economic activity as a means for governments to obtain resources to provide the goods and services that it furnishes to society. Taxes have negative impact on both buyers and sellers. They create a burden on market participants.  They alter behavior, leading buyers and sellers to attempt to avoid or lessen the affect of taxes on their well beingTax incidence is the impact of, and distribution, of the tax burden. However, who actually pays the tax is not important Lecture 13 (October 7) Tax revenue generated will equal the number of units sold times the tax. Showing a tax- When a tax is imposed on buyers, shift the demand curve. - When a tax is imposed on seller, we shift the supply curve.*It does not matter which side we impose the tax on. When you impose a tax in a graph… Tax effects We have noted the impact of elasticity, or more precisely—how differences in elasticity—affects the market- Less elasticity means there will be a smaller drop in quantity demanded