BIOM 121 1nd EditionExam # 2 Study Guide LecturesLabel the graph:A – marginal maximum willingness to payB – excess supplyC – supply curveD – demand curveE – point of equilibriumF – excess demandG – equilibrium priceH – equilibrium quantity demandedWhat are the 3 key questions in economics?What gets produced? (what people are willing to buy at a set price)Who gets what? (those who are willing to pay)Who produces? (those for whom it’s cheapest to produce & make profit)What is equilibrium?Equalizing of supply & demand at an amount & price.What is consumer surplus?Maximum willing ness to pay – price actually paid. What is producer surplus?Price received – cost.What does increase/decrease in supply/demand do?Increase supply, supply curve shift R, marginal cost increases.Decrease supply, supply curve shift L, marginal cost decreases.Increase demand, demand curve shift R, marginal max willingness to pay increases.Decrease demand, demand curve shift L, marginal max willingness to pay decreases.How do you find surpluses of an individual vs. market?Individual: find area of rectangle A=bhMarket: find area of triangle A=1/2bhHow does setting a limit before Q* affect the market?Causes loses. Where is consumer surplus vs. producer surplus?Consumer = above P*Producer = below P*What is elasticity?Way of measuring responsiveness of a change.How do you find elasticity?Variable responding divided by variable that caused change.Lecture 15 (October 2)What is the midpoint formula?How do you break down the midpoint formula?% change in Q = absolute change Q / avg Q% change in P = absolute change P / avg P% change Q / % change PIs P elasticity of demand positive or negative?Always negativeDescribe the following and what they mean:-1 < E ≤ 0 Inelastic: P increases by 1% & Q decreases by < 1%E < -1 Elastic: P increases by 1% & Q decreases by > 1%E = -1 Unit elastic: P increases by 1% Q decrease by 1%What are 2 special cases of elasticity?E = 0 thus perfectly inelastic demand (vertical line)Perfectly elastic (horizontal line)Label the graph, D & E what magnitude of a change is it:A = elastic B = unit elasticC = inelasticD = small changesE = large changesHow do you calculate revenue?Revenue = Price & Quantity demanded (P*Q)What are some factors making demand inelastic?Few substitutes, little time to adjust, goods that are a small part of total spending, and expectations about future prices (can be right or wrong).What are the effects on revenue when price and quantity change?Great price decrease, therefore there is a small quantity increase, thus revenue decreases.Great price increase, therefore there is a small quantity decrease, thus revenue increases. What is rationality & what is it based on?It is a constrained optimization based on goals or objectives, constraints, & rule for figuring out what is the best choice.What is the constraint range?Physical, legal, & economic.On a constraint graph, what do the points on the line, above & below it mean?Point above the graph, not attainable at current income.Point on the line matches the budget line/constraint, shows combination of good A & B you can buy according to your income.Point below the graph, attainable and save money, but complicate the model due to adding 3rd variable.How is the budget line determined?Determined by income & prices of goods. What is the slope of a budget line?-P(good on x-axis)/P(good on y-axis).What are the 2 key assumptions about consumer’s utility?More is better – total utility increase as consumption increases.Law of diminishing marginal utility – each individual unit adds less to utility than previous unit.What is utility?Happiness or satisfaction. What is maximal utility?Extra utility you get from 1 more unit.What is the equation for maximal utility?MUx/Px = MUy/PyWhat is the general definition of income & substitute effects?How a change in price affects change in quantity.Describe the graph: what changed & what affects it had?Budget constraint changed due to a decrease in price of sandwiches. It is possible to buy more sandwiches, pizza, or both goods due to the drop in price of one of the items. The buying power has increase, what the person can purchase. The individual is ‘richer’ because they are able to and can afford to buy moreWhat is the income effect of price decrease?Buy more of normal goods and less of inferior goods.What is the substitution effect of price decrease?Buy more of the good whose price decreased and less of the other goods whose price remainedconstant. What is the slope of a wage effect graph?Slope is –wage.What is the maximal utility rule/equation?MU(leisure)/wage = MU(stuff)/1Other key things to knowChapter 3Be able to define: supply schedule, supply curve, law of supply, equilibrium, excess demand, excess supply.Causes of shift in supply curve & causes of change in quantity supplied.Relationship between firm supply curve & market supply curve.Understand figures in book: 3.7, 3.8, 3.12, relationship between Table 3.3 & Figure 3.6.Factors that affect supply of product.Understand how & why equilibrium changes.Chapter 4Be able to define: price ceiling, price floor, consumer surplus, producer surplus, & deadweight loss.Roles of market system in relation to problems of scarcity.How to calculate consumer & producer surplus, & deadweight loss.Understand figures in book: 4.6, 4.7 & 4.9.Chapter 5Be able to define: elasticity, price elasticity of demand, income elasticity of demand, cross-price elasticity of demand, elasticity of supply.Differentiate between: inelastic, elastic, unit elastic, perfectly inelastic & perfectly elastic.Factors determining whether elasticity of demand is large or small.Chapter 6Be able to define: budget constraint, utility, marginal utility, law of diminishing marginal utility, utility maximizing rule, income & substitution effects.Understand figures in book: 6.1, 6.2 &