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SC ECON 221 - Exam 2 Study Guide

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ECON 221 1st EditionExam # 2 Study Guide Lectures: 1 - 5Lecture 7 (September 25)- Price Elasticity of Demando Price Elasticity of Demand: measures changes in quantity dd. to changes in price, it is closely related to slope of the demand curveo Rule of Thumb: Flatter the dd. curve that passes through a given point, the greater the elasticityo Steeper the dd. curve the smaller the elasticityo There are five different classifications of demand curves… Lecture 8 (September 30)Price Elasticity and Total Revenue:- Revenue=Price x Quantity- Higher P; Lesser Q Elasticity and Total Revenue:- Question 1: If pharmacies raise the price of insulin by 10%, does total revenue rise or fall?o Total revenue increases- Question 2: If due to a price war, the price of a luxury cruise falls 20%, does the total revenue rise or fall?o Total revenue increases Price Elasticity of Supply:- Price elasticity of supply: measures how much quantity supplied responds to a change in price- Measures seller’s price-sensitivity- Supply usually more elastic in the long run than in the short run- We again use the midpoint method to compute the percentage changesLecture 9 (October 2)Determinants of the Price elasticity of Supply:- The more easily sellers can vary the quantity they produce, the greater the price elasticity of supply • Ex. Supply of beachfront property is less elastic than the supply of new cars - Global supply vs. Local supply- Time horizon: price elasticity of supply may be greater in the long run as firms can build new factories or due to entry of new firmsConsumer and Producer Surplus:- A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good.- WTP measures how much the buyer values the good. - Consumer surplus is the amount a buyer is willing to pay minus the amount the buyer actually pays:- Cost is the value of everything a seller must give up to produce a good (i.e., opportunity cost). o Example: Costs of 3 sellers in the lawn-cutting business.Lecture 10 (October 7)- Market is not efficiento Efficientnot having too much or too little of produced products (having the supply and demand equal)o Not sufficient because CS and PS are not equalTaxation:- Tax Incidence: the manner in which the burden of a tax is shared among participants in amarket- Tax: it drives a wedge between the buyer’s price and the seller’s price- Wedge is the same b/w the prices- In the new equilibrium, buyers and sellers share the burden of the taxLecture 11 (October 9) Lecture 12 (October 14)- With tax:o TS = CS + PS + TR- DWL = buyers lost in the market because of the tax (lost sales opportunity)- How can DWL be minimized? (all taxes create DWL)o Supply curve absolutely elastic so demand curve is not absolutely elastico Given same supply curve (flat) government is better off creating a tax where the demandcurve is more inelastic If demand is inelastic, then buyer’s cannot leave the market easily (not many ppeople will stop buying)- Subsidieso Subsidy to sellers  S shifts right to S’o Subsidy to buyers D shifts right to D’o Who benefits more from subsidies?- If demand is elasticbigger burden of tax on sellers- If demand is elasticbigger benefit of subsidy on sellersLecture 13 (October 21)Externalities:- Action someone takes that adversely affects someone elseo Positive (external benefit)o Negative (external cost)External Costs:- When external costs are ignored, the market quantity is greater than the socially efficient level, and social surplus is reduced. - To maximize social surplus output should be reduced to the socially efficient level. External Benefits:- When external benefits are ignored, the market quantity is less than the socially efficient level and social surplus is reduced. - To maximize social surplus output should be expanded to the socially efficient


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