Econ 201: Exam 1

more If the demand is inelastic, a tax will not deter many trades

Deadweight losses are larger the ----- elastic the demand curve: why?

The supply of oil will rise today

If oil executives read in the newspaper that massive new oil supplies have been discovered under the Pacific Ocean but will likely only be useful in 10 years, what is likely to happen to the supply of oil today?

-5%/10%= -0.5 or .5 (in absolute terms) !E^d!< 1 the demand curve is inelastic !E^d!>1 demand curve is elastic !E^d!= 1 unit elastic

If the price of oil increases by 10% and over a period of several years, the quantity demanded falls by 5%, the the long run elasticity of demand is:

38$

If the price of oil is $40 per barrel and Saudi Arabia can produce oil at $2 per barrel, then we say that Saudi Arabia earns a producer surplus of $-- per barrel.

production through specialization.

The real power of trade is the power to increase

In short, a change in demand refers to a shift in the demand curve — caused by a number of factors such as income, population, etc. A change in quantity demanded refers to a movement along a fixed demand curve — caused by a change in price -

What is the difference between a change in demand and a change in the quantity demanded?

A rise in demand

What's the best way to think about the rise in oil prices in the last 10 years, as China and India have become richer: Was it a rise in demand, a fall in demand, a rise in supply, or a fall in supply?

Price and quantity both increase

When demand increases, what happens to price and quantity in equilibrium?

availability of substitutes also: time horizon category of product necessitates vs luxury( more elastic) purchase sizes- bigger purchase sizes more elastic

----- -------- determines elasticity of demand

-consumer surplus Adding up consumer surplus for each consumer and for each unit, we can find total consumer surplus. On a graph, total consumer surplus is the shaded area beneath the demand curve and above the price (see Figure 3.4).

. ----------- is the consumer's gain from exchange.

fall, rise

. Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curves have a negative slope while supply curves have a positive slope), if there is a tax, the equilibrium quantity must _______ and the price that buyers pay must _______.

We will focus on three of the benefits of trade: Trade makes people better off when preferences differ. Trade increases productivity through specialization and the division of knowledge. Trade increases productivity through comparative advantage.

benefits of trade

Consumer surplus

measures the consumer's benefit from trade, and producer surplus measures the producer's benefit from trade.

productivity

specialization increases --------. Without specialization and trade, we would each have to produce our own food as well as other goods, and the result would be mass starvation and the collapse of civilization.

law of supply

supply curve is a function that shows the quantity that suppliers would be willing and able to sell at different prices. The higher the price, the greater the quantity supplied—this is often called the

Commodity tax

tax on goods

1. Who pays the tax does not depend on who writes the check to the government ex: taxing apples- could require buyer or seller to pay tax 2. Who pays the tax does depend on the relative elasticities of demand and supply (Who pays the tax depends not on the laws of congress but on the laws of supply and demand) 3. Commodity taxation raises revenue and creates lost gains from trade (dead-weight loss)

3 important ideas about Commodity tax

elastic

A demand curve is said to be -------- when an increase in price reduces the quality demanded a lot and vice versa

Inelastic

Fewer substitutes short run (less time) necessities small part of budget

flatter

If two linear demand or supply curves run through a common point , then at any given quantity the common point, then at any given quantity the curve that is ------- is more elastic

Technological innovations and changes in the price of inputs Taxes and subsidies Expectations Entry or exit of producers Changes in opportunity costs

Important Supply Shifters

Elastic

More substitutes long run (more time) luxuries Large part of budget

increases

Either way, economists say that a decrease in costs -----------supply. In terms of the diagram, a decrease in costs means that the supply curve shifts down and to the right. The left panel of Figure 3.11 illustrates. Of course, higher costs mean that the supply curve shifts in the opposite direction, up and to the left as illustrated in the right panel of Figure 3.11.

-Oil- inelastic Brazilian coffee- elastic Insulin- inelastic Bayer Aspirin- elastic Inelastic: necessities, product feels cheap Elastic: luxuries, product feels expensive

Elastic or inelastic? -Oil -Brazilian coffee -Insulin -Bayer Aspirin

availability of substitutes

The ------------- -------------- strongly influences the sensitivity of quantity demanded to changes in price -for goods with many of these, switching brands when prices changes is easy, so demand is more elastic -for goods with fewer of these, consumers find it hard to adjust quantity demanded much when prices change , so demand is inelastic

supply curve quantity supplied

The ------------- for oil is a function showing the quantity of oil that suppliers would be willing and able to sell at different prices, or, more simply, this shows the -------------at different prices.

knowledge

The division of -----increases with specialization and trade. Economic growth in the modern era is primarily due to the creation of new ----

Law of Demand

Tells us when a price goes up, quantity demanded goes down and vice-versa

larger (greater burden)

The less elastic side of the market will pay a ------- share of a tax

smaller (smaller burden)

The more elastic side of the market will pay a ------share of a tax

Thinking on the margin

is just making choices by thinking in terms of marginal benefits and marginal costs, the benefits and costs of a little bit more (or a little bit less).

Total producer surplus

is the area above the supply curve and below the price

elastic supply

means that the resources used to produce the taxed good can easily be moved to other industries so they can escape the tax

elastic demand

means the demanders have good substitutes for the taxed goods and so can escape the tax

New ideas,

of course, require incentives and that means an active scientific community and the freedom and incentive to put new ideas into action.

incentives

rewards and penalties that motivate behavior

The theory of comparative advantage

says that to increase its wealth, a country should produce the goods it can make at low cost and buy the goods that it can make only at high cost. Thus, the theory says the United States should make computers and buy shirts. Similarly, the theory says that Mexico should make shirts and buy computers.

theory of comparative advantage

says that when people or nations specialize in goods in which they have a low opportunity cost, they can trade to mutual advantage

comparative advantage

the ability to produce a good or service at a lower opportunity cost than another producer

The opportunity cost Consider the choice to attend college. What is the cost of attending college? At first, you might calculate the cost by adding together the price of tuition, books, and room and board—that might be $15,000 a year. But that's not the opportunity cost of attending college. What opportunities are you losing when you attend college?

the value of the opportunities lost.

deadweight loss

the value of the trades not made because of tax

elastic

The more responsive quantity demanded is to a change the more ------- is the demand curve

-substitutes More generally, a decrease in the price of a substitute will decrease demand for the other good. A decrease in the price of Pepsi, for example, will decrease the demand for Coca-Cola. A decrease in the price of rental apartments will reduce the demand for condominiums. Naturally, an increase in the price of a substitute will increase demand for the other substituted good.

two goods for which a decrease in the price of one leads to a decrease in demand for the other

trade off

Thus, society faces a -----------. More testing means the drugs that are (eventually) approved will be safer but it also means more drug lag and drug loss. When thinking about FDA policy, we need to look at both sides of the -------- if we are to choose wisely.

to take advantage of economies of scale, the reduction in costs created when goods are mass-produced.

Trade also allows us

absolute advantage

We say that a country has an ----- in production if it can produce the same good using fewer inputs than another country.

The price and quantity were close to equilibrium and gains from trade were close to the maximum.

What happened in Vernon Smith's lab?

. Price and quantity both decrease

When demand decreases, what happens to price and quantity in equilibrium?

elastic

When demand is more ---- than supply, suppliers bear more of the burden of tax and receive more of the benefit of a subsidy

aligns

When self-interest ----- with the broader public interest, we get good outcomes, but when self-interest and the social interest are at odds, we get bad outcomes, sometimes even cruel and inhumane outcomes

Price increases and quantity decreases

When supply decreases, what happens to price and quantity in equilibrium?

Quantity demanded decreases

When supply falls, what happens to quantity demanded in equilibrium?

Price decreases and quantity increases

When supply increases, what happens to price and quantity in equilibrium?

inelastic

When the same increase in price reduces quality demand a little, then the curve is said to be

monetary and fiscal policy

When used appropriately, these tools can reduce swings in unemployment and GDP. Unemployment insurance can also reduce some of the misery that accompanies a recession.

decrease increase

a ------- in costs shifts the supply curve down and to the right and an --------- in costs shifts the supply curve up and to the left,

demand curve

a function that shows the quantity demanded at different prices.

inferior good

a good for which demand decreases when income increases ex: ramen noodles

normal good

a good for which demand increases when income increases ex: cars, electronics, restaurant goods

subsidy

a negative tax where the gov't gives money to consumers or producers - drives a wedge between the price received by sellers and price paid by the buyers

inflation

an increase in the general level of prices -comes about when there is a sustained increase in the supply of money -When people have more money, they spend it, and without an increase in the supply of goods, prices must rise.

b. the price of oil will decrease, the quantity of oil will increase

f oil executives read in the newspaper that new solar-power technologies have been discovered but will likely only become useful in 10 years, what is the likely equilibrium impact on the price and quantity of oil today?

production possibilities frontier

all the combinations of goods that a country can produce given its productivity and supply of inputs.

complements -A decrease in the price of a complement increases the demand for the complementary good. An increase in the price of a complement decreases the demand for the complementary good. -If the price of beef goes down, people buy more ground beef and they also increase their demand for hamburger buns; that is, the demand curve for hamburger buns shifts up and to the right. A supermarket having a sale on ground beef, for example, will also want to stock up on hamburger buns.

two goods for which a decrease in the price of one leads to an increase in the demand for the other

fall, fall

Fill in the blanks: As long as supply and demand curves have their normal shape (the demand curve has a negative slope while supply curves have appositive slope), if there is a tax, the equilibrium quantity must _______ and the price that sellers receive must _______.

Important Demand Shifters Income Population Price of substitutes Price of complements Expectations Tastes

Important demand shifters

invisible hand

In a striking metaphor, Adam Smith said that when markets work well, those who pursue their own interest end up promoting the social interest, as if led to do so by an "------------" The idea that the pursuit of self-interest can be in the social interest—that at least sometimes, "greed is good"

specialization

In a world without trade, no one can afford to specialize. People will specialize in the production of a single good only when they are confident that they will be able to trade that good for the many other goods that they want and need. Thus, as trade develops, so does specialization, and specialization turns out to vastly increase productivity.

fall, rise

Q. If we learn today about promising future energy sources, today's price of energy will _______ and today's quantity of energy will __________.

A fall in supply

Q. What's the best way to think about the rise in oil prices in the 1970s, when wars and oil embargoes wracked the Middle East?

1. Who gets the subsidy does not depend on who receives the check from the gov't 2. Who benefits from the subsidy does depend on the relative elasticities of demand and supply 3. Subsidies must be paid for by taxpayers and they create inefficient increases in trade(deadweight loss)

Some economic truths about subsidies:

Elasticity of demand -always negative, but drop it

the percentage change in quantity demanded divided by the percentage change in price

producer surplus

the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity

quantity demanded

the quantity that buyers are willing and able to buy at a particular price