ECON 1101 Midterm 1

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number of sellers shifter

law of supply shifter

price expectations shifter

law of supply shifter

price of input shifter

law of supply shifter

taxes/subsidies shifter

law of supply shifter

technology shifter

law of supply shifter

law of supply decrease (chart)

left

Inefficiency can be caused in a market by the presence of

market power, externalities, imperfectly competitive markets

price elasticity of demand

measures responsiveness (sensitivity) to price changes

as a tax grows larger....

it distorts incentives more and its deadweight loss grows larger

Demand is perfectly elastic

-when any price increase will cause the quantity demanded to drop to zero - elasticity of demand = infinity -horizontal line

A life- saving medicine without any close substitutes will tend to have

a small elasticity of demand

Demand is perfectly inelastic when

- the quantity demanded does not respond at all to changes in the price - elasticity of demand = 0 - vertical line

Total Revenue (TR)

-Amount paid by buyers and received by sellers of a good -Price of the good times the quantity sold (P ˣ Q)

Impact of the minimum wage on teenage labor

-Least skilled and least experienced -Low equilibrium wages -Willing to accept a lower wage in exchange for on-the-job training -Minimum wage: binding

Determinants of Price Elasticity of Demand/what makes it more elastic

1. availability of close substitutes 2.necessities versus luxuries 3.definition of the market 4.time horizon

The price of a good rises from $8 to $12, and the quantity demanded falls from 110 to 90 units. Calculated with the midpoint method, the price elasticity of demand is

1/2

Which of the following might lead to an increase in the equilibrium price of jelly and a decrease in the equilibrium quantity of jelly sold?

An increase in the price of grapes, an input into jelly

What would happen to the demand-supply curve if there was a hurricane?

Demand increases (right), supply decreases (left)

Time Horizon

Demand is more elastic over longer time horizons

The distinction between efficiency and equality can be described as follows:

Efficiency refers to maximizing the size of the pie; equality refers to distributing the pie fairly among members of society

demand is elastic

Elasticity > 1

Price of Related Goods: Substitutes shifter example (demand)

Hamburgers a substitute for Pizza If hamburgers price went up, Pizza's demand would go up If Pizza's price went up, hamburgers demand would go up

price of input shifter example (supply)

Higher input prices, decrease in supply lower input prices, increase in supply

Price of Related Goods: Complements shifter example (demand)

If price of coke goes up/down than Pizza goes up/down with it

Necessities versus Luxuries

Necessities: inelastic demands luxuries: elastic demand.

What happens to TR / P when demand is elastic?

P and TR move in opposite direction

What happens to TR / P when demand is inelastic?

P and TR move in the same direction

How to compute the price elasticity of demand

PEOD = % change in quanity demanded / % change in price

demand shifts to left

Price falls, quantity falls

Elastic examples

Products that have substitutes Products that take a large portion of a consumer's budget Narrowly defined markets (ice cream) Long-run demand Luxuries

For a price increase, if demand is elastic

TR decreases

What happens to TR / P when demand is unit elastic?

TR remains constant when price changes

government uses taxes to

To raise revenue for public projects •Roads, schools, and national defense

law of supply relationship

a positive relationship, as price goes up quantity supplied goes up

Income shifter example (demand)

as income goes up, demand would go up (right) ( more purchasing power)

Population shifter example (demand)

as population increases (more buyers) than demand increases (right)

weather shifter example (supply)

bad weather factors can cause supply to decrease (left) Hurricane destroys sugar crop, the higher the price of sugar but the demand goes up Heatwave shifts the demand curve up (right); hurricane shifts the supply curve down (left)

more tax revenue

bigger deadweight loss

Movement along a fixed demand curve

change in quantity demanded

Movement along a fixed supply curve

change in quantity supplied

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases When the price of a good rises, the quantity demanded of the good falls When the price falls, the quantity demanded rise

as the income increases the demand for a normal good

decreases

as the income increases the demand for the inferior good

decreases

As the price of a complement increases

demand goes down (left)

As the price of substitutes decreases

demand goes down (left)

As the price of substitutes increases

demand goes up (right)

as price of a complement decreases

demand goes up (right)

Price of Related Goods: Substitutes and complement

demand shifter

income

demand shifter

population

demand shifter

taste/preference

demand shifter

Buyers as a group

determine the demand for the product

Sellers as a group

determine the supply of the product

If price increases by 1% and Qd decreases by 0.50% then

elasticity = .5

If price increases by 1% and Qd decreases by 1% then

elasticity = 1

demand is unit elastic

elasticity = 1

if price increases by 1% and Quantity demanded decreases by 2% then

elasticity = 2

Demand is elastic when

elasticity is greater > 1

demand is inelastic when

elasticity is less < 1

price expectation shifter example (supply)

expected higher prices, decrease in supply

the more inelastic (chart)

flat

Inelastic examples

gas, utilities, medication

A competitive market is one in which

here are so many buyers and so many sellers that each has a negligible impact on the price of the product

technology shifter example (supply)

improved technology has a lower price, the supply will increase/curve will shift to the right

Demand Shifters

income, population, price of substitutes, price of related goods, taste/preference

as the income decreases the demand for the inferior good

increases

as the income increases the demand for a normal good

increases

Rent Control in the Short Run is elastic or inelastic

inelastic

price insensitive

inelastic

Elasticity < 1 (inelastic)

inferior good

income relationship for inferior good

inverse relationship (as income goes up, demand goes down-as income goes down, demand goes up)

Law of demand relationship

inverse relationship between price and demand

Elasticity > 1 (elastic)

normal good, luxury good

income relationship for normal good

positive relationship (as income goes up, demand goes up-as income goes down, demand goes down)

supply increases

price decreases and quantity increases

Demand is inelastic

price elasticity of demand < 1

demand has unit elasticity when

price elasticity of demand = 1

supply decreases

price increases and quantity decreases

Law of supply shifters

price of input, taxes/subsidies, weather, number of sellers, price expectation, technology

demand shifts to right

price rises, quantity rises

When consumers face rising gasoline prices, they typically

reduce their quantity demanded more in the long run than in the short run

Taste/Preference shifter (demand)

research says red meat is unhealthy, demand for red meat goes down

law of supply increase (chart)

right

demand decreases (chart)

shift to left

demand increases (chart)

shift to right

the more elastic (chart)

steep

weather shifter

supply and demand shifter

# of sellers shifters example (supply)

supply increases as sellers increase

The discovery of a large new reserve of crude oil will shift ________ curve for gasoline, leading to a __________equilibrium price

supply, lower

taxes/subsidies shifter example (supply)

taxes can decrease supply, subsidies (payments gov make to company) increase supply

Deadweight loss on tax

the fall in total surplus, the sum of consumer surplus, producer surplus and tax revenue is the deadweight loss of the tax

the flatter the demand curve

the greater the price elasticity of demand

Definition of the Market

the more narrowly we define a market, the more elastic demand will be

availability of close substitutes

the more substitutes a good has, the more elastic its demand

A change in which of the following will NOT shift the demand curve for hamburgers?

the price of hamburgers Therefore, if the price of hamburgers changes, the result is a MOVEMENT along the demand curve from the old price to the new one. However, if a change occurs in any of the factors that determine demand - such as the price of hot dogs ( a substitute), the price of hamburger buns (a complement), or the income of hamburger consumers - the result is a shift of the demand curve

Law of supply

the quantity supplied of a good rise when the price of the good rises

for a price decrease if demand is inelastic

tr decrease

For a price decrease if demand is elastic

tr increases

For a price increase, if demand is inelastic

tr increases


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