ECON 300
Tavist allergy pills sell for $25 a box. Steve, Brian, and Toby are willing to pay $33, $27, and $19, respectively, for a box of Tavist. What is the total consumer surplus for Steve, Brain, and Toby?
$10
Nancy paid $55 for car mats but was willing to pay $80. What is Nancy's consumer surplus?
$25
the demand and supply of ethanol are given by Qd=8,000-2,000P and Qs=1,000P-1,000 where P is price per gallon and Q measures gallons per minute. If the government subsidizes ethanol at $.30 per gallon what is the deadweight loss?
$30
The demand for a good is given Qd=750-.4P. What is consumer surplus at a price of $80?
$644,405
If a 10% increase in the price of pork reduces quantity demanded by 7%, the price elasticity of demand is
-.70
The demand curve for a product is Q=50-.5P. What is the price elasticity of demand at a price of $60?
-1.50
Supply and demand model key assumptions
1. we restrict our focus to supply and demand in a single market 2. all goods bought and sold in the market are identical 3.all goods are sold in the market sell for the same price, and everyone has the same information about prices, the quality of the goods being sold, and so on 4. there are many buyers and sellers in the market
producer surplus
1/2 x equilibrium price x equilibrium - Qs
consumer surplus
1/2 x equilibrium price x qd- equilibrium
Suppose that the supply of a good is given by Q=-50+5P, where Q is the quantity supplies and P is the price measures in dollars per unit. This equation indicates that the quantity supplied increases by ________ units for every dollar increase in price.
5
The demand and supply curves for Fuji apples are given by Qd=50-6P and Qs=4P-2 where P is price per bag and Q is in thousands of bags. what are consumer surplus and producer surplus at the equilibrium price?
CS=$29,442; PS=$44,180
What is the difference between a change in quantity supplied and a change in supply?
Change in quantity supplied is a movement along the supply curve as a result of price change and change in supply is the shift of the entire supply curve caused by the change in determinant of supply
Why has microeconomics evolved into an empirical disciple?
It uses more data analysis and experiments and not just abstract theory to explore economic phenomena
How are consumption and production interconnected?
The process in terms of deciding what types of products to buy are similar to those in production for what inputs to use and how they will be useful in the end.
What is true of the quantity supplied and demanded at the market equilibrium?
The quantity supplied and quantity demanded are equal
What happens when price is below the equilibrium price? Why?
There will be excess demand
Why do economists often represent supply and demand using the inverse equations?
To put price in terms of quantity rather than the other way around
What simplifying assumption do we make to build a demand curve?
What happens to the amount of consumers demand when only a goods price changes while everything else that determines consumer demand stays the same
inferior goods
a good for which quantity demanded decreases when income rises
Price floor
a price regulation that sets the lowest price that can be paid legally for a good or service
Consumers are particularly price-responsive when
a product has many substitutes and they have a long time to adjust their consumption
All else equal, a demand increase
causes both consumer and producer surplus to increase
What is the difference between a change in quantity demanded and a change in demand?
change In quantity demanded is a movement along the demand curve that occurs as a result of change in a goods price while change in demand is the shift of the entire demand curve caused by a determinant of demand other than price
How does demand choke price relate to consumer surplus?
consumer surplus is the difference between the market price and the demand choke price
If the government quit subsidizing a product, a consumer surplus would ______ and producer surplus would _________.
decrease; decrease
Electric guitars and amplifiers are compliment goods, and electric guitars and acoustic guitars are substitute goods. An increase in the price of amplifiers ____________ the number of electric guitars consumers want to buy, while an increase in the price of acoustic guitars ___________ the number of electric guitars consumers want to buy
decrease; increases
magnitude for unit elastic
exactly 1
Compliments
goods that can be bought and used together
substitutes
goods that can be used in place of another
normal goods
goods with positive income elasticities
magnitude for elastic
greater than one
price ceiling
highest price that can be paid legally or a good or service
What happens to equilibrium quantity in the same situation?
if supply and demand increase, quantity increases, if both supply and demand decrease, quantity decreases,
In market A, a 4% increase in price reduces quantity demand by 2%. In market B, a 3% increase in price reduces quantity demanded by 4%. The price elasticity of demand in market A and market B are considered __________ and __________ respectively.
inelastic, elastic
magnitude for perfectly elastic
infinite
Factors of supply
price, suppliers cost of production, # of sellers, sellers outside options
equilibrium price/quantity
quantity supplied=quantity demanded
quotas
regulation that sets the quantity of a good or service provided
What is the difference between elasticity and slope?
slope relates a change in one level to another level whereas elasticity is expressed in relative percentage changes that eliminates unit problems and makes magnitudes comparable across markets
How does the supply choke price relate to producer surplus?
the difference between the market price and the supply choke price is the producer surplus
What happens to equilibrium price when supply and demand shift in the same direction?
the effect on price is unknown
if the price of crude oil increases, the number of people who owns cars falls
the equilibrium price of gasoline will be uncertain and equilibrium quantity of gasoline will decrease
An increase in input prices causes
the market supply to shift inward, driving the equilibrium price higher
Supply choke
the price at which no firm is willing to produce a good and quantity supplied is zero, the vertical intercept of the inverse supply curve
Demand choke
the price at which quantity demanded is zero, the vertical intercept of the inverse demand curve
technology and production
the processes used to make, distribute and sell a good
How does a shift in the demand curve cause a movement along the supply curve?
the shift in the demand curve has made the equilibrium price lower and at a lower price, suppliers produce less of the good resulting the shift causing movement along the supply curve to the new equilibrium
What tools do we use to study microeconomics?
theories and models
Movement along the supply curve
when the quantity supplied changes it falls in response to the reduced demand causing movement
tax incidence
who really bears the burden of a tax
magnitude for perfectly inelastic
zero
taxes
price added to drive a wedge between the price buyers pay and the price that producers actually receive
In what direction will price and quantity move as a result of a demand shift?
price and quantity move in the same direction
Why is the demand curve downward sloping?
Movements along the demand curve involve price and quantity which changes in opposite directions
the demand curve for a good is Q=80-.20P, where Q is the quantity demanded and P is the price per unit. This goods inverse demand curve is:
P=400-5Q
subsidies equation
Pb+subsidy=Ps (Pb=price buyer pays, Ps=price seller receives)
on some days Gus makes his own salad for lunch, preferring to use either iceberg or romaine lettuce, topped off with lots of fresh tomatoes. The cross-price elasticity of demand for iceberg lettuce with respect to romaine lettuce is __________, and the cross-price elasticity of demand for iceberg lettuce with respect to tomatoes is _________.
Positive, negative
In what direction will price and quantity move as a result of a supply shift?
Price and quantity move in opposite directions
Why is the supply curve upward sloping?
Producers are willing to supply more of a good as the price rises
demand curve equation
Q=1,000-200P
What form do inverse supply and demand equations take?
Q=1,000-200P P=5-.005Q
Why is the direction of change of either price or quantity unknown when both supply and demand shift?
The direction of change in either quantity or price is determined by the relative magnitudes and directions of the shifts
How does a supply shift affect consumer and producer surplus In a given market?
The higher the equilibrium price and lower equilibrium quantity reduce consumer surplus. for producer surplus, the lower equilibrium quantity that results from the supply shift reduces it
Define market equilibrium
The point where the demand and supply curve cross
Shift on the demand curve
anything that changes how consumers want to buy of a good at any particular price
Factors of demand
price, # of consumers, consumers income, consumer tastes, prices of other goods
Magnitudes for inelastic
less than one
What differentiates microeconomics from macroeconomics?
micro studies the specific choices made by consumers and producers while macro studies the world through a wider lens and is a description of a larger complex system in which consumers and firms operate.
luxury goods
normal goods with income elasticities above 1
subsidies
payment by the government to a buyer or a seller of a good or service