ECON300 FINAL EXAM 1
after you get your first full-time job you stop consuming natty light and switch to chimay. what do we know about these two beers now?
natty is an inferior good and chimay is a normal good
compliments
negative relationship. When price in airfares increases, demand for hotels decreases
what is the best way to avoid creating DWL from the minimum wage?
set minimum wage below the equilibrium rate
finding equilibrium price
setting Qd=Qs
A in CATEN
change in availability of inputs. If there is a drought in the west, it kills the grass, and supply of beef decreases
arc elasticity of demand formula
change in change over change in price x average price over age quantity
I in TIPEN
change in income. When income increases, demand increases and price increases
P in TIPEN
change in price of consumer related products. 2 types: compliments and substitutes.
elasticity of demand equation
change in quantity over change in price x price over quantity
T in CATEN
change in technology. This causes a decrease in cost, an increase in supply, a decrease in price
C in CATEN
change in the costs of production. If workers wages increase, costs to produce increase and supply decreases
E in CATEN
change in the expected future price by sellers. If they expect an increase in price, supply will decrease
E in TIPEN
change in the expected future price by the consumers. If they expect a higher future price, demand increases.
N in TIPEN
change in the number of consumers. When population increases, demand increases.
N in CATEN
change in the number of sellers. If the number of airlines in the US decreases, supply decreases, and price increases
T in TIPEN
changes in tastes/preferences (events, media, advertising, weather). Ex) demand for a Ray Rice jersey right now. Bad publicity causes a decrease in demand
what would NOT occur if the market price was above the clearing price
consumers would bid up the price
what is the best example of a good where demand is perfectly elastic
currency trading
if the price of batteries increases, this will most likely _______the equilibrium price of flashlights and ______the equilibrium quantity of flashlights sold
decrease, decrease
a products price and quantity consumed both increase, what could have happened?
demand increased and supply remained constant
if a products price and the quantity consumed both increased from one year to the next, what could have happened?
demand increased and supply remained constant
how to illustrate a tax that creates a deal of deadweight loss
draw flat (relatively elastic) demand and supply curves
when ed>1 or Es
elastic
vertical demand curve
elasticity of demand is 0, or perfectly inelastic
horizontal demand curve
elasticity of demand is infinity, or perfectly elastic
CATEN
factors that can change supply (not things that change quantity supplied. The only thing that can change Qs is price) these do not involve price
c in supply equation
horizontal intercept
a in demand equation
horizontal intercept (amount people would buy if the item was free)
suppose the demand for natural gas is perfectly inelastic. what would the effect be, if any, of natural gas price controls?
if demand is perfectly inelastic, then price controls will not change the quantity demanded
law of supply
if price increases there will be an increase in quantity supplied
law of demand
if you have an increase in the price of an item, it will cause a decrease in the quantity demanded, and when price goes down quantity demanded goes up
income on inferior goods
income increases and demand decreases, income decreases and demand increases
income on normal goods
income increases and demanded increases, income decreases and demand decreases
in order for the labor supply curve to bend backward it must be true that the ______effect is greater than the ______effect
income, substitution
the demand curve shifts when..
income, tastes, the price of related goods, expectations change, or the number of buyers (whenever ceteris paribus is violated)
when Ed<1 or Es
inelastic
TIPEN
5 factors that could change demand (shift the demand curve, not change quantity demanded) non-price determinants of demand
a movement along the supply curve
is a result of a price change alone, this is known as a change in the quantity supplied
for inferior goods, substitution effect
is still price increases, quantity demanded decreases. but for income effect price increases, purchasing power and real income decreases, and quantity increases
price floors
legal maximum price. If and only if the price floor is above the equilibrium price is it going to be effective.
price ceiling
legally imposed maximum price. if and only if a price ceiling is set below the equilibrium price will it be effective
for most industries, supply is _______in the short run than in the long run
less elastic
explain why for many goods the long run price elasticity of supply is larger than the short run elasticity
long run price elasticity of supply is typically larger because in the short run, some firms may be constrained by their productive capacity
price elasticity is greater in the
long run than in the short run, and in the short run than right now
deadweight loss
loss of consumer surplus and producer surplus from its potential maximum. base x height x 1/2
price ceilings cause ______discrimination amount persons wishing to buy the item
more
determinants of elasticity of demand
-existence of substitutes=the closer the substitutes and the more substitutes there are, the more elastic is demand -share of the budget=the greater the share of the consumer total budget spent on a good, the more elastic -the length of time allowed for adjustment=the longer any price change persists, the more elastic.
assumptions behind consumer choice
1)consumers always choose the highest valued alternative 2)one good can be substituted for another. 3)Decisions are made without perfect informations
reasons why law of demand holds
1)substitution effect=price increases, relatively cheaper to buy something else, quantity decreases. This is negative. Ex)beef and chicken
will an effective price floor always cause a DWL?
No, not if the demand is perfectly inelastic
demand equation
Qd=a-bp
supply equation
Qs=c + dp
what is an example of a veblin good?
a coach handbag
what is most likely to shift the demand curve for good to the left?
a decrease in the price of a substitute good
the movement along the demand curve is
a result of a price change alone. This is known as a change in the quantity demanded
total surplus
also known as social welfare, is the sum of consumer and producer surplus
a price ceiling set below the equilibrium price in a perfectly competitive market:
always reduces producer surplus and may or may not increase consumer surplus
giffen good
an extremely inferior good. Price increases, quantity demanded increases. Ex) heating oil in a cold city in a poor old neighborhood. With a giffen good the income effect from a price increase is greater than the substitution effect when quantity demanded decreases. Giffen goods are very rare.
a shift in the entire supply curve
occurs when something other than price changes. This is a change in supply. It shifts when input prices change, technology improves, taxes change, expectations change, and number of sellers change. (whenever ceteris paribus is violated)
a shift in the demand curve
occurs when something other than the price changes. This is a change in demand
certarus parabus
other things constant
if the government was interested in earning the largest possible tax revenue, it should levy the tax on a good where the elasticity of demand is:
perfectly inelastic
finding equilibrium quantity
plug equilibrium price into either demand or supply equation
substitutes
positive relationship. When price of beef increases, demand for chicken increases
two types of price controls
price ceiling and price floor. effective price control leads to persistent shortage and black markets
explain the difference between a shift in the supply curve and a movement along the supply curve
price changes result in movements along the supply curve, and changes in other supply determining variables result in shifts in the supply curve.
for normal goods, the income effect
price increase, reduces purchasing power, quantity decreases
price gouging
raising the price more than allowed amount (usually 10%) immediately after a declared natural disaster. Ex) electric generator prices
price elasticity of demand
refers to the flexibility of consumers desires for a product
b in demand equation
slope = change over quantity over change in price
d in supply equation
slope of supply. Change in quantity over change in price
describe a veblin good to a non-economist
status goods that cause a change in preferences when the price rises
examining excise taxes using elasticity
taxes on specific products (excise taxes) need to be sold politically. 3 examples: gasoline, alcohol, and cigarette taxes. 3 basic flavors of incentive=economic, social, and moral. very often a single incentive will include all three.
marginal utility
the change in total utility due to a one-unit change in the quantity of a good or service consumed
suppose that unusually cold weather causes the demand curve for ice cream to shift to the left. why will the price of ice cream fall to a new market clearing level?
the cold weather will shift the demand curve left, initially creating a surplus until the price falls to where quantity supplied again equals quantity demanded
what would not cause the demand for coke to shift?
the cost of producing coke increases
consumer surplus
the difference between the willingness to pay for a good and the amount that is paid to get it. It measures the gain that accrues to the buyer. Its size is determined by the market price . base x height/2
producer surplus
the difference between the willingness to sell a good and the price that the seller receives. Represents the net gain of the seller in the market
what factors will determine the sizes of shortages ?
the extent of the excess demand implied by the shortages depends on the elasticities of supply and demand, where shortages will be smaller if both supply and demand are more inelastic.
minimum wage
the lowest hourly wage rate that firms may legally pay their workers
the flatter the demand..
the more elastic
the steeper the demand...
the more inelastic
if there is excess demand of a good, we expect that...
the price of the good will rise
diminishing marginal utility
the principle that as more of any good or service is consumed, its parable of the lost sheep, lost coin, prodigal son. This applies to the consumption of every product
suppose the government regulates the price of beef and chicken and sets them below their market clearing levels. Explain why shortages of these goods will develop
the shortages will develop because at prices set below the market clearing levels firms will supply less than consumers wish to purchase
when quantity demanded is greater than quantity supplied
this is a shortage. Consumers compete when this happens, and it will continue until quantity demanded equals quantity supplied at equilibrium price
when quantity supplied is greater than quantity demanded
this is a surplus. When this happens sellers will compete to bid down the price. It continues until quantity demanded equals quantity supplied at equilibrium price
how to remember elasticity of supply
use the rubber band analogy. p=the pressure in which you put on the rubber band, q=the length of the rubber band, elasticity of supply is the relative responsiveness of the length of the rubber band to changes in the pressure applied. If you have two 3 inch length rubber bands and one enlarges to 8 it is more inelastic. The other enlarges to 14, it is more elastic.
what are some products that have, under the right conditions, perfectly or near perfect inelastic demand?
water, electricity, housing, and hospital services. Many of these goods have taxes associated with them
unitary
when Ed =-1
levy
who is legally responsible for paying the tax. If the seller is legally responsible to pay the tax, they will attempt to raise the product price in order to the tax onto the consumer. The effectiveness of this strategy will depend on supply and demand elasticity.
who pays more tax
whoever is more inelastic
if you have perfectly inelastic supply, an effective price ceiling...
would NOT cause a deadweight loss