Micro Midterm

Uses side

Consumers using the product

What is the biggest problem facing Command Economies (Socialism)

Coordination and incentives to direct output

Stone and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks.

Demand curve shift to the right (higher demand for brick) - Equilibrium price increases - Equilibrium quantity increases

Determine how the equilibrium price and equilibrium quantity in the market for coffee changes if: - the price of tea, a substitute for coffee, decreases - and due to better weather, the price of coffee beans also decreases.

Demand decreases while supply increases - Equilibrium price decreases - Equilibrium quantity may increase, decrease, or stay the same

After graduation from law school, Frank is offered one job in Chicago and another in New York. Where should Frank work?

Either-or decision

Bella is accepted to four graduate school programs. Where should she go to school?

Either-or decision

Price ceilings and price floors do not cause

an increase in total surplus

Quota

an upper limit, set by the government, on the quantity of some good that can be bought or sold; also referred to as quantity control

cross-price elasticity of demand

change in the quantity demanded of Product B divided by the the price of Product A

For compliments

cross-price elasticity for demand is negative

For substitutes

cross-price elasticity of demand is positive

For independent good

cross-price elasticity of demand is zero

Necessity

demand need to be inelastic

Luxury

demand needs to be elastic

If a firm raises their prices

must be inelastic

Elastic Demand Curve

perfectly horizontal

Inelastic Demand Curve

perfectly vertical

Total revenue

price x quantity demanded

Sources side

producers producing the product

Established rules for ownership of resources and creates incentives for innovation

property rights

If tablet costs $250 (willingness to pay)

students who are willing to pay above the equilibrium price will purchase the tablet

The consumers can avoid paying the tax by not consuming the product that is being taxed, meaning,

tax shifting is likely to occur

Example of quota

taxicab medallions in New York City

When the price of of a good changes in the market,

the market will move toward a new equilibrium

Increase in total surplus

New total surplus - Old total surplus

Formation of Demand Equation

(P2 - P1/ Q2 - Q1) Q + Intercept

Free Market

- Businesses compete for our revenue - Market is providing information - Consumer is in power

How to calculate consumer surplus:

- Subtract maximum price consumer is willing to pay buy the equilibrium price of the product - Add calculations together

Rent controls are a typical example of a price ceiling

- black market - inefficient allocation of apartments - reductions in apartment quality - more subletting of apartment

Demand shifters

- changes in the prices of related goods or services - changes in income - changes in taste - changes in expectations - changes in the number of consumer

Elastic

- price increases, total revenue decreases - price decreases, total revenue increases

The _________ of an excise tax depends on the _________ of the taxed good's supply and demand curves

1. incidence 2. price elasticity

Consumer Surplus

1/2(willingness to pay - equilibrium price) x Q

Producer Surplus

1/2/(equilibrium price - willingness to pay) x Q

regressive tax

A tax for which the percentage of income paid in taxes decreases as income increases

Which of the following will NOT increase the supply of strawberries?

An increase in the wages of workers that pick strawberries

Midpoint formula

Change in quantity / (sum of quantities) / 2 divided by Change in price / (sum of the prices) / 2 New - Old/ Old

Assume Fiona is willing to pay $8 for a pizza cutter. Tim also wants one, but is only willing to pay $6 for one. At a pizza baker's convention, Fiona buys the last pizza cutter at the market price just before Tim can buy it. Tim contacts the convention organizers and complains about missing out on the last pizza cutter. The organizers refund Fiona for the pizza cutter and allow Tim to buy it at the market price. What happens as a result of the organizers refunding Fiona, taking the pizza cutter from her, and letting Tim buy it at the market price?

Consumer surplus decreases

Jake need to stay awake while he studies for his midterm tomorrow. What quantity of coffee should Jake drink?

Marginal decision

Marvin arrives at his favorite buffet to eat Chinese food. Sometimes, he overeats and leaves the buffet with a stomach ache

Marginal decision

College students reduce how much detergent they use for each load of laundry in response to higher detergent prices

Movement along the demand curve

College students rush and buy discount furniture to take advantage of an unexpected price drop

Movement along the demand curve

How much does this new technology INCREASE consumer surplus

New consumer surplus - Initial consumer surplus

How to calculate change in consumer surplus:

Original consumer surplus - new consumer surplus

Tax by government

Price (post tax) - Price (initially)

Recently, a series of studies have demonstrated the considerable beneficial health effects of food and drink derived from the amaranth plant. This has affected consumer tastes for amaranth flour, pods, root, etc. At the same time, particularly favorable weather has resulted in a bumper crop of amaranth plants. Show the impact of these changes by properly shifting the appropriate curve or curves in the graph.

Right shift of both supply and demand curve

College student purchase many more energy drinks during final week than during the rest of the semester

Shift in demand curve

Students eat out more often as the federal government increases how much grant money it provides students

Shift in demand curve

The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market.

Supply curve shift to the left - Equilibrium price increases - Equilibrium quantity decreases

Calculate Income Tax Rate

Taxes paid/income x 100

Which of the following is true of specialization?

The gains from trade are due to this

If production can be increases cheaply,

then the supply curve will be elastic

If increases production is very expensive,

then the supply curve will be inelastic

Suppose the price of sprinkler systems increases. Which statement best describes the response that can be expected with regard to supply?

The quantity of sprinkler systems supplied will increase

Perfectly Inelastic Supply

The quantity supplied does not change even when the price changes

Income-inelastic demand

x < 1

Income-elastic demand

x > 1

The market with greater elasticity will have:

a greater surplus

Cross-price elasticity measures

how sensitive the quantity demanded of good A is to the price of good B

Inferior goods

income elasticity is negative

Normal goods

income elasticity is positive

In the long run, the surplus caused by a price floor on hay is likely to

increase because farmers will increase the amount of land used to grow hay

Price floor is binding if

it is greater than the equilibrium price

With fewer substitutes, demand tend to be

less elastic

Brings buyers and sellers together to carry out mutually beneficial exchanges

markets

Allows for the exchange of goods and services using a common unit as a measure of value that is generally accepted as payment

money

Demand for an item that uses a large portion of your budget tends to be

more elastic

Demand for luxury item tends to be

more elastic

Over long periods of time, demand tends to be

more elastic

Organizes resources in order to produce goods and services

firms

Command Economy (socialism)

- money flows from the government to the firms - If the government owns the firms, there is no private property - No competition for consumer dollars - No entrepreneurs - No profit motives (firms are paid regardless because their income is provide by the government) - No market - No loss - Government is in power

Inelastic

- price increases, total revenue increases - price decreases, total revenue increases

Demand price after quota

Highest point the quota line hits on the demand curve