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
