Microeconomics (Chapter 1-7)

Graph of perfectly elastic demand

Horizontal line

Tax incidence

How the burden of a tax is distributed among the various people who make up the economy

Definition of Cross-Price Elasticity of Demand

Measures how the quantity demanded of one good responds to a change in the price of another good

Equilibrium

Quantity demanded Qd(P) = Quantity supplied Qs(P)

Shortage

Quantity demanded>Quantity supplied

Surplus

Quantity supplied>Quantity demanded

Cost

The value of everything a seller must give up to produce a good

Positive statements

Claims that attempt to describe the world as it is

Normative statements

Claims that attempt to prescribe how the world should be

Binding Price Ceiling

Below equilibrium

Shift of a decrease in quantity demanded

Demand curve shifts left

Shift of an increase of quantity demanded

Demand curve shifts right

What causes sellers to face most of the tax incidence?

Demand very elastic, supply very inelastic

What causes buyers to face most of the tax incidence?

Demand very inelastic, supply very elastic

Market failure

A situation in which the market on its own fails to produce an efficient allocation of resources

Binding Price Floor

Above equilibrium

Circular-flow diagram: -In the markets of goods and services.... -In the markets for the factors of production...

-In the markets of goods and services, households are buyers and firms are sellers. -In the markets for the factors of production, households are sellers and firms are buyers.

What happens to total revenue if: -demand is inelastic -demand is elastic -demand is unit elastic

-price and total revenue move in the same direction -price and total revenue move in opposite directions -total revenue remains constant when price changes

Variables that Shift Demand Curve

1) Income 2) Prices of Related Goods (complements vs. substitutes) 3) Tastes 4) Expectations 5) Number of Buyers

Variables that can shift supply curves

1) Input prices 2) Technology 3) Expectations 4) Number of sellers

2 conditions with taxes:

1) Qd(Pd)=Qs(Ps) 2) Pd=Ps+tax

Inelastic

<1

Consumer surplus of a purchase

= Max price willing to pay- price you actually paid

Producer surplus on an individual sale

= Price they actually got - cost of production

Total surplus

= Sum of all the surplus= Value to buyers - Cost to sellers

Unit elasticity

=1

Elastic

>1

Inferior good

A good for which an increase (decrease) in income leads to a decrease (increase) in demand

Normal good

A good for which an increase (decrease) in income leads to an increase (decrease) in demand

Price ceiling

A legal maximum on the price at which a good can be sold

Price floor

A legal minimum on the price at which a good can be sold

Why is the supply curve upward sloping?

As price increases, we can only add sellers because as we increase selling price, anyone willing to sell at a lower price still sells at a higher price.

Factors of production

Firms produce goods and services using inputs, such labor, land and capital (buildings and machines)=factors of production

Cross-price elasticity of complements

Negative

Equation for Cross-Price Elasticity of Demand

Percent change in quantity demanded of good 1/ Percent change in price of good 2

Income elasticity of demand

Percent change in quantity demanded/Percent change in income

Price elasticity of supply

Percentage change in quantity supplied/Percentage change in price

Trend with tax incidence

Person with more of an inelastic curve faces more of the tax incidence

Cross-price elasticity of substitutes

Positive

Price Elasticity of Quantity Demanded

Price Elasticity of Quantity Demanded= Percent change in Qd/ Percent change in Price

Consumer surplus is defined by an area bounded by:

Price axis, price curve, and demand curve (area above curve)

Producer surplus is defined by an area bounded by:

Price axis, price curve, and supply curve (area below curve)

Shift of a decrease of quantity demanded

Shifts to the left

Shift of an increase of Quantity Supplied

Shifts to the right

What does a price ceiling cause?

Shortage

Efficiency

Society is getting the maximum benefits from its scarce resources

What does a price floor cause?

Surplus

Market Power

The ability of a single person or firm (or a small group_ to unduly influence market prices

Productivity

The amount of goods and services produced by each unit of labor input

Law of Supply and Demand

The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Externality

The impact of one person's actions on the well-being of a bystander

Willingness to pay

The maximum amount that a buyer will pay for a good

Law of Demand

The quantity demanded of a good falls when the price of the good rises

Law of Supply

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

Macroeconomics

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

The study of how households and firms make decisions and how they interact in markets

A curve shifts when...

There is a change in a relevant variable that is not measured on either axis

Equality

Those benefits are distributed uniformly among society's members

Total revenue

Total revenue= P x Q

Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other

Subsititutes

Two goods for which an increase in the price of one leads to an increase in the demand of the other

Graph of perfectly inelastic demand

Vertical line

Opportunity Cost

Whatever must be given up to obtain some item

Why is the demand curve downward sloping?

You can only add buyers because anyone willing to buy at a higher price is still willing to buy at a lower price.