midterm 1 notes

Question 1

scarcity

Answer 1

limited nature of society’s resources

Question 2

how people make decisions

Answer 2

• people face trade offs
• efficiency and equality
• opportunity cost (whatever must be given up to obtain something else
• rational people think at the margin
• people respond to incentives

Question 3

how people interact

Answer 3

• markets to organize economic activity
• market economy
• governments can improve market outcomes (market failure, externality, market power)

Question 4

law of demand

Answer 4

inverse relationship between price and quantity demanded

Question 5

shifters of demand

Answer 5

income, taste/preference, price of related goods (substitutes and compliments), population/number of buyers

Question 6

law of supply

Answer 6

positive relationship between price and quantity supplied

Question 7

shifters of supply

Answer 7

price of input, taxes/subsidies, weather, number of sellers, technology

Question 8

price elasticity of demand:

Answer 8

measures responsiveness/sensitivity to price changes

Question 9

computing the price elasticity of demand

Answer 9

((Q2 - Q1) / (Q2 + Q1)/2) / ((P2 - P1) / (P2 + P1) / 2)

Question 10

price elasticity of demand > 1

Answer 10

demand is elastic

Question 11

price elasticity of demand < 1

Answer 11

demand is inelastic

Question 12

price elasticity of demand = 1

Answer 12

demand has unit elasticity

Question 13

demand curve when price elasticity of demand = 0

Answer 13

demand curve is vertical, demand is perfectly inelastic

Question 14

demand curve when price elasticity of demand = infinity

Answer 14

demand curve is horizontal, demand is perfectly elastic

Question 15

more/less elastic when availability of close substitutes?

Answer 15

goods with close substitutes = more elastic demand

Question 16

are necessities or luxuries more elastic

Answer 16

necessities = inelastic , luxuries = elastic

Question 17

how does elasticity change over time?

Answer 17

demand is more elastic over long periods of time

Question 18

what is total revenue

Answer 18

amount paid by buyers and received by sellers of a good

Question 19

total revenue formula

Answer 19

price of good times quantity sold ( P * Q )

Question 20

total revenue for a price decrease and inelastic demand?

Answer 20

decreases

Question 21

total revenue for a price decrease and elastic demand?

Answer 21

increases

Question 22

total revenue for a price increase with inelastic demand?

Answer 22

increases

Question 23

total revenue for a price increase with elastic demand?

Answer 23

decreases

Question 24

if demand is inelastic what happens to price and total revenue

Answer 24

they move in the same direction

Question 25

if demand is elastic what happens to the price and total revenue

Answer 25

they are inverse

Question 26

what happens to price and total revenue when demand is unit elastic

Answer 26

total revenue stays the same when price changes

Question 27

what is a negative elasticity of demand called

Answer 27

inferior goods

Question 28

income elasticity is high/low when its between 0 and 1

Answer 28

low

Question 29

income elasticity is high/low when it is higher than one

Answer 29

high

Question 30

normal goods

Answer 30

positive income elasticity

Question 31

normal goods with smaller income elasticities

Answer 31

necessities

Question 32

normal goods with large income elasticities

Answer 32

luxuries

Question 33

inferior goods

Answer 33

negative income elasticities

Question 34

substitutes have +/- cross price elasticity

Answer 34

positive

Question 35

complements have +/- cross price elasticities

Answer 35

negative

Question 36

a zero cross price elasticity means

Answer 36

the goods are not related

Question 37

price ceiling that is not binding

Answer 37

above the equilibrium price

Question 38

price ceiling that is binding

Answer 38

below the equilibrium price

Question 39

price ceiling

Answer 39

a cap, you are not allowed to sell above this price

Question 40

binding price floor

Answer 40

above equilibrium

Question 41

nonbinding price floor

Answer 41

below equilibrium

Question 42

price floor

Answer 42

price maximum, you cannot sell above this price

Question 43

how taxes affect market outcomes

Answer 43

shift in supply left, higher equilibrium price, lower equilibrium quantity, reduced size of market

Question 44

what side does tax burden fall on

Answer 44

market that is less elastic

Question 45

tax burden: small elasticity of demand

Answer 45

buyers do not have good alternatives to this good

Question 46

tax burden: small elasticity of supply

Answer 46

sellers do not have good alternatives to producing this good

Question 47

how taxes on buyers affect market outcomes

Answer 47

demand curve shifts left, lower equilibrium price, lower equilibrium quantity, tax reduces the size of the market

Question 48

how is tax burden divided

Answer 48

buyer price - equilibrium ( or price without tax ) = buyers burden, equilibrium ( or price without tax ) - price sellers receive = sellers burden

Question 49

tax burden on very elastic supply and relatively inelastic demand

Answer 49

sellers bear small burden, buyers bear most of the burden

Question 50

tax burden on relatively inelastic supply and very elastic demand

Answer 50

sellers bear most of the burden and buyers bear a small burden

Question 51

consumer surplus formula

Answer 51

1/2 (top price at demand curve * initial price)

Question 52

consumer surplus to new customers formula

Answer 52

1/2 ( (distance from q1 to q2) * (distance from p1 to p2))

Question 53

producer surplus formula

Answer 53

1/2 (( distance bottom of supply curve to p1 ) * q1)

Question 54

producer surplus to new producers

Answer 54

1/2 ((q2 - q1) * (p2 - p1))

Question 55

tax revenue formula

Answer 55

size of tax * quantity sold with tax

Question 56

deadweight loss of taxation

Answer 56

fall in total surplus that results from a market distortion (tax)

Question 57

deadweight loss with more elastic supply curve

Answer 57

larger deadweight loss

Question 58

deadweight loss with more elastic demand curve

Answer 58

larger deadweight loss

Question 59

relation between deadweight loss and elasticities

Answer 59

greater the elasticities the greater the deadweight loss

Question 60

what happens to quantity with a subsidy

Answer 60

quantity increases, shift to the right

Question 61

value of subsidy formula

Answer 61

P supply - P demand

Question 62

subsidy benefits

Answer 62

goes to the line that is more inelastic (if one side is perfectly elastic entire benefit goes to other side)