Microeconomics Exam 2 Review PDF

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Lang, Bree ...

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Microeconomics Exam 2 Review Price elasticity of demand measures the responsiveness of quantity demanded to a change in price -> change in Qd%/ change in P% -> always negative because the demand curve is negative Consumer surplus willingness to pay minus price paid -> is the area below the demand curve and above the price Producer surplus - the amount a producer receives for a good minus the lowest price at which they were willing to sell it -> area below the price and above the curve/lowest willing price Deadweight loss - the surplus that is lost because the tax reduced the amount of production and consumption in the economy -> this is inefficiency caused by a reduction in consumption and production caused by government intervention Tax incidence the number of units sold multiplied by the size of the tax -> consumer and producer burden added together Consumer tax burden Ptax minus P* Producer tax burden P* minus (Ptax minus tax) Price ceiling legally established maximum price for a good or service Price controls - attempt to set, or manipulate, prices through government involvement in the market Price floor - legally established minimum price for a good or service Shortage - when the demand is greater than the supply Surplus - when the supply is greater than the demand Elasticity- responsiveness of buyers and sellers to changes in market conditions Elastic -> demand is only considered elastic if it falls by a large amount (say half) Inelastic- exists whenever price is secondary to the desire to attain a certain amount of a good

Long run period of time when consumers have time to fully adjust to market conditions -> most elastic Short run period of time when consumers can partially adjust their behavior -> in the short run, we can make decisions that reflect our immediate or short term wants/needs Immediate run there is no time for consumers to adjust their behavior (ex. gasoline) Willingness to pay - maximum amount a buyer is willing to pay for a good Willingness to sell - the minimum amount a buyer is willing to sell for a good Demand for Demand for Demand for Demand for Demand for Demand for Demand for elastic Demand for inelastic Demand for Demand for

goods with a lot if substitutes= elastic goods without many substitutes= inelastic necessary goods= inelastic luxury goods= elastic goods over the long run= elastic goods over the short run= inelastic goods that make up a large portion of income = goods that make up a small portion of income= broadly defined goods= inelastic narrowly defined goods= elastic

Remember What Determines Ed -> The share of the budget spent on a -> How broadly defined the market is -> Demands with many substitutes tend -> Demand for necessary goods tend to -> Demand for goods over the long run

good to be elastic be inelastic tends to be inelastic

There are categories of elasticity based on the value of the elasticity of demand 1. Elastic -> relatively horizontal -> |Ed| > 1 2. Inelastic -> relatively vertical -> |Ed| < 1

3. Perfectly inelastic -> perfectly vertical -> Ed= 0 4. Perfectly elastic -> perfectly horizontal -> Ed= infinite 5. Unit elastic -> Ed= 1 Revenue from sales = # of units sold x price of each unit - If price increases and Qd decreases a lot then Revenue decreases - If price increases and Qd increases a lot then Revenue increases Midpoint Formula Q2   Q1  P2 P1 

+ 2 + 2

Q1 Q2 p1 p2

Income elasticity of demand (Ei)->  change in QD/ change in i Ei < 0 = inferior good Ei > 0 = normal good Price elasticity of supply (Es) -> change in Qs/ change in P -> always positive Cross-Price elasticity (Ec)->  change in Qd of good A/ change in P of good B The income elasticity of demand coefficient for normal goods= greater than zero For inferior goods= less than zero or negative...