Econ Midterm

Much higher DWL increase

The tax on the last dollar of earnings

Bigger

smaller

$T X QT

• TS = CS + PS
• (Value to buyers) - (cost to sellers)

Area between P and S curve from 0 to Q

PS - P - cost

Seller who will leave if price any lower

CS = Area under demand curve above P from 0 to Q

CS = WTP - P

One who is at his WTP and would leave if P gets higher

Willingness to pay. Highest price buyer will pay

Shows relationship between size of tax and tax revenue

DWL small

Studies HOW the allocation of resources affects economic welbeing

Revenue falls

Rise in revenue

Bigger DWL

• -Total surplus maximized
• -Goods produced by sellers with lowest cost
• -Consumed by buyers who most value them

PS = P- cost

DWL. Fall in total surplus due to market distortion like tax

• The highest benefit you give up to obtain an this item
• Determined by slope on graph

Prosperity is distributed uniformly amogn society's members

• Limited nature of society's resources.
• Limited + Good

• Increase in # of buyers increases quantity demanded at each price
• shifts D curve to the right

An increase in income shifts D curve for inferior goods to the left

• Incrase in income causes increase in quantity demanded at each price
• D curve shifts to the right

the claim that the quantity demanded of a good falls when the price of the good rises, other things equal (P↑, Q↓)

the ability to produce a good at a lower opportunity cost than another producer

the ability to produce a good using fewer inputs than another producer

Suggestion beyond facts (can be argued against)

Just the facts

• Production Possibilities Frontier
• a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
• posssible points
• efficient points
• impossible points

• Households provide Factors of Production - rent/sell to firms
• Firms buy/hire factors of production - produce goods and services - sells goods/services
• Households consume goods/services

the resources the economy uses to produce goods & services, including –labor –land –capital (buildings & machines used in production)

• Market failure:
• monopoly - Market power
• polution - Externality

the claim that the quantity supplied of a good rises when the price of the good rises, other things equal (P↑, Q↑)

• Changes in:
• Income
• Prices of related goods
• Tastes
• Expectation
• # of buyers
• Shift D curve

• Changes in own price
• caues movement along the D curve

• • Two goods are complementsif an increase in the price of one (Px↑) causes a fall in demand for the other. (Qy↓)
• • Logic: Px↑=> Qx↓ => Qy↓
• • Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.
• • Other examples: college tuition and textbooks, bagels and cream cheese, ice-cream and fudge.

• • Two goods are substitutesif an increase in the price of one (Px↑) causes an increase in demand for the other. (Qy↑)
• • Logic: Px↑=> Qx↓ => Qy↑
• • Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.
• • Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads

• elasticity = infinity
• horizontal

• elasticity > 1
• relatively flat

• elasticity = 1
• intermediate slope

• Elasticity <1
• relatively steep

• Elasticity = 0
• vertical

• Bigger
• Smaller

• Midpoint method:
• (end value –start value) / midpoint x 100%

measures how much Qd responds to a change in P

• The price elasticity of demand depends on:
• –the extent to which close substitutes are available
• –whether the good is a necessity or a luxury
• –how broadly or narrowly the good is defined
• –the time horizon –elasticity is higher in the long run than the short run

• Change in the quantity demanded: a movement along a fixed Dcurve occurs when Pchanges

• Change in demand: a shift in the Dcurve occurs when a non-price determinant of demand changes (like income or # of buyers)

• Change in the quantity supplied: a movement along a fixed Scurve occurs when Pchanges

• Change in supply: a shift in the Scurve occurs when a non-price determinant of supply changes (like technology or costs)

• Variable A change in this variable…
• Own Price …causes a movement ALONG the Scurve
• Input Prices …shifts the Scurve
• Technology …shifts the Scurve
• Expectations …shifts the
• Scurve # of sellers …shifts the Scurve

• Example: - Events in the Middle East lead to expectations of higher oil prices. - In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price. - S curve shifts left. • In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable)

• An increase in the number of sellers increases the quantity supplied at each price, shifts Scurve to the right.

• • Technology determines how much inputs are required to produce a unit of output.
• • A cost-saving technological improvement has the same effect as a fall in input prices, shifts Scurve to the right.

• • Examples of input prices: wages, prices of raw materials.
• • A fallin input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the Scurve shifts to the right.

(Revenue) - (total cost)

P X Q

P down, Q up alot so TR rises

P up, Q down a little so TR rises

% change in Qs / % change in P

% change in Qd / % change in P

measures the response of Qd to a change in consumer income

= % change in Qd / % change in income

income elasticity > 0

< 0

measures the response of demand for one good to changes in teh price of another good

= % change in Qd for good 1 / % change in price of good 2

> 0

(e.g., an increase in price of beef causes an increase in demand for chicken)

• < 0
• (e.g., an increase in price of computers causes decrease in demand for software)

• the division of the burden of the tax between buyers and sellers
• doesnt depend on whether the tax is imposed on buyers or sellers

It's easier for sellers than buyers to leave the maket, so buyers bear most of the burden of the tax

It's easier for buyers than sellers to leave the market. Sellers bear most of the burden of the tax

• how much of each good is produced
• which producers produce it
• which consumers consume it

–a buyer or seller has market power–the ability to affect the market price. –transactions have side effects, called externalities, that affect bystanders. (example: pollution)

• –country has comparative advantage in the good
• –under free trade, country exports the good

• –country does not have comparative advantage
• –under free trade, country imports the good

A small economy is a price takerin world markets: Its actions have no effect on P.

• tax on importts
• In general, price facing domestic buyers and sellers = (Pw + T)
• Revenue recieved by government

a quantitative limit on imports of a good.

• • Mostly has the same effects as a tariff: –Raises price, reduces quantity of imports. –Reduces buyers’ welfare. –Increases sellers’ welfare.
• revenue recieved by sellers