Study Guide 2
Study Guide 2 Econ 2106
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This 4 page Study Guide was uploaded by Catherine Notetaker on Sunday January 31, 2016. The Study Guide belongs to Econ 2106 at Georgia State University taught by Professor Chijioke Nwosu in Spring 2016. Since its upload, it has received 39 views. For similar materials see PRINCIPLES OF MICROECONOMICS in Economcs at Georgia State University.
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Date Created: 01/31/16
Microeconomics Study Guide: Chapters (5,6,7,16) Chapter 5 Price Controls Price controls are an attempt to set prices through government intervention in the market they are meant to ease perceived burdens in society Price ceiling legally establishes a maximum price for a good or service Notes(things to remember) The supply and demand law states that if prices drop the quantity demanded will increase. In addition, the quantity supplied will decrease because producers will receive lower profits for effort. These things create a SHORTAGE! many people will want more of the good producers will decrease the size of unit and the quality will decrease there is not enough to go around so consumers will buy goods on the black market at a higher price Black market illegal markets that pop up when price controls are present Types of Price Ceilings Binding Nonbinding Nonbinding: when a price ceiling is above equilibrium price it is nonbinding (surplus) Notes Any price above the price ceiling is illegal Any price below the price ceiling is legal Binding: when a price ceiling is below equilibrium price it is binding Notes A shortage will occur if the price ceiling is below equilibrium price Q (d >Q (s) black markets will eliminate shortages caused by price ceilings(binding) *in the longrun supply and demand become more elastic(flatter curve) Price floors are legal minimum prices for a good or service Types of Price Floors Binding Nonbinding Nonbinding: when the price floor is below equilibrium price it is nonbinding Binding:(surplus) when the price floor is above the equilibrium price it is binding Notes if prices are binding, it will affect the market Q (s<Q (d) Chapter 6 Efficiency of Markets and the Cost of Taxation Welfare economics the study of how the distributions of resources affect economic wellbeing Notes the balance between supply and demand improves welfare Measures of Market Value Consumer surplus Producer surplus Willingness to Pay (WTP) is the maximum amount consumer will pay for a good or service Consumer surplus the difference between WTP and the purchase price Willingness to Sell (WTS) the minimum amount a producer will sell for a good or service Producer surplus the difference between WTS and the selling price Notes total surplus is adding consumer surplus and producer surplus, this also known as social welfare when the distribution of resources maximize total surplus, it means the market is efficient efficiency is at equilibrium point consumer surplus cannot be negative Deadweight Loss the decrease in economic activity from market disruptions (e.g. taxes) –Taxes (lead to deadweight loss due to underproduction) –Subsidies (lead to deadweight loss due to overproduction) Chapter 7 Externalities and Public Goods (Market inefficiency) Externalities are cost or benefits that affect thirdparties due to economic activity Types of Externalities Internal cost External cost Negative Positive Internal costthe activity is directly paid by the individual External costthe cost of the activity is paid by someone else Social costs are the sum of internal and external cost Negative overproduced ex:pollution Positiveunderproduction ex:education Notes Public goods are nonexcludable and nonrival public goods encourages the freeloader issue a freeloader is someone who can benefit without paying for it they are underproduced Private goods are excludable and rival ex:property Club goods are nonrival and excludable ex: Sam’s, country club Common resource goods are rival and nonexcludable ex:fishing In negative externalities, social costs are greater than internal cost Society will benefit if all external and internal costs are taken into consideration in order to correct a negative externality (negative external cost) is to internalize it in order to correct a positive externality ( positive internal cost) is to externalize it Chapter 16 Consumer Choice Utility the satisfaction that consumers enjoy from goods and services Notes utility is subjective, it varies from person to person the unit util is the way economist measure satisfaction utility helps economist understand why consumers make decisions Marginal utility it is the extra satisfaction someone receives from one more unit Formula: Marginal utility / price Diminishing Marginal utility marginal utility decreases as consumption increases Notes marginal utility can be negative when total utility is maximized, marginal utility will be zero a consumer who gets the biggest bank from their buck has reached a consumer optimum Types of Utility Ordinal utility Cardinal utility Ordinal utilitypreference over another good (no value attached) Cardinal utility has value (needs a unit of measurement) ex: util M= change of Total Utility / change in quantity
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