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ECU Microeconomics 2113 - Exam 2 Study Guide/Review Chapters 4-7

by: rachelviolet

ECU Microeconomics 2113 - Exam 2 Study Guide/Review Chapters 4-7 Microeconomics 2113

Marketplace > East Carolina University > Economcs > Microeconomics 2113 > ECU Microeconomics 2113 Exam 2 Study Guide Review Chapters 4 7
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Professor: John A. Bishop Class: Microeconomics 2113 School: East Carolina University These extensive notes on chapters 4-7 in Microeconomics cover all of the material needed for the exam. At...
Principles of Economics: Microeconomics
John A. Bishop
Study Guide
microeconomics 2113 economics john bishop east carolina university study guide notes practice questions
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This 13 page Study Guide was uploaded by rachelviolet on Monday February 15, 2016. The Study Guide belongs to Microeconomics 2113 at East Carolina University taught by John A. Bishop in Fall 2015. Since its upload, it has received 164 views. For similar materials see Principles of Economics: Microeconomics in Economcs at East Carolina University.

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Date Created: 02/15/16
MICROECONOMICS EXAM #2 REVIEW Chapters 4-7 Chapter 4 What to know: Demand vs. quantity demanded Increase in demand Law of supply Changes in supply Supply vs. quantity supplied P*, Q* Shortage/surplus Identifying changes in S/D How P* Q* change when either S/D change Demand - Quantity Demanded: amount of a good that buyers are willing and able to purchase AT ANY GIVEN PRICE – only thing that price affects - CHANGE IN QUANITITY DEMANDED: movement along fixed demand curve - Law of Demand: other things are equal / when price of a good rises, the quantity demanded falls - Increase in Demand: if price is lower, demand goes up Changes in Demand: 4 things 1. Income – normal or inferior good 2. Tastes 3. Expectations 4. Prices of Related Goods a. Substitutes (baloney vs peanut butter) b. Complements (flashlights and batteries) Supply - Quantity Supplied: amount of a good sellers are willing and able to sell AT ANY GIVEN PRICE - CHANGE IN QUANTITY SUPPLIED: movement along fixed supply curve - Law of Supply: when the price of a good rises, quantity supplied of a good rises Changes in Supply: variables that shift the supply curve 1. Input prices 2. Technology INCREASE IN SUPPLY: curve shifts to right DECREASE IN SUPPLY: curve shifts to left Equilibrium: when quantity demanded=quantity supplied Shortage VS Surplus Surplus: above equilibrium Quantity supplied > quantity demanded Downward pressure on price * SUpplied > SUrplus Shortage: below equilibrium Quantity demanded > quantity supplied Upward pressure on price **More value to item** Chapter 5 What to Know: Define price elasticity of demand Inelastic vs. elastic Elasticity and substitutes Elasticity and time Elasticity and slope Elasticity and total revenue Elasticity: How big the response is to increase in price Price Elasticity of Demand: measures the responsiveness of quantity demanded Determined by: 1. Availability of close substitutes (more close substitutes, more elastic) 2. Necessities vs. Luxuries 3. Definition of market 4. Time horizon Inelastic: Less substitutes, raises total revenue, <1 Elastic: More substitutes *can stretch farther*, lowers total revenue *because more options to get stuff, not as exclusive, >1 Unit Elasticity = 1 Horizontal (flat) demand curve = Greater elasticity **price stays same, quantity just goes up, so more people will sell it cause same price** Vertical demand curve = Greater inelasticity ** fixed quantity, the price just goes UP – think valuable items. Chapter 6 What to Know Binding price ceilings/floors and equilibrium Tax graph (5) Who bears burden of tax in general Tax incidence and elasticity Price ceiling & price floor – controls (legal max and min) on price Price Ceiling – limits seller’s income while lower cost for buyers **less common in US** Price Floor – guarantee income for sellers but hurt buyers BINDING Price Ceiling (buyers) - Legal MAXIMUM on the price at which a good can be sold - Occurs Below equilibrium (equil. price is above) - Price ceiling = market price - Quantity demanded > quantity supplied - SHORTAGE of goods (there is higher demand than supply meaning low price which makes buyers happy) NON-BINDING (not effective) Price Ceiling - Occurs above equilibrium - Not effective because quantity demanded = quantity supplied - Consumers would buy more if price was lower BINDING Price Floor (sellers) Legal MINIMUM on the price at which a good can be sold - Occurs above equilibrium - Quantity demanded < quantity supplied - SURPLUS of goods NON-BINDING Price Floor - Occurs below equilibrium, not effective Taxes Who bears burden of tax in general? - Answer: BUYERS AND SELLERS, there’s no difference who you collect tax from Tax Incidence: Manner in which the burden of a tax is shared among participants in a market, determined by ELASTICITY: - Inelastic Demand (less subs, buyer pays most) o Sellers – little tax burden o Buyers – big tax burden - Elastic Demand (more subs, seller pays most) o Sellers – big tax burden o Buyers – little tax burden Tax on Sellers – supply curve left (decrease in quantity supplied) Tax on Buyers – demand curve left (shifts by the size of the tax) Price buyers pay = gross price – tax Price sellers receive = net price – no tax ^ In the middle of that is the equilibrium (price without tax) Taxes levied on sellers = Taxes levied on buyers Chapter 7 What to Know Define Consumer and Producer Surplus Find CS and PS on graph Efficiency and Total surplus Consumer Surplus: amount a buyer is willing to pay for a good (ex-$100) MINUS the amount he actually pays for a good (ex-$80) - SURPLUS=$20 (100-80) - Measures the benefit the buyer receives - Below demand curve (=what you’re demanded to pay-$100) - Above price (=price you actually pay-$80) Producer Surplus: amount a seller is paid for a good (ex-$100) MINUS the seller’s cost of providing it (ex-$80) - SURPLUS=$20 - Above supply curve ($80) and below price ($100) Total Surplus = The sum of producer and consumer surplus Efficiency – is attained when the total surplus is maximized Exam 2 Practice MC Questions 1. Farm programs that pay farmers NOT to plant crops on all their land… - Helps farmers by increasing revenue (inelastic) but hurts consumers by raising the price 2. Surplus exists in a market if… - The current price is ABOVE the equilibrium 3. The demand for a good tends to be more inelastic the fewer the… - Substitutes 4. Changes in technology… - Shift supply curve (increase-to the right) 5. Over time, housing shortages cause by rent control… - Increase because the demand for and supply of housing are more elastic in the long run 6. Decrease in input costs (**think supply**) to firms in a market… - Decrease in equilibrium price and increase in equilibrium quantity 7. The demand for bourbon whiskey is… - More elastic than alcoholic beverages in general 8. If the price a consumer pays = the price they are willing to pay, consumer surplus is… - ZERO baby 9. Consumer surplus is… - The amount a consumer is willing to pay minus the amount they do pay 10. The flatter the demand curve (elastic) through a given point… - Means greater the price elasticity at that point 11. Law of Supply is the… - Positive relationship between price and quantity supplied (Positive bc when the price rises, quantity supplied rises) 12. At a minimum wage that exceeds equilibrium wage… - Quantity supplied of labor exceeds quantity demanded 13. Price elasticity measures… - Quantity demanded response to a change in price 14. The movement (shift) from S1 to S2 to the right is… - Increase in supply 15. What causes an increase in supply? - Improvement of technology 16. What would least likely happen as a result of a price ceiling imposed in market for rental cars? - Free gas given to customers (cause price is already so low) 17. Legal maximum price at which a good can be sold… - Price ceiling 18. When a binding price ceiling is imposed to benefit buyers… - Some buyers won’t be able to buy any of the good (there’s a shortage) 19. When a demand is inelastic, a decrease in price will cause… - Decrease in total revenue 20. Consumer surplus (consumer=DEMAND) is the area… - Below demand curve and above the price 21. Which side of the market is more likely to lobby government floor? (AKA WHO WANTS HIGHER PRICE?) - The sellers (floor-benefits sellers**) 22. The surplus caused by a binding price floor will be greatest if… - Both supply and demand are elastic (flat) 23. In general, a steeper supply curve means… - More inelastic (vertical, fixed quantity) 24. Which of the following would cause a demand curve for a good to be price inelastic? - The good is a necessity 25. A decrease in supply (shift to left, supply is shifting so the answer has to do with demand) will increase total revenue in that market if… - Demand is price inelastic 26. What’s an example of a price floor? - Minimum wage 27. Price elasticity of demand is defined as… - Change in the quantity of a good demanded divided by the change in the price of that good 28. The demand for which of the following is most likely to be most price inelastic? - Transportation 29. If a supply curve for a good is price elastic, then… - The quantity supplied is sensitive to changes in the price of that good 30. If a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught the fisherman’s price elasticity of supply for fresh fish is… - ZERO 31. A decrease in supply (shift to left) will increase total revenue if… - Demand is price inelastic 32. If an increase in the price of a good has no impact on total revenue, demand must be… - Unit price elastic 33. Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to… - Reduce total revenue to farmers as a whole because demand for food is inelastic 34. If supply is price inelastic (LESS subs LESS than 1), the value of the price elasticity of supply must be… - Less than 1 35. Demands for necessities tend to be… - INELASTIC 36. If a smaller percentage increase in the price of a good greatly reduces quantity demanded, the demand for the good is… - Price elastic 37. Which of the following statement about a binding price ceiling is true? - The shortage created by the price ceiling is greater in the long run than short run 38. The surplus caused by a binding price floor will be greatest if… - Both supply and demand are elastic 39. Which of the following statements is true if the gov places a price ceiling on gas at 1.50 per gallon and equilibrium price is 1.00? - A significant increase in the demand for gasoline could cause the price ceiling to become a binding constraint 40. Studies show that a 10 percent increase in minimum wage… - Decreases teenage employment by about 1 to 3 percent 41. Within the supply and demand model, a tax collected from the BUYERS of a good shifts the… - Demand curve downward by size of tax per unit 42. Within the supply and demand model, a tax collected from the SELLERS of a good shifts the… - Supply curve upward by size of tax per unit 43. Which of the following happens when a tax is placed on a good? - An increase in the price buyers pay, decrease in price sellers receive and decrease in quantity sold 44. When a tax is collected from the buyers… - The tax burden on the buyers and sellers is the same as an equivalent tax collected from the sellers 45. A tax of $1 per gallon on gasoline… - Places a tax wedge of $1 between price buyers pay and price sellers receive 46. Burden of tax falls more heavily on sellers when… - Demand is elastic and supply inelastic 47. For which of the following products would the burden of a tax likely fall more heavily on the seller (demand is elastic)? - Entertainment 48. For a price ceiling to be a binding constraint, the gov must set it… - Below equilibrium 49. A binding price ceiling creates a… - SHORTAGE 50. A buyer’s willingness to pay is that buyer’s - Maximum amount they are willing to pay for a good 51. An increase in the price of a good along a stationary demand curve… - Decreases consumer surplus 52. Producer surplus is the area… - Above supply curve and below the price 53. If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then… - The value placed on the last unit of production by buyers exceeds the cost of production 54. If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then… - The cost of production on the last unit produced exceeds the value placed on it by buyers 55. The seller’s cost of production is… - The minimum amount the seller is willing to accept for a good 56. Total surplus is the area… - Below demand curve and above supply curve 57. In general, if a benevolent planner wanted to maximize total benefits received by buyers and sellers in a market, the planner should… - Allow market to seek equilibrium on its own


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