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Econ Midterm 2 Study Guide

by: Michelle Pope

Econ Midterm 2 Study Guide Econ 102

Michelle Pope
GPA 3.5

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About this Document

This covers all the material since the first midterm. Comparative Statics and Price Controls
Microeconomic Principles
Dr. Issac DiIanni
Study Guide
Econ, 102, midterm, 2, price, Controls, comparative, statics
50 ?




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This 13 page Study Guide was uploaded by Michelle Pope on Saturday October 8, 2016. The Study Guide belongs to Econ 102 at University of Illinois at Urbana-Champaign taught by Dr. Issac DiIanni in Fall 2016. Since its upload, it has received 80 views. For similar materials see Microeconomic Principles in Microeconomics at University of Illinois at Urbana-Champaign.


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Date Created: 10/08/16
Midterm 2 Study guide Definitions  :  Comparative Statics: studying how supply and demand curves shift Normal Goods: good where when income increases, demand increases; when income decreases, demand  decreases Inferior Goods: good where when income increases, demand decreases; when income decreases, demand  increases Elasticity: measure of responsiveness of one variable to changes in another variable Income Elasticity of Demand: effect that a change in a person’s income has on their demand for a certain good Cross­Price Elasticity of Demand: effect that a change in the price of one good has on the demand for another  good Substitutes: goods that perform a similar function or satisfy a similar human desire Compliments: goods that are more valuable when consumed together Inputs: products used to produce the initial product Subsidy: sum of money granted by the government or a public body to assist an industry or business so that the  price of a commodity or service may remain low or competitive Owned­Price Elasticity of Demand (Price Elasticity of Demand or Elasticity of Demand): percent change in  quantity demanded divided by the percent change in price Owned­Price Elasticity of Supply (Price Elasticity of Supply or Elasticity of Supply): percent change in  quantity supplied divided by the percent change in price Demand Curve: set of maximum buying prices Supply Curve: set of minimum selling prices Consumer Surplus: measure of the gain that the buyer experiences from an exchange Producer Surplus: measure of the gain that the seller experiences from an exchange Total Gain from Trade: sum of consumer surplus and producer surplus Equilibrium: situation in which no individual, taking the behavior of all others as given, wants to change their  own behavior (Nash equilibrium)  Shortage: when the quantity supplied is lower than the quantity demanded Surplus: when the quantity demanded is lower than the quantity supplied Scarcity: amount of goods is not enough to satisfy all human desires Dead Weight Loss: gains from trade that are not being made Economic Efficiency: situation in which all possible gains from trade are being made Entrepreneur: person who takes advantage of profit opportunity in the market Direction of Causation: causal relationship between one event and another Price Control Law: law that mandates what price buyers and sellers must trade at Effect Price Control: price control law that keeps the price above or below the market­clearing price Maximum Price Control Law (Price Ceiling): law that prohibits from trading at a price above legal maximum Minimum Price Control Law (Price Floor): law that prohibits people from trading at a price below legal  minimum Rent Control Law: maximum price control on rental housing Rationing Laws: laws that restrict people’s consumption of certain goods Minimum Wage Law: minimum price control on workers’ wages Wage: price of labor Unemployment Rate: percentage of the population that is actively looking for work but has no job Stuff to Know:     Increase Decrease  Increase in demand or supply: shift to the right  Decrease in demand or supply: shift to the left  Shifts of Demand Curve: o Q =f (Price, Consumer Tastes, # of  d buyers, Income, Prices of related goods) o Price: changes move along the curve o If # of buyers:  Increase: demand increases  Decrease: demand decreases o If income:  Increases: demand for normal goods increase, demand for inferior goods decrease  Decreases: demand for inferior goods increase, demand for normal goods decrease  Subjective because some people will not buy certain goods even if their income goes up  or down (EX: vegetarians will not buy steak) o Price of related goods:  If substitutes:   Increase in Good 1: decrease in Good 2 (& vice versa)  Decrease in Good 1: increase in Good 2 (& vice versa)  If complements:  Increase in Good 1: increase in Good 2 (& vice versa)  Decrease in Good 1: decrease in Good 2 (& vice versa)  Subjective because for some people will have no substitutes for items, therefore no  change will occur in demand for them  Shifts in Supply Curve:  o Q sf (Price, # of sellers, technology, input prices, per unit taxes or subsidies) o Price: changes move along the curve o If # of sellers:   Increase: more quantity supplied, prices decrease, and quantity demanded decreases  Decrease: less quantity supplied, prices increase, and quantity demanded increases o Technology:   Improvements: increase in supply, prices decrease, and quantity demanded decreases  Destruction: decrease in supply, price increases, quantity demanded increases o If input Prices:  Increase: supply decreases, prices increase  Decrease: supply increases, prices decrease  Not like Labor Theory of Value because there is no demand in LToV.  If the demand of a certain input increases, the price of that same input for a different  output would increase because of the demand o Per­unit taxes or Subsidies  Taxes: shift supply to left  Lesser tax, then shifts right  Subsidies: shift supply to right  Lesser subsidy, then shifts to left  Elasticity o General Form: Ey,x∆Y/%∆X o Owned­Price Elasticity of Demand (Price Elasticity of Demand or Elasticity of Demand):  percent change in quantity demanded divided by the percent change in price  ED=%∆Q /%DP    EX 1 o Owned­Price Elasticity of Supply (Price Elasticity of Supply or Elasticity of Supply): percent  change in quantity supplied divided by the percent change in price  ES=%∆Q /S∆P  EX 2 o Graphing Demand Elasticity   When |E|> 1, the curve is elastic  Closer to ∞, more gradual of the slope  When |E| = ∞, the curve is Perfectly elastic  Horizontal line  When |E|< 1, the curve is inelastic  Closer to 0, steeper the line  When |E| = 0, the curve is perfectly inelastic  Vertical line o Income Elasticity of Demand  Percent change in quantity divided by the percent change in income  EQ=%∆Q /%DM  M=income  If +, product is inferior good  If ­, product is normal good  EX 3 & 4 o Cross­Price Elasticity of Demand  Crossing one good with another  Ex,y∆Q /%XP Y  If +, products are substitutes  If ­, products are complements  EX 5 & 6  Equilibrium o Equilibrium price and market clearing price are two different concepts but refer to the same point on graph o Scarcity is when there are not enough goods to satisfy all human desires; cannot be solved o Shortage is when the quantity supplied is lower than the quantity demanded at a particular point  in time  o Dead Weight Loss:   When gains from trade are not being made  In surplus, demand would be limiting factor  In shortage, supply would be limiting factor  DWL is economic efficiency  EX 7 & 8  Price System o Information system  Has improvements in technology  When there are new improvements, supply goes up o Incentive system  When prices are at a certain number, there are certain incentives for people to buy and  not to buy certain products  EX: when there is a shortage of gas, the prices go up; this gives people the  incentive to not buy that much gas because the prices are so high  Individual prices give people incentives to change behavior  Prices have to be free to adjust  Price, demand, and supply changes much more in market economies  Direction of Causation o May have significant consequences if understanding of causation is incorrect and reacts  incorrectly  Price Controls o Maximum Price Controls  Keeps price away from equilibrium  Effective if price is below market­clearing price  Effects:   Benefits some consumers and harms others  Harms all producers  Does more harm than good  Much more DWL  EX 9 o Minimum Price Controls  Keeps price away from equilibrium  Effective if price is above market­clearing price  Effects:  Benefits some producers and harms others  Harms all consumers  Does more harm than good  EX 10 o Effects of Rent Control  Housing shortage  Slums   Lawbreaking (bribery)  The “Old Widow” Effect  Women stay in big apartments because of cheap rent  Market Distortion  Luxury apartments are exempt from rent control laws  Unprofitable to build low income housing  Illegal to sublet  o Maximum Price Control on Oil  Caused shortage of domestically produced oil  International companies raised prices because of shortage  Rationing:  Only certain amount of gas could be supplied at each gas station  Made a shortage in electricity as well o Price Gauging Laws  Imposed after national disasters  Price of a good is used as the max price to sell by during and after national disaster  Creates a shortage o Minimum Wage Laws  Determined by supply and demand  Surplus of labor in lower labor market (unemployment)  Not effective price control for white collar workers  Higher productivity leads to higher wages  Reduces hours, benefits, and training  Eliminates job categories  Workers leave labor force Example 1 Example 2 Ex 3: ­income increases from $20,000 to $30,000 ­quantity demanded for steak increases from 200 to 300 ­what is the income elasticity of demand for steak and is it a normal good or inferior good? Ex 4:  ­income decreases from by 20% ­quantity of good 1 increases by 10% ­what is the income elasticity of demand and is it a normal good or inferior good? Ex 5:  ­price of Good A went up from $4 to $6 ­quantity of Good B went down from 300 to 150 ­what is the cross­price elasticity of demand and are the goods complements or substitutes? Ex 6: ­price of Good A goes down by 34% ­quantity of Good B goes down by 20% ­what is the cross­price elasticity of demand and are the goods complements or substitutes? Example 7 Example 8 Example 9 Example 10


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