ECN 201, study guide 2
ECN 201, study guide 2 ECN 201 (Professor Colleen Scott)
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ECN 201 (Professor Colleen Scott)
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This 9 page Study Guide was uploaded by Thanh Notetaker on Friday March 25, 2016. The Study Guide belongs to ECN 201 (Professor Colleen Scott) at La Salle University taught by Colleen Scott in Spring 2016. Since its upload, it has received 60 views. For similar materials see Introductory Microeconomics in Economcs at La Salle University.
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Date Created: 03/25/16
ECON 201 STUDY GUIDE FOR 2 TEST.nd Format: All multiple choices Contains: 1) Other Elasticities: Elasticity of Supply: The elasticity of supply measures the responsiveness of the quantity supplied to a change in the price of a good, when all other influences on selling plans remain the same. Calculating the Elasticity of Supply The elasticity of supply is calculated by using the formula: Determinants of Elasticity of Supply: The elasticity of supply depends on Resource substitution possibilities Time frame for supply decision Resource Substitution Possibilities The easier it is to substitute among the resources used to produce a good or service, the greater is its elasticity of supply. Time Frame for Supply Decision The more time that passes after a price change, the greater is the elasticity of supply. Momentary supply is perfectly inelastic. The quantity supplied immediately following a price change is constant. Short-run supply is somewhat elastic. Long-run supply is the most elastic. Income Elasticity of demand: The income elasticity of demand measures how the quantity demanded of a good responds to a change in income, other things remaining the same. The formula for calculating the income elasticity of demand is Goodluck with the test. If the income elasticity of demand is greater than 1, demand is income elastic and the good is a normal good. If the income elasticity of demand is greater than zero but less than 1, demand is income inelastic and the good is a normal good. If the income elasticity of demand is less than zero (negative) the good is an inferior good. Cross Price Elasticity of Demand: The cross elasticity of demand is a measure of the responsiveness of demand for a good to a change in the price of a substitute or a complement, other things remaining the same. The formula for calculating the cross elasticity is: The cross elasticity of demand for a substitute is positive. a complement is negative. Elasticity of demand graphically and 2 extreme cases: 1) Perfectly Inelastic Demand 2) Relatively Inelastic Demand (The demand line is very steep) ΔP > ΔQd Goodluck with the test. 3) Unit Elastic Demand: 4) Relatively Elastic Demand: (The demand curve is flat) ΔP < ΔQd 5) Perfectly Elastic Demand ε = ∞ Elasticity of Supply graphically and 2 extreme cases: (Similar to demand, the only difference if unit elastic) Supply is perfectly inelastic if the supply curve is vertical and the elasticity of supply is 0. Goodluck with the test. Supply is unit elastic if the supply curve is linear and passes through the origin. (Note that slope is irrelevant.) Supply is perfectly elastic if the supply curve is horizontal and the elasticity of supply is infinite. 2) Taxation and Government Intervention: Tax Incidence: The effects of excise taxes on supply and demand NOTES: It doesn’t matter whether the tax is imposed on producers (supply) or consumers (demand). The effect (impact) is the same: producers receive less, consumers pay more, and the number of mutually beneficial transactions (trades) is reduced. The incidence of the tax is evenly split between them. Tax incidence is the division of the burden of a tax between buyers and sellers. When an item is taxed, its price might rise by the full amount of the tax, by a lesser amount, or not at all. If the price rises by the full amount of the tax, buyers pay the tax. If the price rises by a lesser amount than the tax, buyers and sellers share the burden of the tax. If the price doesn’t rise at all, sellers pay the tax. What determines who bears the tax: Tax Incidence and Elasticity of Demand NOTES: The division of the tax between buyers and sellers depends on the elasticities of demand and supply. To see how, we look at two extreme cases. Goodluck with the test. Perfectly inelastic demand: Buyers pay the entire tax. Perfectly elastic demand: Sellers pay the entire tax. The more inelastic the demand, the larger is the buyers’ share of the tax. Tax Incidence and Elasticity of Supply To see the effect of the elasticity of supply on the division of the tax payment, we again look at two extreme cases. Perfectly inelastic supply: Sellers pay the entire tax. Perfectly elastic supply: Buyers pay the entire tax. The more elastic the supply, the larger is the buyers’ share of the tax. Tax Wedge: The difference between the price consumers pay and the price the firm receives. Excise Tax, Deadweight loss, Willingness to pay, Surplus: Look at handouts 3) Consumer theory Total Utility: The choices you make as a buyer of goods and services are influenced by many factors, which economists summarize as Consumption possibilities: are all the things that a consumer can afford to buy. Consumption possibilities are limited by income, the price Preferences: likes and dislikes. Total Utility: is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility. Marginal analysis: Weighing the additional costs v additional benefits of a decision (MC, MB) To make a choice at the margin, you evaluate the consequences of making incremental changes in the use of your time. The benefit from pursuing an incremental increase in an activity is its marginal benefit. The opportunity cost of pursuing an incremental increase in an activity is its marginal cost. If the marginal benefit from an incremental increase in an activity exceeds its marginal cost, your rational choice is to do more of that activity. Goodluck with the test. Total Utility versus Marginal utility: Marginal utility from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed. As the quantity consumed of a good increases, the marginal utility from it decreases. Derive total utility and marginal utility: We call the decrease in marginal utility as the quantity of the good consumed increases the principle of diminishing marginal utility. MU per dollar spent: The marginal utility per dollar is the marginal utility from a good that results from spending one more dollar on it. The marginal utility per dollar equals the marginal utility from a good divided by its price. How to find maximum utility per dollar spent: Utility-Maximizing Rule: A consumer’s total utility is maximized by following the rule: Spend all available income Equalize the marginal utility per dollar for all goods Marginal rate of Substitution (MRS): The marginal rate of substitution, (MRS) measures the rate at which a person is willing to give up good y to get an additional unit of good x while at the same time remaining indifferent (remaining on the same indifference curve). The magnitude of the slope of the indifference curve measures the marginal rate of substitution. If the indifference curve is relatively steep, the MRS is high. In this case, the person is willing to give up a large quantity of y to get a bit more x. If the indifference curve is relatively flat, the MRS is low. In this case, the person is willing to give up a small quantity of y to get more x. Goodluck with the test. Indifference Curves: An indifference curve is a line that shows combinations of goods Budget Line and Budget Constraint: A household’s consumption choices are constrained by its income and the prices of the goods and services available. The budget line describes the limits to the household’s consumption choices. Find Optimal solution: The consumer’s best affordable choice Is on the budget line. Is on the highest attainable indifference curve. Has marginal rate of substitution equal to relative price Substitutes/ Complements, Types of indifference curves: Goodluck with the test. Change in budget (chapter 9 ppt): 4) Externalities and Public Goods: Market failures: Externalities and Public Goods: Externality: the uncompensated impact of one person’s actions on the well-being of a bystander. Externalities can be negative or positive, depending on whether impact on bystander is adverse or beneficial. Examples: Air pollution from a factory The neighbor’s barking dog Late-night stereo blasting from the dorm room next to yours Externalities If negative externality, market quantity larger than socially desirable If positive externality, market quantity smaller than socially desirable To remedy the problem, “internalize the externality” tax goods with negative externalities subsidize goods with positive externalities Public policies towards externalities: Two approaches: Command-and-control policies regulate behavior directly. Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions Market-based policies provide incentives so that private decision-makers will choose to solve the problem on their own. Examples: corrective taxes and subsidies tradable pollution permits Goodluck with the test. Pigouvian tax, Pigouvian Subsidy: Corrective tax: a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality Also called Pigouvian taxes after Arthur Pigou (1877-1959). The ideal corrective tax = external cost For activities with positive externalities, ideal corrective subsidy = external benefit Tradable permits: A tradable pollution permits system reduces pollution at lower cost than regulation. Firms with low cost of reducing pollution do so and sell their unused permits. Firms with high cost of reducing pollution buy permits. Result: Pollution reduction is concentrated among those firms with lowest costs. Coase Theorem: If private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own. Public Goods: See handouts Goodluck with the test.
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