ARE Midterm 2 Review
ARE Midterm 2 Review ARE 1150
Popular in Principles of Agriculture & Resource Economics
Popular in Agricultural & Resource Econ
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This 5 page Study Guide was uploaded by Caitrín Hall on Monday March 28, 2016. The Study Guide belongs to ARE 1150 at University of Connecticut taught by Emma Bojinova in Spring 2016. Since its upload, it has received 43 views. For similar materials see Principles of Agriculture & Resource Economics in Agricultural & Resource Econ at University of Connecticut.
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Date Created: 03/28/16
Chapter 10 Consumer Choice and Behavioral Economics Utility – the enjoyment of satisfaction people receive from consuming goods and services The Principle of Diminishing Marginal Utility Marginal utility (MU) – the change in total utility a person receives from consuming one additional unit of a good or service; slope of total utility Law of diminishing marginal utility – the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time The Rule of Equal MU per Dollar Spent Budget constraint – the limited amount of income available to consumers to spend on goods and services Key: spend income up to the point where the last purchase of one good gives an equal increase in utility per dollar Equalize MU per dollar spent NOT MU from each good MU per dollar = MU goodPgood 2 conditions for maximizing utility: 1. MU good Agood A MU good Bgood B 2. Spending on good A + spending on good B = amount available to be spent Income effect – change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant Substitution effect – change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power Income effect causes consumers to decrease quantity demanded, while the substitution effect causes consumers to increase quantity demanded Social Influences Network externality – a situation in which the usefulness of a product increases with the number of consumers who use it; create switching costs Consumers value fairness Three common mistakes by consumers: 1. Ignoring nonmonetary opportunity costs o Endowment effect – the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn’t already own it 2. Failure to ignore sunk costs (cannot be recovered) 3. Unrealistic about future behavior (inconsistent preferences & underestimation) *be able to complete a table including quantity, total utility, marginal utility, and marginal utility per dollar of different goods* Chapter 6 Elasticity: The Responsiveness of Demand and Supply Measuring the Price Elasticity of Demand Price elasticity of demand = % change in qty demanded / % change in price Not the same as the slope of the demand curve Since it is always negative, we compare their absolute values Elastic Demand and Inelastic Demand Elastic demand –percentage change in qty demanded > percentage change in price; price elasticity > 1 in absolute value Inelastic demand – percentage change in qty demanded < percentage change in price; price elasticity < 1 in absolute value Unit-elastic demand – percentage change in qty demanded = percentage change in price; price elasticity = 1 in absolute value The Midpoint Formula Ensures that we have only 1 value of the price elasticity of demand between the same 2 points on a demand curve Uses the average of initial and final quantities and initial and final prices Q 1nd P a1e initial values, while Q a2d P are2final values When Demand Curves Intersect, the Flatter Curve is More Elastic Elasticity does NOT equal slope Slope uses changes in qty and price; elasticity uses percentage changes Smaller slope (in absolute value) = flatter demand curve = more elastic Larger slope (in absolute value) = steeper demand curve = less elastic Determinants of the Price Elasticity of Demand: Availability of Close Substitutes Most important determinant If a product has more substitutes available, it will have more elastic demand. Passage of Time The more time that passes more elastic the demand for a product becomes Luxuries versus Necessities Luxuries have more elastic demand curves than necessities Definition of the Market More narrowly defined market more elastic Share of a Good in a Consumer’s Budget Goods that take a small fraction of a consumer’s budget less elastic Larger share of the good in the average consumer’s budget more elastic Total revenue – the total amount of funds received by a seller of a good/service, calculated by multiplying price per unit by the number of units sold TR = PQ Elasticity and Revenue with a Linear Demand Curve Elastic Increase in qty demanded > increase in price Inelastic Increase in qty demanded < increase in price Unit elastic Increase in qty demanded = increase in price Cross-price elasticity of demand – percentage change in qty demanded of one good divided by percentage change in price of another good = % Change in qty demanded for 1 good / % change in price for another o Substitutes have positive cross-prices o Complements have negative cross-prices Price elasticity of supply – responsiveness of the qty supplied to a change in price; measured by dividing the percentage change in qty supplied of a product by the percentage change in the product’s price Price elasticity of supply = % change in qty supplied / % change in price Price elasticity > 1 in absolute value elastic supply Price elasticity < 1 in absolute value inelastic supply Price elasticity of supply = 1 in absolute value unit elastic Determinants of the Price Elasticity of Supply Ability and willingness of firms to alter the qty they produce as price increases Often, firms have difficulty increasing qty of their product during a short period of time Chapter 4 Economic Efficiency, Government Price Setting, and Taxes Price ceiling – a legally determined max price that sellers may charge Price floor – a legally determined minimum price that sellers may receive o When gov’t imposes a price ceiling/floor, economic surplus is reduced Consumer surplus – the difference between the highest price a consumer is willing to pay for a good or service and the price the consumer actually pays Marginal benefit – additional benefit to a consumer from consuming one more unit of a good/service Marginal cost – additional cost to a firm of producing one more unit of a good Producer surplus – the difference between the lowest price a firm would be willing to accept for a good/service and the price it actually receives Graphing Demand curve – shows the marginal benefit consumers receive Area below the demand curve and above price line represents the difference between the price consumers would have paid versus the price they did pay Total amount of consumer surplus = area below the demand curve & above the market price Total amount of producer surplus = area above the demand curve & below the market price Economic surplus – the sum of consumer and producer surplus o EQ in a competitive market results in the greatest amount of economic surplus (total net benefit to society) o Economic surplus is maximized when a market is in competitive EQ o Deadweight loss – reduction in economic surplus resulting from a market not being in competitive EQ; always graphed as a triangle Price Floors: Government Policy in Agricultural Markets Legally determined minimum price that buyers should pay for a good Binding – price floor is above P ; keeps price from reaching EQ price level Price floor consumer surplus declines deadweight loss represents decline in economic efficiency Government essentially buys the deadweight loss Price Ceilings: Government Rent Control Policy in Housing Markets Binding if set below EQ level Create shortages in the market
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