Flashcards in Exam 1 Deck (63):

1

## Key assumptions of supply and demand model

###
1. S and D are in a single market

2. all goods are identical

3. all goods sells for the same price and everyone has the same info

4. many producers and consumers in the market

2

## Demand choke P

###
Where D curve intercepts Y-axis

-P @ which no consumer is willing to pay-- Qd=0

3

## inverse demand curve

###
-price as a function of Qd

-solve for P

4

## Factors that influence supply

###
1. price

2. cost of production

3. # of sellers

4. sellers' outside options (substitutes)

5

## supply choke price

###
no firm is willing to produce a good

Qs=0

Supply curve y-intercept

6

## inverse supply curve

###
price as a function of quantity supplied

solve for P

7

## to find choke prices of both S and D

### set each equation equal to 0

8

## market equilibrium

### Qd=Qs

9

## to find equilibrium P

### set S and D equations equal to each other and solve for P

10

## to find equilibrium Q

### take equilibrium P and plug it into either the S or D curve equation

11

## curve equations

###
y=a+bx

b=slope

a=y intercept

12

## Qs>Qd

###
surplus

price floors cause

13

## Qd>Qs

###
shortage

price ceiling cause

14

## price floor

###
sets lowest P that can be paid legally for a good or service

binding above Pe

nonbinding below Pe

15

## price ceiling

###
sets highest P that can be paid legally for a good or service

binding below Pe

nonbinding above Pe

16

## elasticity of demand (Ed)

###
Ed= %ΔQd/%ΔP

no more absolute value

17

## Perfectly inelastic

### Ed=0

18

## inelastic

### -1<0 or between 0 and 1

19

## unit elastic

### =(-1) or 1

20

## perfectly elastic

### Ed= (-∞) or ∞

21

## to calculate Ed at a point

### (1/slope)*(P/Q)

22

## horizontal demand curve

### perfectly elastic

23

## vertical demand curve

### perfectly inelastic

24

## the steeper the D curve & the bigger the slope

### the more inelastic the D

25

## the flatter the D curve & the smaller the slope

### the more elastic the D

26

## as move SE down a D curve

### D becomes more inelastic

27

## TR=

### P*Q

28

## if elastic and P goes down

### TR goes up

29

## if elastic and P goes up

### TR goes down

30

## if inelastic and P goes down

### TR goes down

31

## if inelastic and P goes up

### TR goes up

32

## Es=

### %ΔQs/%ΔP

33

## Ey= Income elasticity of demand

###
%ΔQd/%ΔY

either pos or neg

pos=normal good

neg=inferior good

34

## Cross price elasticity

###
Exy= %ΔQdy/%ΔPx

if pos then they are substitutes

if neg then they are complements

35

## consumer surplus

###
willingness to pay-what actually pay

=1/2(quantity sold)*(demand choke price-market price)

36

## producer surplus

###
price-cost of production

=1/2(quantity sold)*(market price-supply choke price)

37

## to calculate CS and PS graphically

### A=1/2bh

38

## economic incidence

###
whose purchasing power is reduced by the tax?

not always the same as the legal incidence

39

## DWL

### inefficiency created by the tax--reduces the incentive to produce

40

## DWL< with ________demand

### inelastic

41

## DWL > with __________demand

### elastic

42

## demand inelastic the more incidence on the

### consumers, less DWL

43

## demand elastic the more incidence on the

### producers, more DWL

44

## When tax size increases

### DWL goes up exponentially

45

## Laffer curve with taxes

### as tax size increases, TR will go up but it will peak and then TR will go down if the tax size keeps getting bigger

46

## consumption bundle

###
the goods and services that you consume

goes into the Utility Function to compute the amt of utility

47

## marginal utility

### the amt of utility you get from consuming one more unit of something

48

## law of diminishing marginal utility

### as consume more, smaller additions of utility then dont get any utility or it becomes neg.

49

## assumptions about consumer preferences

###
1. completeness and rankability

2. more is better than less

3. transitivity A>B B>C then A>C

4. the more a consumer has of a good the less she is willing to give up of something else to get even more of that good

50

## completeness and rankability

### ordinal ranking not cardinal

51

## Indifference curve

###
shows the bundles @ which a consumer won't care which is bought

the higher the curve the more utility

52

## properties of an indifference curve

###
1. ubiquitous( everywhere)

2. can figure out which indifference curves have higher utility and why they are downward sloping (substitutes)

3. curves never cross

4. convex to the origin

53

## marginal rate of substitution definition

### how many units of Y you are willing to give up to get one more unit of X

54

## marginal rate of substitution (MRS)

### |ΔY/ΔX|

55

## MRS=

### MUx/MUy= Px/Px

56

## budget constraint

### Income= (Px*X)+(Py*Y)

57

## Px/Py=

### slope of budget constraint

58

## solve for _____ to get budget constraint equation

### Y (the good relative to what is on the Y axis)

59

## MRS vs price ratio definition

### How many units of y WILLING to give up vs how many units of Y you HAVE to give up

60

## if MUx/MUy=Px/Py then...

### utility is maximized

61

## If MRS>price ratio then

### not maximizing, buying too much y and too little x

62

##
If MRS

### not maximizing, buying too much x and too little y

63