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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

consumers optimal choice

when MRSxy=Px/Py
tangent of constraint and indifference curve