Exam 1 Flashcards
Key assumptions of supply and demand model
- S and D are in a single market
- all goods are identical
- all goods sells for the same price and everyone has the same info
- many producers and consumers in the market
Demand choke P
Where D curve intercepts Y-axis
-P @ which no consumer is willing to pay– Qd=0
inverse demand curve
- price as a function of Qd
- solve for P
Factors that influence supply
- price
- cost of production
- # of sellers
- sellers’ outside options (substitutes)
supply choke price
no firm is willing to produce a good
Qs=0
Supply curve y-intercept
inverse supply curve
price as a function of quantity supplied
solve for P
to find choke prices of both S and D
set each equation equal to 0
market equilibrium
Qd=Qs
to find equilibrium P
set S and D equations equal to each other and solve for P
to find equilibrium Q
take equilibrium P and plug it into either the S or D curve equation
curve equations
y=a+bx
b=slope
a=y intercept
Qs>Qd
surplus
price floors cause
Qd>Qs
shortage
price ceiling cause
price floor
sets lowest P that can be paid legally for a good or service
binding above Pe
nonbinding below Pe
price ceiling
sets highest P that can be paid legally for a good or service
binding below Pe
nonbinding above Pe
elasticity of demand (Ed)
Ed= %ΔQd/%ΔP
no more absolute value
Perfectly inelastic
Ed=0
inelastic
-1<0 or between 0 and 1
unit elastic
=(-1) or 1
perfectly elastic
Ed= (-∞) or ∞
to calculate Ed at a point
(1/slope)*(P/Q)
horizontal demand curve
perfectly elastic
vertical demand curve
perfectly inelastic
the steeper the D curve & the bigger the slope
the more inelastic the D
the flatter the D curve & the smaller the slope
the more elastic the D
as move SE down a D curve
D becomes more inelastic
TR=
P*Q
if elastic and P goes down
TR goes up
if elastic and P goes up
TR goes down
if inelastic and P goes down
TR goes down
if inelastic and P goes up
TR goes up
Es=
%ΔQs/%ΔP
Ey= Income elasticity of demand
%ΔQd/%ΔY
either pos or neg
pos=normal good
neg=inferior good
Cross price elasticity
Exy= %ΔQdy/%ΔPx
if pos then they are substitutes
if neg then they are complements
consumer surplus
willingness to pay-what actually pay
=1/2(quantity sold)*(demand choke price-market price)
producer surplus
price-cost of production
=1/2(quantity sold)*(market price-supply choke price)
to calculate CS and PS graphically
A=1/2bh
economic incidence
whose purchasing power is reduced by the tax?
not always the same as the legal incidence
DWL
inefficiency created by the tax–reduces the incentive to produce
DWL< with ________demand
inelastic
DWL > with __________demand
elastic
demand inelastic the more incidence on the
consumers, less DWL
demand elastic the more incidence on the
producers, more DWL
When tax size increases
DWL goes up exponentially
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
consumption bundle
the goods and services that you consume
goes into the Utility Function to compute the amt of utility
marginal utility
the amt of utility you get from consuming one more unit of something
law of diminishing marginal utility
as consume more, smaller additions of utility then dont get any utility or it becomes neg.
assumptions about consumer preferences
- completeness and rankability
- more is better than less
- transitivity A>B B>C then A>C
- 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
completeness and rankability
ordinal ranking not cardinal
Indifference curve
shows the bundles @ which a consumer won’t care which is bought
the higher the curve the more utility
properties of an indifference curve
- ubiquitous( everywhere)
- can figure out which indifference curves have higher utility and why they are downward sloping (substitutes)
- curves never cross
- convex to the origin
marginal rate of substitution definition
how many units of Y you are willing to give up to get one more unit of X
marginal rate of substitution (MRS)
|ΔY/ΔX|
MRS=
MUx/MUy= Px/Px
budget constraint
Income= (PxX)+(PyY)
Px/Py=
slope of budget constraint
solve for _____ to get budget constraint equation
Y (the good relative to what is on the Y axis)
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
if MUx/MUy=Px/Py then…
utility is maximized
If MRS>price ratio then
not maximizing, buying too much y and too little x
If MRS<price ratio then
not maximizing, buying too much x and too little y
consumers optimal choice
when MRSxy=Px/Py
tangent of constraint and indifference curve
