Micro 2

Question 1

Normal/superior vs inferior goods

Answer 1

Normal/superior: buy more as income increases

Inferior: buy less as income increases

Question 2

Substitutes

Answer 2

Good used in place of each other

price of one increases, demand for other increases

Question 3

Complementary

Answer 3

Used in conjunction with one another

Price increases for one, demand decreases for both

Question 4

Consumer expectations

Answer 4

Expectations of higher prices in the future lead to increase in current demand
FOMO

Question 5

which way will increase/decrease in supply/demand shift the curve?

Answer 5

INCREASE:
supply right
demand right

DECREASE:
supply left
demand left

Question 6

anything that makes production cheaper will shift supply which way?

Answer 6

to the right
S increases

Question 7

market equilibrium

Answer 7

where supply and demand intersect
only place to satisfy buyers AND sellers

Question 8

results of:
1. D in S in
2. D de S de
3. D in S de
4. D de S in

Answer 8

1. P? Q in
2. P? Q de
3. P in Q?
4. P de Q?

Question 9

results of price ceilings

Answer 9

Black markets
(below equilibrium price)

Question 10

results of price floors

Answer 10

surplus
(above equilibrium price)

Question 11

formula for price elasticity of demand

Answer 11

E = %change Q/%change P

always absolute value!

E>1 means elastic

Question 12

When E=1 what does that mean

Answer 12

unit elasticity

perfectly elastic demand
-An increase in P results in sales of 0
-horizontal demand curve

perfectly inelastic demand
-change in P has no influence on Q
-vertical demand curve

Question 13

where on the curve is demand more elastic?

Answer 13

upper left, E>1
middle, E=1
lower right, E<1

Question 14

Total revenue test

Answer 14

TR = PxQ

Elastic- A decrease in P will increase TR
Inelastic- A decrease in P will decrease TR
Unit elastic- decrease in P will not change TR

Question 15

determinants of elasticity…
1. substitutes?
2. trade barriers?
3. specificity?
4. prop. of income?
5. luxuries vs necessities?
6. time

Answer 15

1. more substitutes=more elastic
2. lowering trade barriers increases substitutes= more elastic
3. more narrow=more elastic
4. lower price= inelastic
5. most necessities=inelastic
6. elasticity increases over time (develop taste for substitutes)

Question 16

Law of supply

Answer 16

a positive, direct relationship between P and Q supplied
this is why the S curve is up sloping
so… elasticity of supply will not be negative

Question 17

Time- the main determinant of supply
1. market period
2. short run
3. long run

Answer 17

1. producers are unable to change output so supply is perfectly inelastic
2. plant size is fixed, but firm is able to use its plant more or less intensively
3. all resources are variable, firms may enter or exit market

Question 18

cross elasticity of demand

Answer 18

E= %changeQ of Y/ %changeP of X

measures effect of a change in P of one good on the Q demanded of different good

Positive= substitute goods
Negative= Complementary goods
0 or near 0= independent goods

Question 19

income elasticity

Answer 19

E= %changeQ/ %change income

positive= normal goods
negative= inferior goods

Question 20

consumer surplus
-what
-where on graph

Answer 20

difference between what consumers are WILLING to pay for one unit and the market price for one unit

-above P equilibrium until D curve

Question 21

producer surplus
-what
-where on graph

Answer 21

difference between market price and what producers are WILLING to sell one unit for

-below P equilibrium until S curve

Question 22

Efficiency Loss (Deadweight loss- DWL)
-what
-where on graph

Answer 22

when a good is either over or under-produced there is a loss in PS and CS

-draw lines to mark surplus (QD and QS) and then from the left half shade between the D and S curve until the left surplus line

Question 23

Excise tax

Answer 23

production tax- will shift supply to the left

the more inelastic the D is, the more a tax burden will be shifted to consumers

Question 24

Progressive tax vs regressive tax

Answer 24

pro (aka income tax)= average tax rate INCREASES as taxpayer’s income INCREASES

reg (aka sales tax)= average tax rate DECREASES as taxpayer’s income INCREASES

Question 25

how will Equilibrium world price and quantity affect employment?

Answer 25

increase employment!
MORE domestic production
-producers charge more
-consumers pay more

Question 26

consumer and producer surplus when Pw and Tariff
-where on graph

Answer 26

CS: above tax revenue, touch PW and tariff, and D

PS: triangle below, touch PW and tariff and S

Question 27

how to find market supply curve for a product from the individual firm supply curves?

Answer 27

summing the quantities each producer sells at each possible price

Question 28

what would make the elasticity of a good more elastic?

Answer 28

The ability to easily reallocate inputs to production of good

Question 29

when is total economic surplus maximized?

Answer 29

at equilibrium (S and D intersect)

Question 30

what will INITIALLY result from increased demand for a good?

Answer 30

There will be a temporary shortage at the original equilibrium price.

Question 31

per unit subsidy
-what is it
-when is it used

Answer 31

-money the government pays producers or consumers for each unit of goods bought and sold.
- in order to increase the quantity sold

Question 32

autarky

Answer 32

an economic system of self-sufficiency and limited trade

Question 33

relationship between P and TR when…
1. elastic
2. inelastic
3. unit elastic

Answer 33

1. inverse (P in TR de)
2. direct (P in TR in)
3. doesn’t change

Question 34

elasticity of supply measures…

Answer 34

How responsive sellers are to changes in the PRICE!!

Question 35

quota

Answer 35

limited quantity that can be imported or exports