Tips Flashcards
Do something if…
Do something if the Marginal benefits > Marginal Cost
Stop doing something if…
Stop doing something when the marginal benefits = marginal costs of doing it
Never do something when the…
Never do something when the marginal benefits < marginal cost of doing it
The slope of the curve, 2 in our case, measures the opportunity cost of the good on the x-axis
The inverse of the slope, 1 ⁄2 in our case, measures the opportunity cost of the good on the y axis.
The law of demand predicts a downward- (or negative) sloping demand curve (Figure 6.1). If the price moves from $1 to $1.25 and all other factors are held constant
we observe a decrease in the quantity demanded from 60 to 40 cups. It is important to place special emphasis on “quantity demanded.” If the price of the good changes and all other factors remain constant, the demand curve is held constant and we simply observe the consumer moving along the fixed demand curve. If one of the external factors change, the entire demand curve shifts to the left or right.
As suppliers increase the quantity supplied of a good
they face rising marginal costs
As suppliers increase the quantity supplied of a good, they face rising marginal costs….
As a result, they only increase the quantity supplied of that good if the price received is
high enough to at least cover the higher marginal cost.
When both demand and supply are changing
one of the equilibrium outcomes (price or quantity) is predictable and one is ambiguou
Before combining the two shifting curves
predict changes in price and quantity for each shift, by itself
The variable that is rising in one case and falling in the other case is
your ambiguous prediction.
The area under the demand curve and above the market price is equal
to total consumer surplus.
The area above the supply curve and below the market price is equal
to total producer surplus.
When describing or calculating elasticity measures,
you must use percentage changes
• In general, the more vertical a good’s demand curve (D0)
the more inelastic the demand for that good.
The more horizontal a good’s demand curve (D1)
, the more elastic the demand for that good.
Despite this generalization, be careful;
elasticity and slope are not equivalent measures.
Inelastic demand Ed < 1: % DQd < % DP,
(D = Change)
so total revenue increases with a price increase.
• Elastic demand Ed > 1: % DQd > % DP,
so total revenue decreases with a price increase.
Unit elastic demand Ed = 1: % DQd = % DP
(D = Change)
so total revenue remains the same.
If EI > 1, the good is
normal and income elastic (a luxury).
If 1 > EI > 0, the good is
normal but income inelastic (a necessity)
If EI < 0
the good is inferior.
• A cross-price elasticity of demand less than zero identifies
complementary goods.
A cross-price elasticity of demand greater than zero identifies
substitute goods.
Taxes create lost efficiency by
moving away from the equilibrium market quantity where MB = MC to society
The area of deadweight loss (triangle DWL) increases as the
quantity moves further from the competitive market equilibrium quantity.
A price floor is installed when producers
feel the market equilibrium price is “too low.”
A price floor creates a
permanent surplus at a price above equilibrium.
• If the government purchases the surplus
taxpayers eventually pay the bill.
The more price elastic the demand and supply curves,
s, the greater the surplus and the greater the government spending to purchase the surplus.
• The price floor reduces net benefit by
overallocating resources to the production of the good.
