E160 Topical Review - ECON160 Spring 2008 Topical Review...

ECON160 Spring 2008 : Topical Review for Second Midterm
The following is a general guide to the material we have covered since the first midterm. It is not
necessarily definitive.
1. Elasticity and its Applications. (Chapter 5)
A. Defined the Price elasticity of Demand: a measure of the responsiveness of the
quantity demanded by buyers to change in price.
Derived the calculation for an unbiased estimate of Elasticity.
E
d
= %h Qty demanded / %h Price (percentage change in quantity over
percentage change in price)
B Defined degrees of elasticity: elastic: if elasticity is greater than 1, so it moves
proportionally more than price (decrease in price =>Increase in total revenue) ,
unitary elastic: elasticity is equal to one ( increase/decrease in price has no effect
on total revenue) , Inelastic: if elasticity is less than 1, so it moves proportionally
less than price (increase in price => increase total revenue)
(Analyzed the effects on total revenue of changes in price for each)
C. Derived the determinants of Elasticity of demand.
Number/closeness of product substitutes, info about price change and availability
of substitutes, % of income spent, amount of time following price change.
D. Derived the Second law of demand: Demand is more elastic in the long run
(more substitutes, more info about price change and availability of substitutes,
greater opportunity to change complementary set of goods owned)
E. Defined the elasticity of supply: measure of how much the quantity supplied of
a good responds to a change in the price of that good ; the cross price elasticity of
demand: measure of how much the quantity demanded of one good responds to a
change in the price of another good ; the income elasticity of demand: measure of
how much the quantity demanded of a good responds to a change in consumers’
income
2. The Process of Exchange (Chapter 6)
A. Derived the Transaction costs of exchange