Midterm Guide

# Midterm Guide - Microeconomics Midterm Exam Price...

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Unformatted text preview: Microeconomics Midterm Exam Price Elasticity of Demand Coefficient = % Change in Quantity Demanded % Change in Price Ed = %∆QD %∆P E > 1 demand is Elastic € E < 1 demand is Inelastic E = 1 demand is Unitary %ΔQ D = (Q1 − Q0 ) ȺQ1 + Q0 Ⱥ Ⱥ 2 Ⱥ Ⱥ Ⱥ %ΔP = ( P1 − P0 ) Ⱥ P1 + P0 Ⱥ Ⱥ 2 Ⱥ Ⱥ Ⱥ € What Determines Elasticity? 1. The availability of substitutes 2. Short vs. Long term (long is more elastic than short term) 3. Necessity vs. Luxury item 4. % of income spent on the product (the higher % of income that a product/service consumes, the higher the elasticity) S1 Perfectly Inelastic Price S2 Elastic Quantity Supplied ****Shift to the right is good, shift to the left is bad**** Surplus caused by Price Floor, which is drawn above the equilibrium price, forces the government to buy the surplus supply Shortage caused by Price Ceiling, which is drawn below the equilibrium price and creates a black market • Excise Taxes o Is a tax on a particular good to raise the price and discourage use o A tax collected from sellers, shifts the supply curve to the left o A tax collected from buyers, shifts the demand curve to the left o The part of the tax paid by each side of the market is the same whether the tax is imposed on the buyers or imposed on sellers The law of diminishing marginal utility As consumption of a good or service increases, marginal utility decreases o Maximize utility: MUx/Px=MUy/Py no gain from reallocating expenditures If MUx/Px>MUy/Py o move away from y toward x o If MUx/Px<MUy/Py move away from x toward y ...
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## This note was uploaded on 02/04/2011 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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