Final Exam Study Guide

Final Exam Study Guide - Final Exam Study Guide Chapter 4...

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Unformatted text preview: Final Exam Study Guide Chapter 4: Supply & Demand- determinants of demand: o price o income o preference o expectations- increase in quantity demanded- movement along the demand curve as price changes- increase in demand- consumer buys more at each price; curve shifts right- normal good- increase in income increases demand o negative elasticity of demand o positive income elasticity- inferior good- increase in income decreases demand o positive elasticity of demand o negative income elasticity- substitutes- increase in price of good 1 leads to increase in demand of good 2 o ex. Butter and margarine o positive cross-price elasticity- complements- increase in price of good 1 leads to decrease in demand of good 2 o ex . Ketchup and burgers o negative cross-price elasticity- determinants of supply: o price of goods o expenses o expectations- market supply is the sum of supplies of all sellers (sum of individual supply curves horizontally)- surplus- supply is greater than demand; excess supply- shortage- demand is greater than supply; excess demand Chapter 5: Elasticity- elasticity- measures how quantity demanded/supplied changes based on a price change- necessities have inelastic demand (steep demand; people get them regardless of price)- luxuries have elastic demand (flat demand; people only get them at a certain price)- price elasticity of demand = % change in Q d / % change in P o greater than 1: elastic o less than 1: inelastic o equal to 1: unit elastic o equal to 0: perfectly elastic o undefined: perfectly inelastic- total revenue- P x Q (area between demand curve and x-axis)- income elasticity of demand = % change in Q d / % change in INCOME o normal goods- positive income elasticity o inferior goods- negative income elasticity o necessities- small income elasticity o luxuries- large income elasticity- cross-price elasticity of demand = % change in good 1 / % price in good 2 o substitutes- cross-price elasticity is positive o complements- cross-price elasticity is negative- price elasticity of supply = % change in Q s / % change in P o supply is elastic if Q responds substantially to P o supply is inelastic if Q barely responds to P Chapter 6: Floors, Ceilings, & Taxes- price ceiling- max price a good can be o if equilibrium is ABOVE ceiling, there is a shortage of supply (binding constraint)- price floor- min price a good can be o if equilibrium is BELOW floor, there is a surplus of supply (binding constraint)- tax incidence- how burden of tax is shared o when sellers are taxed, supply curve shifts UP (equil P rises, Q falls) o when buyers are taxes, demand curve shifts DOWN (equil P & Q fall)- tax burden falls more heavily on curve that is LESS ELASTIC o if supply is perfectly elastic (flat) the full burden fall on demanders o if supply is perfectly inelastic (vertical) the full burden falls on suppliers o if demand is perfectly inelastic (vertical) the full burden falls on demanders o if demand is perfectly elastic (flat) the full burden falls on suppliers...
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Final Exam Study Guide - Final Exam Study Guide Chapter 4...

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