ECON 102 – FINAL Cheat Sheet Divya Tankasala Ch. 4: • Consumer surplus: willingness to pay for a good-market price • Producer surplus: market price – marginal cost of production of a good • Price floor: minimum price below which exchange is not permitted. (minimum wage) o Causes surplus; placed ABOVE equilibrium market price so that prices are there and ABOVE • Price ceiling: max price sellers charge for a good (creates shortage, placed BELOW equilibrium market price) • Deadweight loss • Excess demanded price ↑ quantity demanded & quantity supplied meet certain price (equilibrium price) • The more specific the good, the greater the amount of deadweight loss • Markets are an efficient way to distribute resources because they maximize social welfare • Price floor above equilibrium level in market for labor = ↑ unemployment • Tax reduces market efficiency because it reduces # of potential market transactions • The more elastic the supply curve, the larger the deadweight loss • When supply shifts, consumer surplus increases • Price ceiling = loss of surplus Elasticity : Less Elastic More Elastic Fewer Substitutes More substitutes Short Run Long Run Product Categories Brands Necessities Luxuries Small Portion of Budget Larger portion of budget Elasticity of Demand (Ed) = (Qf-Qi)/((Qf+Qi)/2) x100% (Pf-Pi)/((Pf+Pi)/2) If: |Ed| > 1, then elastic |Ed| <1, then inelastic |Ed| =1, then unit elastic REVENUE: Revenue = Price x Quantity (Elasticity measures how much Q goes down when P goes up) If demand curve is INELASTIC, then revenues go up when price goes up If demand curve is ELASTIC, then revenues go down when price goes up Cross-price elasticity of demand measures the sensitivity of the quantity demanded of the one good to charges in the price of another good. Elasticity of Supply: Less Elastic More Elastic Difficult to increase production (raw materials) Easy to increase production (manufactured goods) Short Run Long Run Global Supply Local Supply Large share if market for Small share of market for inputs inputs Percent change in price from a shift in demand (or supply) Percent change in demand (or supply) Ed + Es TAXATION : Tax = Price paid by buyers – Price received by sellers Deadweight loss is larger when the demand curve is more elastic. When demand is more elastic than supply, demanders pay less of the tax than suppliers. Therefore, whichever curve is less elastic carry more of the burden of tax. “If demand is more inelastic than supply buyers share most burden of tax.” The more inelastic shares more of the burden Whoever bears the burden of tax receives the benefit of subsidies. If the minimum wage is lowered and closer to the market level, the gains from trade would increase, compared to a higher minimum wage. Ch. 6:
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