ECON 2110 - Final Exam Review

If we as a country decide to dedicate more resources to making meat safe

There will be less left over to do other desirable things.

Most economists believe that the assumption of rationality

Is not always a realistic assumption, but allows useful predictions to be made nonetheless

"Senior citizens deserve an income that will allow them to live in comfort for their remaining years." This is an example of

A normative statement.

A good is "scarce" when

• Something must be given up to get more of it.

• Anything that is limited in supply (Coca-Cola, Insulin, Diamonds)

Making cars safer could result in more accidents

If people respond to incentives.

Assumptions of the economic model (4)

People respond to incentives

Goods are scarce

People make decisions by comparing marginal benefits and marginal costs

The only costs that matter are opportunity costs.

Should the government allow mining or grazing on a parcel of public land?

Should new houses be built in San Diego or in Las Vegas or both, and how many?

Should my spouse and I have another child?

Resource allocation questions

The decision whether to purchase the breakfast "all you can eat" buffet versus ordering from the menu at fixed prices

Is a marginal decision

The relationship between price and quantity supplied

How many units of the good will be supplied at various prices.

The cost of supplying the good

Supply curve

The demand curve represents _____ while the supply curve represents _____.

Benefits, costs

The "law of demand"

Says that people buy less of a good when price rises.

The demand curve is based on ____________________ and represents a person's____________________ at various quantities of goods and services

Willingness to pay, marginal benefit

The existence of an "owner" (i.e., well-defined property rights) is important because

Someone thus has the incentive to consider all possible costs and benefits.

If the supply of a good is absolutely fixed

The supply will be vertical

The "law of supply"

Says that firms supply more of a good when the price rises

The demand curve represents the ____ of the buyer, while the price the buyer pays represents the _____

Marginal benefit, marginal cost

The supply curve represents the ____ of the seller, while the price the seller received represents the ______

Marginal cost, marginal benefit

The seller is indifferent between selling another unit and not selling another unit when the _____ is equal to the ____

Marginal benefit, marginal cost

The buyer is indifferent between buying another unit and not buying another unit when the _____ is equal to the _____

Marginal cost, marginal benefit

Anything that increases the value that potential buyers receive from a good may be expected to

Increase demand.

A normal good is one for which

Demand increases when income increases.

When the supply and demand for a good both increase,

The equilibrium price may increase, decrease, or remain unchanged.

If demand is elastic, we would expect

A big change in quantity when price changes.

If Clemson decides to increase tuition so as to raise its revenues, it must believe that

The demand for education at Clemson is inelastic.

Elasticity of demand depends on

The closeness of substitutes.

Supply and demand are always more elastic in the long-run because

A greater range of actions can be taken in longer periods.

"Elasticity" measures the relationship between

Price and quantity.

If a supplier can sell as much as it wants at $10 per unit, but none at all at $10.01, we know that the demand it faces is

Perfectly elastic

At the equilibrium price and quantity in a market

The good is being produced by the lowest cost sellers.

What is the most likely effect of rent control laws, which forbid apartment owners from raising rents?

A shortage of rental apartments.

Price floor

Surplus

If a new technology is developed that lowers the cost of making sunglasses

Consumer surplus will rise.

In a freely operating market, when there is excess demand or excess supply

Price adjusts to bring quantity supplied and quantity demanded into balance.

A tax on buyers

Decreases both the quantity demanded and quantity supplied, unless one or the other is perfectly inelastic

When a good is taxed and neither demand nor supply is perfectly inelastic

The quantity produced will fall.

When a good is taxed and either demand or supply is perfectly inelastic

The quantity produced will not change.

If you discover that short-run gasoline supply is substantially less elastic than the short-run demand for gasoline, you would then expect (after a fifty-cent cut in gasoline taxes)

Consumer price to fall by very little.

Suppose the government puts a tax of $1 on each jar of apple sauce purchased. As a result of the tax, the price consumers pay for a jar of apple sauce......Suppose the elasticity of demand for apple sauce is less than the elasticity of supply. Who will end up paying most of the $1 tax?

Will rise by less than $1, consumers

5 main economic principles

Incentives matter (People respond to incentives)

Trade-offs are everywhere (If you want something you must give up something to get it)

Rational behavior involves choices at the margin

Trade makes people better off

Positive statement

Objective

Normative statement

Subjective

Diminishing returns

As you consume or do more of the good the marginal benefit starts to decrease

Consumer surplus

The difference between what you're willing to pay and what you must pay (The price)

Consumers gain from exchange

Inferior good

An increase in income decreases demand

Producer surplus

The difference between the lowest price that a producer is willing to sell a good for and the actual price

Producers gain from exchange

Surplus

Excess supply

Shortage

Excess demand

Ceteris Parabus

How a demand curve is drawn

All these factors held constant

Elasticity of demand equation

E=(Q1−Q0)÷(Q1+Q0) / (P1−P0)÷(P1+P0)

Perfectly elastic

Horizontal line

Perfectly inelastic

Vertical line

Tax on producers

Decreases supply by the amount of the tax

Tax on consumers

Decreases demand by the amount of the tax

When demand is more elastic than supply

Demanders pay less of the tax than the suppliers

When supply is more elastic than demand

Suppliers pay less of the tax than buyers

Deadweight Loss

Reduction in total surplus caused by a market distortion or ineffeciency

Lost gains from trade that don't occur because of the tax

Subsidy

Reverse tax

When government gives money to consumers/producers

Subsidy deadweight loss

When non-beneficial trades occur