Economics Exam Review Notes

Income Effect

• Consumers will buy more beef (normal good) when incomes increase.

• Less beef is purchased when the price increases due to income limitation.

Consumer Behavior

• A decrease in soft drink price increases purchasing power → more computer apps bought (income effect).

• If a good's price rises, consumers may opt for cheaper substitutes, affecting overall consumption.

Market Equilibrium

• Hedlund: Demand for caps exceeds supply at $9, leading to imports for equilibrium at 11 million caps.

• Market demand for private goods: horizontal summation of individual demands.

Supply Determinants

• Increased wages of workers in chocolate factories decreases supply.

• Reduced resource costs lead to increased supply.

Demand Elasticity

• Demand for milk is inelastic between $5-$11 (total revenue test indicates price and revenue rise together).

Loanable Funds Market

• Equilibrium interest rate is 7% with 600 quantity of loans due to matching demand and supply.

Monopoly Pricing

• Profit-maximizing output exists in the elastic range (0-Q2).

• A monopoly producing below socially optimal output incurs losses; requires government subsidy to sustain production.

Market Forces and Externalities

• Higher prices of inputs decrease both producer and consumer surplus (e.g., sport peppers for hot dogs).

• An increase in supply of soybeans due to lower resource costs can disrupt equilibrium and affect prices.

Deadweight Loss

• Occurs when market fails to produce efficient quantity (e.g., monopolies, positive/negative externalities).

• Government-imposed prices may create deadweight loss if set inefficiently and not effective.