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Economics Exam Review Flashcards

Marketing Equilibrium

  • Introduction to marketing equilibrium as a foundational concept in economic analysis.
  • Understanding the interplay of price and quantity in market equilibrium.

Problem-Solving Steps

  • The approach is categorized into three steps: forward thinking and backward application.
    • Step One: Identify the type of movement in the market (backward steps).
    • Step Two: Determine the direction of changes (price and quantity).
    • Step Three: Recognize and establish the new equilibrium point, labelled as e2.
    • The price moves downward.
    • The quantity expands outward.

Supply Changes

  • Key concept: An increase in supply leads to shifts in the supply curve to the right.
    • To achieve equilibrium, identify factors prompting the shift to the right. Examples include:
    • Production innovations
    • Reductions in input costs
    • Expectations of future price declines.
  • Supply behavior summary:
    • Price decreases, quantity increases if supply is increasing.

Demand and Supply Determinants

  • Recognition of the factors influencing demand and supply:
    • Determinants of Demand (5 Total):
    • Income changes
    • Consumer preferences
    • Price of related goods (substitutes and complements)
    • Consumer expectations
    • Number of buyers.
    • Determinants of Supply (5 Total):
    • Input prices
    • Government regulations
    • Expectations about future prices
    • Number of sellers
    • Technology.
  • Understanding the effects of shifts in demand and supply, including the importance of distinguishing between movements along curves versus shifts of the curves themselves.

Elasticity Concepts

  • Elasticities are essential for analyzing consumer and producer responsiveness.
    • Perfectly Elastic Elasticity: A horizontal curve indicating that the price does not change with a change in quantity supplied or demanded. This relates to an infinite value of elasticity.
    • Graphical representation of perfectly elastic demand and supply graphs.
    • Perfectly Inelastic Elasticity: A vertical demand or supply curve where quantity does not change as price changes.

Income Elasticity of Demand

  • Definition: A measure of how the quantity demanded of a good responds to changes in consumer income.
    • Normal Goods: Positive income elasticity; when income rises, the quantity demanded increases.
    • Example: Consumers buy more when their incomes increase.
    • Inferior Goods: Negative income elasticity; people buy less as their income increases.

Substitutes and Complements

  • Understanding relationships:
    • Substitutes: Goods that can replace each other, positive cross-price elasticity; if the price of one rises, demand for the other increases.
    • Complements: Goods consumed together, negative cross-price elasticity; if the price of one rises, demand for the other falls.
  • Importance of sign in calculations in multiple-choice questions, where both negative and positive values may appear.

Technical Calculation Emphasis

  • Importance of using appropriate mathematical formulas to calculate elasticities and shifts in supply and demand.
    • Use of the midpoint formula to calculate elasticity:
      Ed = rac{(Q2 - Q1)}{(Q2 + Q1)/2} igg/ rac{(P2 - P1)}{(P2 + P_1)/2}
  • Need for practice in substituting values accurately to avoid calculation errors.

Exam Strategies

  • The significance of documentation and explanation of thought processes in answering exam questions:
    • Providing a clear methodology in written examination not only targets correct answers but also qualifies for partial credit in case of numerical errors.
  • Encouragement to practice connections rather than mere memorization in elasticities.

Taxes in Supply and Demand

  • Discussing the effects of taxes on market supply:
    • Decreasing supply can lead to a reduction in total revenue.
  • Price controls discussion:
    • Price Ceiling: The maximum legal price a seller can charge, impacting supply and demand.
    • A binding price ceiling creates shortages when it restricts prices below equilibrium.
    • Example: Price ceiling of 4 creates a shortage, which can be analyzed as Quantity Demanded exceeds Quantity Supplied.
  • Calculation of shortages:
    ext{Shortage} = Qd - Qs (where demand exceeds supply due to imposed ceiling).

Tax Implications on Market

  • Taxation effects on the seller's received price followed by shifts in supply.
    • When taxes are imposed on buyers, the demand curve shifts, impacting the equilibrium quantity and prices.
    • Measurement of consumer and producer surplus is essential for understanding taxpayer burdens and pricing impacts.

Key Mathematical Relationships

  • Understanding and calculating surpluses:
    • Producer Surplus:
      PS = rac{1}{2} (P ext{max} - P ext{equilibrium}) * Q ext{equilibrium}
  • Implications of changes in prices and revenues on market equilibrium and overall economic analysis.