ECON 1B03 Midterm: Microeconomics Review
30 Jun 2018
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ECON 1B03 Test 2 Review
Content
Ch 4: 6 applied, 7 theory questions
Ch 5: 4 applied, 4 theory questions
Ch 6: 5 applied, 4 theory questions
Ch 7: 3 applied, 7 theory questions
Terms
CHAPTER 4
Elasticity: measures how responsive Qd or Qs is to changes in P and other
determinants
Price elasticity of demand: measure of how much quantity demanded of a good
responds to a change in the price of that good
Coefficient of elasticity: the number we get from the percentage change in Qd divided
by the percentage change in P
Inelastic demand: a change in P leads to a proportionately smaller change in Qd -
demand not very responsive to a price change
Perfectly inelastic demand: a change in P does not change Qd whatsoever - demand
is not at all responsive to a price change
Elastic demand: change in P leads to a proportionately larger change in Qd - demand
is very responsive to a price change
Perfectly elastic demand: a change in P leads to an infinitely great change in Qd -
demand is extremely responsive to price change
Unit elastic: a change in P leads to a proportionately equal change in Qd - % change in
P = % change in Qd
Point Elasticity: measures the impact of a marginal change in price on quantity
demanded (Ep = dQ/dP * P/Q)
Income elasticity of demand: measures how much the quantity demanded of a good
responds to a change in consumers’ income (% change in Qd divided by % change in N)
Cross-price elasticity of demand: (Eab) measures the response of Qd of a good ‘a’ to
a change in price of a related good ‘b’ (% change in Qd of A divided by % change in P of
B)
Price elasticity of supply: measure of how much the quantity supplied of a good
responds to a change in the price of that good
Perfect inelastic supply: Qs will not change for any change in P - vertical supply curve
oEs = 0
Inelastic supply: supply doesn’t respond greatly to a change in P - fairly steep
oEs between 0 and 1
Elastic supply: supply is responsive to changes in P - fairly flat
oEs > 1
Perfect elastic supply: any price change will affect Qs infinitely - horizontal curve
oEs = infinity
Unit elastic supply: a % change in P is exactly offset by a % change in Qs
oEs = 1
CHAPTER 5
Economic welfare: benefits consumers and firms receive by participating in the market
Willingness-to-pay: the maximum amount that a buyer will pay for a good or service
(a.k.a reservation price)
find more resources at oneclass.com
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Willingness-to-sell: the lowest price a supplier will take to produce a good and offer it
for sale; this is the seller’s reservation price
Producer surplus: the benefit a producer receives when the price he receives is
greater than his bottom line willingness-to-sell
Consumer surplus: value to buyers - amount buyer pays
Total surplus: consumer surplus + producer surplus OR value to buyers - cost to sellers
Deadweight loss, DWL: surplus no one gets because Q is less than equilibrium
Positive externality: a benefit enjoyed by individuals even though they did not pay to
receive it
Negative externality: a cost suffered by individuals for which they are not compensated
Marginal Private Benefit, MPB: maximum price someone would pay to consume one o
more unit of the good - generally decreases as people buy more of the good
Marginal Private Cost, MPC: to produce more costs producers more; the supply curve
Marginal Social Benefit, MSB: greater than the private benefit - benefits all of society
Internalization: adjusting decisions/actions according to externalities
Property right: the exclusive authority to determine how a resource is used, whether
that resource is owned by government or by individuals
Coase Theorem: if private parties can bargain without (or with little) cost over the
allocation of resources, they can solves the externalities problem on their own
Excludability: you can prevent someone from using or enjoying the good
Rivalry: if one person is using or enjoying a good, the ability of someone else to use or
enjoy it is diminished
Free-rider: a person who receives the benefit of a good but avoids paying for it
Cost-benefit analysis: in order to decide whether to provide a public good or not, the
total benefits of all those who use the good must be compared to the costs of providing
and maintaining the public good
Tragedy of the commons: the misuse or overuse of common (public) property by
individuals acting in their own best interest while ignoring the interests of the collective
CHAPTER 6
Price ceiling: is a legal maximum on the price that an be charged for a good; is binding
(effective) if set below equilibrium price, leading to a shortage - not effective if above
equilibrium
Price floor: legal minimum price that can be charged in the market
oBinding if set above equilibrium price and not if it’s below
Tax incidence: distribution of a tax burden
CHAPTER 7
Total revenue: amount a firm receives for the sale of its output
Total cost: the market value of the inputs a firm uses in production
Cost of production: all the opportunity costs of making its output of goods and services
Explicit costs: direct outlay of money - receipts
Implicit costs: no outlay of money - no receipts
Accounting profit: firm’s total revenue minus only the firm’s explicit costs
Economic profit: total revenue minus total cost, including both explicit and implicit
costs, that is total opportunity costs
Positive economic profits: super high, unexpected profits for firms in that industry -
attract entrepreneurs to the industry
Economic losses: negative profits; firms that consistently earn losses will eventually
leave the industry
Normal economic profit: zero economic profit; profits you would expect for firms in that
industry - nothing special so no firms want to enter market (still making an accounting
profit)
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find more resources at oneclass.com
Production function: shows the relationship between quantity of inputs used to make a
good and the quantity of output of that good
oWe assume that firms know about and use the most efficient technology
available: that gives them the most output from the input
Fixed inputs: inputs that cannot vary in quantity for some period of time e.g. physical
capital
Variable inputs: inputs that can vary in quantity; e.g. labour
Marginal product: of any input in the production process is the change in output that
arises from an additional unit of that input
Diminishing marginal product: marginal product of any input will decrease as the
quantity used of the input increases if there are fixed inputs
Fixed costs: costs that do not vary with the quantity of output produced e.g. rent
Variable costs: costs that do vary with quantity of output produced e.g. labour costs
Marginal cost, MC: addition to total cost from producing one more unit of output
Increasing Returns to Scale, IRS: LRAC falls as Q increases
Decreasing Returns to Scale, DRS: LRAC rises as Q increases (a.k.a diseconomies
of scale, DOS
Constant returns to scale CRS: LRAC stays the same over a range of Q
Concepts
CHAPTER 4
Total Revenue (P*Q)
o
oIn this case 10 * 100
Price Elasticity, Ep
oEp = %change in Qd
% change in P
Number we get from calculations = coefficient of elasticity
The larger the coefficient, the more responsive it is to a change in price
Inelastic Demand/supply
oChange in P > change in Q
oEp < 1
oDemand curve = steep
Perfectly Inelastic Demand
oChange in P = no change in Qd
oEp = 0
oDemand curve = vertical
Elastic Demand
oChange in P < change in Qd
oEp > 1
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find more resources at oneclass.com
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ECON 1B03 Full Course Notes
Verified Note
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Document Summary
Elasticity: measures how responsive qd or qs is to changes in p and other determinants. Price elasticity of demand: measure of how much quantity demanded of a good responds to a change in the price of that good. Coefficient of elasticity: the number we get from the percentage change in qd divided by the percentage change in p. Inelastic demand: a change in p leads to a proportionately smaller change in qd - demand not very responsive to a price change. Perfectly inelastic demand: a change in p does not change qd whatsoever - demand is not at all responsive to a price change. Elastic demand: change in p leads to a proportionately larger change in qd - demand is very responsive to a price change. Perfectly elastic demand: a change in p leads to an infinitely great change in qd - demand is extremely responsive to price change.
