----------------- AP MICROECONOMICS-2018 MICRO Unit #1 Study Guide Name: Instructions: UE: day of your unit exam Block Period 1/31 st or 2/1 st Section 1: SUPPLY & EMAN (review Section from Semester 1) 1) eterminants of emand shift the demand curve => lead to an in emand or a in emand a. TIPSEN stands for: 2) eterminants of Supply shift the supply curve => lead to an in Supply or a in Supply a. TINE & TP stands for: 3) When there is an increase in demand it leads to an increase in supplied. (movement along supply curve) ================================================================================================= Section 2: ELASTICITY SECTION: Graph A Graph B 1 1 4) Graph A illustrates an demand curve & graph B is an demand curve. 5) Why is the mid-point method preferred over the simple method for calculating elasticity: 6) Elastic goods have Ed 1 Inelastic goods have Ed 1. Unit elastic has Ed 1. Perfectly Inelastic emand have Ed = Perfectly Elastic emand have Ed = 7) List 3 factors which cause a good to have elastic demand: (i.e. the determinants of elasticity) 8) When prices in the elastic range of a demand curve => Total Revenue: (falls, rises, stays the same) (pick one) 9) When prices in inelastic range of a demand curve => Total Revenue: (falls, rises, stays the same ) (pick one) 10) Total Revenue is always maximized at elasticity. 11) Please fill in the elasticity ranges in the blank labels below: MR 1
You should also know these 3 other types of elasticity: (see formula sheet) 1) Income elasticity 2) Cross price elasticity 3) Elasticity of Supply 12) Inferior goods have income elasticity. Meaning that when Income emand for the good. 13) Luxury Goods have income elasticity 14) Normal Goods have income elasticity 15) Substitutes have cross-price elasticity which is (positive, negative) pick one 16) Complements have cross-price elasticity which is (positive, negative) pick one 17) List at least 2 factors which would cause a good to have inelastic supply: (think beachfront property) ============================================================================================ Section 3: TAXES & TOTAL WELFARE 18) Taxes create a between the price the buyers pay and the price sellers receive. a. The end result is buyers pay and sellers receive compared to market equilibrium. 19) A Tax will always* lead to: greater quantity exchanged lower quantity exchanged *assuming a downward sloping demand curve 20) A Tax will produce a smaller WL when demand is relatively This simply means the LESS a market after a tax the SMALLER the WL! 21) A Tax will produce large tax revenue when demand is relatively. 22) A Tax will not reduce quantity sold (shrink mkt) ONLY if demand is (vertical) 23) Tax incidence measure what burden of a tax the buyer and seller pay. a. Only if supply & demand are equally elastic will the tax incidence be shared b. The more inelastic curve will always have a tax incidence. (burden) c. If demand is perfectly inelastic (Ed = 0) then the tax incidence would be paid 100% by the 24) If the government was interested primarily in minimizing WL they should tax goods 25) If the government was interested primarily in raising tax revenue they should tax goods 26) When you modify a graph for a tax, begin by drawing in the tax wedge first. The top of the wedge is the price the pay while the bottom of the wedge is the price the receive. 27) Shifting the supply or demand curve should be your LAST STEP and it only tells you who sends the tax to the. Simply shift the appropriate curve to either the top of the wedge or the bottom of the wedge. 28) A tax placed on buyers will always shift: (demand left demand right) to the (top of wedge bottom of wedge) 29) A tax placed on sellers will always shift: (supply left supply right) to the (top of wedge bottom of wedge) 2
Graph #1 Graph #2 S S 30) Assume the Government places a $2 per unit excise tax on the sellers in the markets illustrated in both Graph #1 & Graph #2 a. raw a tax wedge approximately the same length in each graph! b. Label the price buyers pay P B and price sellers receive P S c. Shade in any deadweight loss & new Quantity sold (Q2) d. Shift the appropriate curve above by the size of the tax (supply curve shifts to top of the wedge) i. Tax Incidence falls more heavily on the in Graph 1 because ii. eadweight Loss is larger in Graph 2 because Price P2 A S = MC P1 B C E P3 F = MB 0 Q2 Q1 31) Assume the market is at equilibrium at P 1 and the Government places a tax on the good illustrated in the above graph. Recall that regardless of who the tax is levied on----both buyers & sellers will be affected. b. Original Consumer Surplus consisted of (just state letter areas such as +E+F+B) c. Original Producer Surplus consisted of d. Which letter areas represent the Government Revenue collected from the tax: e. Which letter areas represent the eadweight loss from the tax: f. Which letter areas represent the lost consumer surplus from the tax: g. Which area represents the size of the tax (tax wedge) h. Explain what determines the degree of tax incidence (i.e. whether a tax falls more heavily on buyers or sellers ) 3
T-Shirts An excise tax caused supply to decrease from S1 to S2 in the graph The size of the tax (per unit) is The new price buyers pay PB = Buyers pay $ of the tax The new price sellers receive PS = Sellers pay $ of the tax Shade in the eadweight loss (WL) Size of WL = Label the new quantity sold What can you conclude about elasticity of supply relative to demand in the graph: Section 4 Subsidies & Price Floors/Ceilings 32) A government subsidy on buyers will always shift: supply left supply right demand left demand right 33) A government subsidy on sellers will always shift: supply left supply right demand left demand right 34) Subsidies still create WL! Subsidies make markets too while taxes make market quantity too 35) eadweight Loss (WL) means that total welfare (surplus) has decreased in a market versus the natural equilibrium. Subsidies, Price floors & price ceilings will also lead to a WL unless you are correcting a 36) raw in a price ceiling of $200 in the market for Smartphones below. a. Label the new quantity, price, consumer surplus, producer surplus & WL Label new CS, PS, WL and Q2, P2 ($200) 37) In the above graph, after the price ceiling the market quantity sold is now 100 million and both the consumer & producer surplus. The size of the WL would depend on the of demand and supply for Smartphones. 4
Section 4 Externalities/Market Failures 38) Market failures is any allocation of resources that is not maximizing total. A market is only considered efficient when the actual marginal benefit = actual marginal cost. (MB = MC) 39) All externalities are one type of market failure. With negative externalities true costs are while with positive externalities true benefits are. 40) This is because negative externalities have external while positive externalities have external. 41) What is a spillover cost? 2 examples 42) What is a spillover benefit? 2 examples 43) With externalities substitute the demand curve for a MB curve which has only benefits. 44) With externalities substitute the supply curve for a MC curve which has only benefits. 45) The true demand curve is the MSB = marginal social benefit MSB = MB + 46) The true supply curve is the MSC = marginal social cost MSC = MC + 47) With any externality, you add the exact size of any spillover cost or spillover benefit to the marginal cost (MC) curve or marginal benefit curve (MB) respectively to create a MSC or MSB curve. SUV Production Price Assume SUV production creates pollution MC Pollution equals $1,000 per SUV spillover cost The Gov t should each producer $ per SUV P 1 E 1 Modify the graph for this Gov t policy MB Label new socially optimal price, quantity and the WL before tax 0 Q Quantity 48) List 3 ways the Government can internalize (correct) an externality. 49) Negative externalities always create production that is too a. The Gov t can correct this loss of welfare by a good the exact size of the cost 50) Positive externalities always create production that is too a. The Gov t can correct this loss of welfare by a good the exact size of the benefit TOTAL SCORE /30 PTS Excellent Work Very Good Work Good Work Try Harder 5