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[ECON 1B03] - Final Exam Guide - Everything you need to know! (60 pages long)


Department
Economics
Course Code
ECON 1B03
Professor
Hannah Holmes
Study Guide
Final

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McMaster
ECON 1B03
FINAL EXAM
STUDY GUIDE

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Monday, November 7, 16
Microeconomics- Chapter 5
Economics: the study of how society manages its scarce resources
How people decide what to buy, how much to work, save, and spend
How firms decide how much to produce, how many workers to hire
How society decides how to divide its resources between national defence,
consumer goods, protecting
Microeconomics exams
Individual units, households, and firms, and how they make decisions
People face trade offs:
Society faces an important trade-off: Efficiency or equity.
Efficiency: maximization of output from scarce resources.
Equity: “fair distribution of economic prosperity among the members of society
Trade-off: greater equality of distribution comes at the cost of decreased efficiency.
Productivity: quantity of goods and services produced by a worker per unit of time.
Price rise when too much money is printed
Inflation: increase in the overall price level in an economy.
Elasticity and its Application.
Elasticity: Measure of the responsiveness of Quantity demanded or quantity
supplied to one of its determinants
Elasticity is a measure of how much buyer and sellers respond to changes in
market conditions
Price Elasticity of Demand
Measure of how much the quantity demanded of a good or service responds
to a change in the price of that good or service.
Calculated as the proportional change in quantity demanded divided by the
proportional change in price.
Price of elasticity of demand depends on:
1. Availability of close substitutes to the good or service
2. Whether the good or services is a necessity or a luxury
3. Definition of the market for the good or service
4. Time horizon under consideration
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Elasticity = change in quantity
Change in underlying variable
Price elasticity of demand= change in quantity demanded / change in price.
Midpoint Method.
Example:
Point A: P = $4, QD = 120
Point B: P = $6, QD = 80
Starting at Point A, Price Elasticity of Demand =
[(120 80) / 120]
[(4 6) / 4]
= 0.33 / -0.50
= -0.66
Starting at Point B, Price Elasticity of Demand =
[(80 120) / 80]
[(6 4) / 6]
= -0.50 / 0.33
= -1.5
Midpoint Method:
Price Elasticity of Demand =
(QD2 QD1) / [(QD2 + QD1) / 2]
(P2 P1) / [(P2 + P1) / 2]
(120 80) / [(120 + 80) / 2]
[(4 6) / [(4 + 6) / 2]
= 40 / 100 / -2 / 5
= .4 / -.4
= -1
Variety of Demand Curves
Inelastic: when the proportional decrease in quantity demanded is less than
the proportional increase in price (absolute value < 1)
Elastic: when proportional decrease in quantity demanded is greater than
the proportional increase in price (absolute value > 1)
Demand exhibits unit elasticity when the proportional decrease in quantity
demanded is equal to the proportional increase in price (absolute value = 1)
Total Revenue: amount paid by buyers and received by sellers of a good, computed
as the price of the good times the quantity sold.
When Demand is Inelastic: the increase in price increases total revenue
When demand is elastic: the increase in price decreases total revenue.
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