ECON-E 201 Study Guide - Midterm Guide: Pigovian Tax, Planned Economy, Cost
INTRO TO MICROECONOMICS: 1721
Exam 2 Study Sheet
Elasticity of Supply
●An increase in price gives rises to an increase in quantity supplied. (vice versa)
●Measures how responsive the quantity supplied is to a change in Price
●The more responsive quantity supplied is to a change in price, the more elastic the supply
curve
Formula
=
%△Q
%△PP
△P
Q
△Q
Formula for Elasticity of Supplied
ES= percent change in price
P ercent change in quantity supplied
Midpoint Formula
ES= =
%△P
%△Qsupplied Q2 − Q1
(Q2 + Q1) / 2
P2 − P1
(P2 + P1) / 2
Determinants of Elasticity of Supply
●The Fundamental Determinant is how quickly per-unit costs increase with an increase in
production
○If increased production requires much higher per-unit costs, then supply will be
inelastic
○If production can increase without increasing per-unit costs very much, then supply
will be elastic
Price System
●Markets link the world
●The market acts like a giant computer to arrange our limited resources to satisfy as many of our
wants as possible
●Millions of people acting in his or her own self-interest, plays a role to the market
●Invisible Hand: The unobservable market force that helps the demand and supply of goods in
a free market to reach equilibrium automatically
○Voluntary cooperation and exchange
○No need planning from the government
●A change in supply or demand in one market can influence markets for different products in
different parts of the world
●Great Economic Problem: How to arrange our scarce resources to satisfy as many of our wants
as possible
●Price is a signal wrapped up in an incentive because prices signal the value of resources to
consumers, suppliers, and entrepreneurs, and they incentivize everyone to take appropriate
actions to respond to scarcity and changing circumstances.
●Central Planning: a planned economy,
○the allocation of resources is determined by a comprehensive plan of production
which specifies output requirement
●Free market prices work as a signal because through buying and selling, prices come to reflect
important pieces of information
●Market prices can be informative that new markets are being created to help many predict
future events.
Price Controls
Government intervention in the market involving the setting of price ceilings or price floors,
preventing the market from reaching a market-clearing equilibrium price.
Price Ceilings
●Maximum price on a good set by the government that is below the equilibrium price of the
market which results in a shortage
●Make necessities affordable to poor people
●Creates 5 Important Effects:
○Shortages
○Reductions in product quality
○Wasteful lines and other search costs
○A loss of gains from trade
○A misallocation of resources
●Reduces the gains from trade
●Cause a misallocation of scarce resources
●Demanders with the highest willingness to pay have no easy way to signal their demands nor
do supplier have an incentive to supply their demands
Shortages
●Shortages (excess demand): PC don’t let the price to adjust to its equilibrium value which
results in a shortage, Q demanded > Q supplied (Qd > Qs)
●The lower the price the bigger the shortage, Sellers have more customers than they have goods
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ECON-E 201 Full Course Notes
Verified Note
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Document Summary
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