Review for Quiz 1(Everything through Chapt 5)

Peter Berck

2012

Env. Econ. 1

Supply and Demand• Supply and Demand• demand vs. quantity demanded • supply vs. quantity supplied • movements along vs. shifts of S & D • price ceiling, price floor • Excess supply/demand• market & individuals' demand curves • horizontal summation • specific tax • tax incidence • elasticity of demand and supply • complementary vs. substitute goods • normal and inferior goods

Tax example

-0.5

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10

Q

P

SDD - .6

Ps = 0.25 QPd = 3 – .4 Q t= .6

D-1(Q) – t = S-1(Q)Pd - t = Ps

Tax

• Incidence• Flat and vertical supply curve

Loan rate

• A price floor supported by government purchase.

QLQD

Excess supplyPL

Demand

Supply

?treasury outlay

Consumer Theory

• consumption bundle* *=learn the definition• Preferences* • budget line or budget constraint* • indifference curve* • properties of indiff. curves

– (1) slope down (2) don't cross (3)"moon" shaped • derivation of demand curves

– Why tangency of budget line & indiff curve– Change price

Demand Curve

0

10

20

30

40

50

0 50 100Bread

Win

e

High P

Medium P

Low P

Price of Wine is 8

Normal & Inferior Again

• What happens to q demanded with increased income?

Sale

• 10 at normal price of 5 and then rest at half price of 2.5.

• Price of other good is 1 and income is 100• Draw budget constraint with sale

Pareto Improvement*

• When at least one party to a deal is made better off and no parties are made worse off the deal is said to be Pareto improving.

• Examples of market trades that are pareto improving

• Examples of market trades that are NOT pareto improving

What Goes Wrong With Markets

• Reasons for– No ownership; open access*– Externalities*– Public Goods (non-rival; non-excludable)*– Insufficient weight on future– Government Failure

• Give examples of each

Surplus,EV,CV

• Total Willingness to Pay*• Amount Paid• Consumer Surplus*• Surplus from a public good• Define EV* and CV* for a price change.