Review for Quiz 1 (Everything through Chapt 5) Peter Berck 2012 Env. Econ. 1

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 P s = 0.25 Q P d = 3 –.4 Q t=.6 D -1 (Q) – t = S -1 (Q) P d - t = P s

Tax Incidence Flat and vertical supply curve

Loan rate A price floor supported by government purchase. QLQL QDQD Excess supply PLPL 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 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.