What is meant by the following terms: tax incidence; tax burden and tax shifting between consumers
EC 110 Principles of Macroeconomics –Hubbard & O’Brien 6th Edition
Mid Term Exam Study Guide (Spring Semester, 2017)
What is meant by Price Elasticity of Demand (“PED”) and Price Elasticity of Supply (“PES”).
Additionally, explain demand elastic, unitary, and inelastic relative to price changes and impacts on total revenue (Price * Quantity).
Equation & graphical analysis required. Refer to class discussion / notes below.
Important: Elastic: Ed > 1; Unitary, Ed = 1; Inelastic, Ed < 1.
Price Elasticity of Demand (“PED”) = % Change in Quantity Demand / % Change in Price. If Ed > 1, therefore, % Change in Qd> % Change in Price; If Ed = 1, then % Change in Qd = % Change in Price; If Ed < 1, then % Change in Qd<% Change in Price.
How are the various elasticities determined ?Good & services based on i) Necessities, ii) Luxury / Discretionary, iii) Alternatives, Substitutes, iv) High Opportunity Costs, v)Time & Price “$” Relative to Income Budget. Refer to class discussion / notes.
Price Elasticity of Supply (“PES”) = % Change in Quantity Supplied / % Change in Price; How does the shape of the producer’s supply function reflect price elasticity ? Does cost analysis come into play ? What about time ?? Short Run versus Long Run ??
Explain Income Elasticity of Demand = % Change in Quantity Demand / % Change in Income;
What are inferior versus normal goods and how are they impacted by changes in income? Refer to class discussion & notes.
ii). The New York Times reported…“ That subway ridership declined by five (5) million fewer riders in December, 1995, the first full month after the price of the token increased $.55 to $1.75, than in the previous December, resulting in a 7.3% ridership decline.” Note: Token increase from $ 1.20 to $1.75 = +$.55 increase).
With this information, estimate the Price elasticity of Demand for subway rides; According to your analysis, what happens to the Transit Authority’s total revenue when the fare rises? Explain ?
Why might your initial elasticity calculation be unreliable?
If your total cost is $100,000,000,based on the documented token increase, are you now generating enough revenue to cover your operating costs? Explain. Hint: Formulas to use are TR – TC = Profit; Elasticity of Demand is = % Change in Quantity Demanded / % Change in Price.
What is the relationship between the Law of Diminishing Marginal Utility and the Law of Demand? What is the Law of Supply? In your analysis, please explain the concepts of utility, marginal utility, price and quantity demanded & quantity supplied? Chapter 3, pages 74 – 81; 83- 88; Review Table 3.1, Table 3.2, Figure 3.7.
Also, explain the following in your response….”Advertising seeks to change consumer tastes and thus the willingness to buy. If tastes and income do change, the demand and supply curves will shift”. What are the principal factors that causes shifts in market demand and supply for a good or service?
iv) What are the unique characteristics of a perfectly competitive market compared to the other market structures discussed class? Chapter 3, pages 73 – 75.
How do competitive firms make supply / output decisions and how are production levels, prices, profits determined in a competitive market ? In your summary, are certain market participants (consumers & producers) “included” and / or “excluded” in the dynamic market process ? Hint: Think about the 4 quadrants of market supply & market demand discussed in class. Refer to Chapter 3 & 4.
What is the relationship between costs and the degree of contribution (i.e. productivity) of a factor of production ? (Remember…Increase the amount and productivity in the factors of production). How does productivity influence an economy’s production possibilities frontier? How can we improve the standard of living in an economy ? Chapter 1 & 2.
>List & explain some measures which are important in determining growth in production for aneconomy ? Think about circular view / production possibilities frontier ! Chapter 2, pages 41 – 56.
In a competitive market, what is the difference between revenue and profits ? Explain the following in your analysis… “Advances in technology and the efficacy / quality of our inputs have been a major source of productivity growth. The advances (human and non-human capital) have shifted productivity up and pushed cost curves down” ? What are the ultimate determinants in supply?Refer to Chapter 3, pages 73 – 88.
vii) What is meant by market / equilibrium versus dis-equilibrium pricing ? Chapters 3 & 4.
Provide examples of government induced dis-equilibrium pricing and impact on production levels, consumption, price, quantity and quality ? Are “price controls – price ceilings / price floors, taxes” examples of dis-equilibrium pricing? What are subsidies? Give examples? Can subsidies influence demand, supply market activities?
>What are the observed INTENDED VERSUS UN-INTENDED CONSEQUENCES of rent control and minimum wage legislation “debate” as it relates to employment, demand and productivity and ultimate impacts (i.e. shortages / surpluses). Include graphical analysis. Your readings from the text, class discussion should be the basis for your analysis. Graphical analysis required. Refer to Chapter 4, pages 117- 121.
viii). What are some of the challenges facing the U.S. and world wide economy as it relates to the accumulation of unfunded debt liabilities? Why is this important in understanding and addressing this societal challenge relative to current and future economic growth? Think impact on aggregate demand: Y = C+I+G+ (X –M) ! Class discussions/ notes.
What is GDP and what are the components of GDP (Gross Domestic Product)? Is it a good measure of economic well being? What are the primary sub-components of consumption (durables, non-durables & services), and why is it important in analyzing when deciphering economic behaviors and overall trends? Refer to Chapter 8, pages 250 -256.
Explain the following, GDP measures two things at once -”The total income of everyone in the economy and the total expenditure (demand) of the economy’s output of goods and service. For an economy as a whole, income must equal expenditure”. Chapter 8, pages 250 – 261 & 265 – 267.
When describing changes in consumer behavior, explain the difference between substitute and complementary goods ? Provide examples of both and describe their impacts on each other when price changes. Howdoes price elasticity for a specific product (i.e. good or service) become influenced by such goods ? Does time and a good’s price ($) relative to one’s overall income budget influencethe demand elasticity. Why ?
xi) What is the role of government in WHAT, HOW, or FOR WHOM goods / services are produced in our mixed economy ? Discuss concepts such as equality of opportunity, distribution of income, consumer, labor protection, civil rights concurrent w/ safeguarding individual property and opportunities of all.What is the legal basis of a “Successful Market System” ? Refer to Chapters 1 & 2. Also, focus your attention to pages 56 – 61.
Define economic surplus and deadweight loss? What is economic efficiency ? Why do economists define efficiency in this way? Explain the concepts of consumer & producer surplus. Note: Economic surplus is the summation of both consumer & producer surplus. Deadweight loss is the loss (reduction)of total economic surplus as a result of taxation. Refer to Chapter 4, pages 109 – 121.
Compare the US economy to that of China, Japan, and Europe regarding economic drivers, growth, debt, inflation / deflation, demographics, and other performances measures. What differentiates the US versus the other world wide economies? Class discussions. Reading from the WSJ.
What is meant by the following terms: tax incidence; tax burden and tax shifting between consumers and producers ? What is meant by deadweight loss of a tax or that of any form of government intervention in a market economy? Graphically illustrate ? Chapter 4, pages 125 – 127.
>What is meant by the following statement– “The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market cannot respond as easily to the tax rate by changing the quantity bought or sold”. Refer to Chapter 4, pages 125 – 133.
Explain the following– “The behavior of buyers and sellers naturally drives market toward their equilibrium”. “When a market price is above the equilibrium price, there is a surplus of that good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise”? Refer to Chapter 4, pages 118 – 123.
Explain the following two economic statements regarding interdependence and gains from trade:
“Trade makes everyone better of because it allows people to specialize in those activities in which they have a comparative advantage”….
“The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries…..as well as commerce (mutual / voluntary exchange) among individuals”… Refer to Chapter 2, pages 48 – 57.
Describe and categorize the major types of firms in the United States and the various “advantages / disadvantages” of each. In addition, summarize the typical management structure of each business organization including financing challenges. What is the structure of corporations and what is referred to as the “Principal Agent Problem” ? Is the growth of small businesses important to the U.S. economy ? Why? Refer to Chapter 6, pages 181 – 186.
When using financial statements (i.e. balance sheet, income statement, cash – flow uses, etc), to analyze a company’s financial position, what is (if any), the difference between accounting versus economic profit ? What is the importance of each ? Refer to Chapter 6, pages 194 – 196.
xviv) Define the effect of “Demand & Supply Shifts on Market Equilibrium”. How do you use demand & supply curves to predict changes in prices & quantities ? Explain graphically, hiow shifts in demand & supplyaffect equilibrium price and quantity ? Refer carefully to Chapter 3, pages 86 – 88 & 90 – 93, Table 3.3 (3 x 3 Table Matrix)….Know.
Ken Goroshko, 860.212.4905.
……………………….Answer preview………………………..
The relationship between law of diminishing and law of demand is that both laws variable operate at indirect proportions, that is in law of demand customers demand more when the price are low and demand less when prices are high and in law of diminishing marginal utility, output increases when one variant decreases and vice versa…………………………………
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