Review for Quiz 1
Peter Berck
2011
Env. Econ. 1
Supply and Demand
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Supply and Demand
demand vs. quantity demanded
supply vs. quantity supplied
movements along vs. shifts of S & D
price ceiling, price floor
economic shortage/surplus
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
3
2.5
2
S
D
D - .6
P
1.5
1
0.5
0
-0.5 0
Ps = 0.25 Q
Pd = 3 – .4 Q
2
4
6
Q
t= .6
8
10
D-1(Q) – t = S-1(Q)
Tax
• Incidence
• Flat and vertical supply curve
Loan rate
?treasury outlay
Demand
Gov’t Purchases
PL
Supply
QD
QL
Consumer Theory
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consumption bundle
preferences
budget line
indifference curve
properties of indiff. curves
– slope down
– don't cross
– "moon" shaped
• tangency of budget line & indiff curve
• normal vs. inferior goods
• derivation of demand curves
Demand Curve
Price of Wine is 8
50
40
High P
Wine
30
Medium P
20
Low P
10
0
0
50
Bread
100
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
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
– Externalities
– Public Goods
– Insufficient weight on future
– Government Failure
• Give examples of each
Surplus
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Total Willingness to Pay
Amount Paid
Consumer Surplus
Surplus from a public good
EV/CV/WTP/WTA
• Define EV and CV for a price change.
• What is Willingness to Pay and
Willingness to Accept (they are forms of a
question to elicit a value)
• Give examples of how WTP or WTA can
elicit CV and EV
Revealed Preference
• What is revealed vs. state preference?
• Use v. non use value
• Which methods work for use? For
nonuse?
• “arm chair environmentalist”
• (this takes us to page 113 of BH, as far as
we go for 2011 quiz one.)