Review for Quiz 1
(Everything through Chapt 5)
Peter Berck
2015
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
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
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)
Pd
- t = Ps
Tax
• Incidence
• Flat and vertical supply curve
Loan rate
• A price floor supported by government
?treasury outlay
purchase.
Demand
Excess supply
PL
Supply
QD
QL
Consumer Theory
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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
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
• 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
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Total Willingness to Pay*
Amount Paid
Consumer Surplus*
Surplus from a public good
Define EV* and CV* for a price change.
• Willingness to Accept and Willingness to
pay questions.
• When are they EV and when are they CV