Revision for chapter 3:

definition of elasticity: PED, YED, PES as a measure of responsiveness of Q/income to change in price
values and ranges of elasticity and reason due to responsiveness (inequality between numerator and
denominator in the formula that allows calculation)

Revision for chapter 4:

Price control: max/min + market unable to adjust to equilibrium by forces of supply and demand due to
a persisting market disequilibrium (surplus or shortage)
Taxes and subsidies: create a new market equilibrium

Note: for welfare loss, first show the maximized case then the deadweight loss + justify it
(overallocation/ underallocation/ opportunity cost of government spending)

For impact on stakeholders, mention consumers, producers, government in terms of price, quantity,
revenue, expenditure, surpluses

Price ceiling:
- legal maximum price below the equilibrium price determined by forces of supply and demand to
render good affordable for low-income households
- creates a shortage due to Qs<Qd + leads to non-price rationing and black market
- underallocation of resources since Qs<Qe
- welfare loss: supply-demand diagram and it points leftwards (leads to market failure)
- impact on stakeholders: consumers, producers, government by mentioning price, quantity, revenue,
expenditure, surpluses (gained, transferred …)

Price floors:
- Legal maximum price below equilibrium price to support low income farmers (agriculture who provide
primary commodities) and workers (adequate salary, or minimum wage)
- surplus since Qs>Qd + shift in supply curve since the government purchases the surpluses
- disposing surplus (donate, foreign competition with domestic product), firm inefficiency (no incentive
to cut down cost of production since high price shields them from low-cost competition)
- overallocation since Qs>Qd
- welfare loss due to overallocation and opp. cost of purchasing the surplus

For minimum wage, the supply-demand curve applies for the resource market, where price becomes
wage, supply becomes supply of labor, and demand becomes demand for labor, surplus becomes labor
surplus = unemployment

Illegal workers; workers partially gain and partially lose; firms are worse off (high labor cost hence
product supply curve of output shifts leftwards) ; consumers are worse off (high price and low quantity
received due to the shift) + controversial and political effect

Indirect tax:
Excise and specific
Note: function of tax is determined by the starting point of allocative efficiency/ inefficiency
Diagram showing shift, wedge, and surpluses
Subsidies:
Specific
Note: function of subsidy is determined by the starting point of allocative efficiency/ inefficiency
Diagram showing shift, wedge, and surpluses

Past Papers:

2011- Paper 2: revision from chapter 2: competitive market

1- externalities: actions of producers or consumers that cause a negative spillover cost on third
parties who do not take part in these actions and whose interests are not taken into
consideration; MSC>MSB and welfare loss points leftwards at Qopt due to overallocation of
resources to production/consumption of the good

Indirect taxes: taxes per unit output (good or service) named after English economist Pigou, i.e.
Pigouvian taxes; they are treated as a cost of production and cause a leftward shift in the market
supply curve; imposed by the government

2- Negative production externality diagram showing MSC>MSB + welfare loss + link to article + ;ink
to how the negative production externality is a market failure since it leads to allocative
inefficiency

3- Define demand as various quantities of a good consumers are willing and able to buy at different
possible prices during a particular time period, ceteris paribus
- link to law of demand (negative proportionality between price and quantity)
- link to article (repercussions on welfare)
- explain how this deters the consumer’s consumption of the good (non-price determinant of
demand: change in preferences against the good since it becomes hazardous)
- explain how it causes causing a leftward shift in the demand curve (disequilibrium surplus
Qs>Qd equal to horizontal distance and how it exerts a downward pressure on price, resulting in
a new equilibrium determined by the intersection of D’ and S, leading to a lower equilibrium
price and quantity and deviating from equilibrium conditions)

4- Any potential definitions and references to previous questions

Policies in article: diagram + link to them + evaluate
AND policies I know: diagram (if different than what is present in the article) + link + evaluate

May 2008

1- Merit goods: goods that are socially desirable and underprovisioned since their consumption
leads to positive externalities due to low levels of income and poverty, where consumers are
willing and unable to buy these goods hence their market demand (sum of individual demands)
is too low, and due to consumer ignorance, as consumers are unaware of the negative impacts
of consuming these goods
Negative externalities (check previous question)
 2- Negative consumption externality + refer to article
3- Leftward shift … (explain)
4- Policies

May 2007

1- Negative Externalities
Resource allocation: assigning factors of production (land, labor, capital and entrepreneurship)
to specific uses chosen among many possible alternatives; answering the 3 basic economic
questions: “what, how, for whom to produce”
2- Inward shift in PPC hence less economic growth
3- Positive consumption externality + define merit good
4- Demand increases, incentive to increase output (to make more profit)
Price rationing discriminates against people willing but unable to buy the good

November 2006 (cigarettes test)

May 2006

1- Negative externalities and indirect taxation

2- Tax as non-price determinant of demand and new price combination (disequilibrium leads to
new market equilibrium at a higher price and lower quantity)
3-
Define PED (equation + measure of responsiveness)
To increase government revenue by indirect taxes, the government should consider the PED of
good in question. The lower the PED, the greater the tax revenue.
Show how demand is relatively price inelastic (steeper)
Tax causes a leftward shift (cost of production) so that the firm can receive a price higher than
original price by the amount of tax.
After-tax equilibrium determined by the intersection of S2 and D. Shaded area is government’s
tax revenue (amount of tax per unit output).
Tax revenue is larger when demand is inelastic (0<mag(PED)<1) since an increase in price due to
tax causes a proportionately smaller decrease in quantity demanded hence total revenue
increases (cigarettes, petrol have a low PED)
4- Define taxes + explain why government imposes taxes (to correct market failure and negative
externalities)
Refer to article: air pollution due to cars as an environmental problem
Show how tax operates and compare it with other methods (with diagrams and evaluations for
each)