Supply and Demand
Q: What happens to equilibrium price and quantity when supply increases?
A: Price ↓, Quantity ↑.
Q: What does it mean if demand is elastic?
A: Quantity responds strongly to price changes.
Q: Who bears more tax burden when supply is more elastic than demand?
A: Consumers.
Q: Why do negative externalities cause overproduction?
A: Private cost < social cost.
Q: Define consumer surplus.
A: WTP − price.
Q: What is the difference between a movement along the demand curve and a shift?
A: Movement = price change.
Shift = non-price change.
Q: If elasticity > 1, what happens to revenue when price rises?
A: Revenue ↓
Q: What is tax incidence?
A: How the tax burden is split between buyers and sellers.
Q: Give one example of a positive externality.
A: Vaccinations, education, research.
Q: When supply increases, what happens to consumer surplus?
A: It increases.
Q: If demand increases and supply stays constant, what happens to equilibrium price?
A: Price ↑.
Q: Why do firms prefer to tax inelastic goods?
A: Consumers reduce quantity only slightly → more revenue.
Q: What does a subsidy do to equilibrium price?
A: Price decreases.
Q: What policy corrects a negative externality efficiently?
A: Pigouvian tax.
Q: What is deadweight loss?
A: Lost total surplus from a distorted quantity.
Q: On a supply–demand graph, show what happens when a tax on sellers is imposed.
A: Supply shifts left/up; new equilibrium has P↑ and Q↓.
Q: If substitutes increase, what happens to elasticity?
A: Elasticity ↑.
Q: Why do taxes create deadweight loss?
A: They reduce mutually beneficial trades.
Q: Why do common resources get overused?
A: They are non-excludable → “tragedy of the commons.”
Q: When supply increases, what happens to producer surplus?
It's ambiguous
Q: Why does a binding price ceiling create a shortage?
A: Price is held below equilibrium → Qd > Qs.
Q: Which type of elasticity is used to measure whether goods are complements or substitutes?
A: Cross-price elasticity.
Q: Draw areas showing consumer surplus, producer surplus, and deadweight loss after a tax.
A: CS and PS shrink; DWL is the triangle between old and new quantities.
Q: Why might Coasian bargaining fail in real life?
A: High transaction or negotiation costs.
Q: True/False: government revenue is considered part of total surplus after a tax
A: True.