Elasticity Cheat Sheet (updated)

Elasticity Cheat Sheet (updated)

New stuff,,  New stuff added to XED and YED.  The AP examiners seem to accept the alternative formula for finding PED or the midpoint formula for year 2015 FRQ #3 .

Determinate of Demand - Compliments - Korean Fried Chicken & Beer

Determinate of Demand - Compliments - Korean Fried Chicken & Beer

Korean Chicken and Beer - Chimaek

 New York Times- Korean Fried Chicken & Beer

Korean Fried Chicken and Beer are compliments.

If the price of Korean fried chicken increases what happens to the demand curve for beer.

If the price of Korean Fried Chicken increases then the Quantity Demanded will decrease (less chicken being eaten) therefore the demand for beer will decrease (shift leftward).

Determinate of Demand - Substitutes - Siu Mai vs Har Gow

Substitutes - Siu Mai (HK) vs. Har Gow

(Pork & Mushroom dumpling vs. Shrimp dumplings)

Substitutes are two goods that can be substituted for one another. Usually the substitution happens when the price of one good increases/decreases making the other good a better/worse purchase.

We tend to substitute one good for another to increase/maintain our purchasing power.

The substitution effect reinforces the income effect.

Remember that the 3 reasons the demand curve slopes downward are the:

Income effect - as the price of a good increases our purchasing power decreases, or when prices decrease we tend to buy more stuff (or purchasing power increases)

Substitution effect - When the price of one good increases we substitute a cheaper good to maintain our purchasing power.

Diminishing Marginal Utility - the more we consume the lower the price must be to entice us to consume more as our satisfaction, benefit, value, happiness falls with each unit of consumption.

Siu Mai - Siu Mai Wikipedia

Ha Gow - Har Gow Wikipedia

AP question - The price of Siu Mai increases what happens to the demand curve for Har Gow?

If the price of Siu Mai increases people will substitute Har Gow as it is relatively cheaper. Thus the demand curve for Har Gow will shift rightward to show an increase in demand at all prices.

AP Question - The price of Siu Mai decreases what happens to the demand curve for Har Gow?

The price of Siu Mai has fallen and is therefore relatively cheaper than Har Gow. The demand curve for Har Gow will shift leftward/decrease as the cheaper price of Siu Mai attracts consumers away from the consumption of Har Gow. Less is demanded at every price.

Determinate of Demand - Compliments - Vada Pav and Coriander/Peanut Chutney

Compliments are two goods that are consumed usually with each other.

Compliments are usually introduced in the determinants of demand section, paired with substitutes

Today I want to introduce Vada Pav and Peanut and/or Coriander Chutney as compliments.

This is an Indian dish eaten on the streets and in the homes of Mumbai, India.

Here is a video of Nisha teaching how to create the Vado Pav with its chutney compliments.

Think,  potatoes deep-fried with spices and chutney spread on a bun.

Link at wikipedia - Vada Pav

So compliments are two goods that are usually consumed together. The AP asked this question with one good's (Vada Pav) price rising and then asks how this affects the demand curve for the second good.

Example - The price of Vada Pav has increased, how does this effect the demand curve for peanut/coriander chutney.

Obviously, when the price of a good increases this causes a change in the Qd (quantity demand) not the demand curve of the good whose price changed. A change in price affects the quantity demanded not the demand.

BUT, the second part of the question asks what happens to the demand curve for peanut/coriander chutney.

AND, since Peanut/Coriander chutney is eaten with Vada Pav the quantity demanded (consumption) of one will affect the consumption of the other.

Price increases for Vada Pav and therefore the Qd of Vada Pav decreases, it seems reasonable that with less (a decrease) of Vada Pav being consumed that the demand for peanut/coriander chutney would decrease.

So less graph that with a CLG (Correctly Labeled Graph)

Thinking, explanation - less Vada Pav consumed - less peanut/coriander chutney demanded.

AP 1995 question

Answer - (E) Complementary

AP 2005 (I believe)

Answer - (B) X & Y are complementary goods

AP Question

Answer - (B) An increase in the price of potatoes, if potatoes and beef are complimentary goods.

Updated Demand & Supply Cheat Sheet

Determinants of Demand

Determinants of Demand Questions 

1995 AP Micro Question

There was some confusion about this question the other day and I wanted to explain my thinking. The question wants the answer that is the most likely (best answer) to shift the demand curve.

 (B) A decrease in the price of a license necessary for aircraft mechanics.

If the price of the license is paid for by the mechanic, then the license must be looked at as a tax on the mechanic to supply his labor. Taxes are a determinate of supply and an increase of taxes (license prices) will reduce the supply of airplane mechanics.

If the price of the license is a cost to the airplane companies,  they pay the fee for the license, then a reduction of the license price would be a movement on the curve. A decrease in the license price would lower the price for a mechanic, with the effect being  an increase of the quantity demanded for mechanics.

Answer - (A) An increase in the demand for air travel.

An increase in the demand for air travel is a demand shifter for the need for airplane mechanics. The demand (at every price) would shift right.

The rest of the questions are easily seen as not the best answer.

1995 AP Micro Exam

Normal Goods are by definition those goods that when an increase in income occurs more of the good is purchased. This is simply a definitional question.

An inferior good is one that would have been bought less when income rises.

A Public good is a good provided for by society. 

A Giffen good is a good that is consumed more as the price rises.

2000 AP Micro Exam

Answer - (D) The release of three summer movies sets records for movie attendance.

Popcorn and movies are complements, meaning that when movie attendance increases, so does the demand for popcorn. The Demand curve for popcorn would shift rightward. 

More popcorn would be Demanded at all prices.

(A) The wages of farm workers and movie theatre employees increase.

Increasing wages are a cost to the suppliers of a good and would cause prices to rise, and rising  movie and popcorn prices would reduce the quantity demanded of both goods. Mr Concession would not sell more popcorn (most likely) with rising prices.

(B) A technological improvement results in less expensive and more efficient harvesting of corn.

This would lower the costs of supplying the corn and result in Mr Concessions profits to increase but as for prices being able to rise and a greater quantity being sold, not so much.

(C) The introduction of new fat-free potato chips provides new competition in the snack food market.

Competition tends to make suppliers lower their prices to compete, not raise them and get more sales.

(E) New government regulations force movie theatres to hire more security guards at each new theatre. More security guards mean that the theatre will have to raise its prices for movies to pay for the new guards and that means less attendance at the theatre and less sales of popcorn.

Comparative Advantage (Input Problems)

Comparative Advantage (Input Problems)

Absolute Advantage - A country is said to have an absolute advantage in the production of a good if it can produce the most goods with the same resources: or the same amount of goods, using the least amount of resources. (Efficiency is key) 

The definition does not assume trade and there is no analysis of opportunity cost.

Input Problems - a country can produce the same good (1 unit of) using the least amount of resources.

The key phrase is:

(can produce one unit of food or one unit of clothing).

I have not found a FRQ question using comparative advantage that requires the input method. 

1995 AP Macro Exam

Notice: one unit of food or one unit of clothing (Input Problem)

2000 AP Micro Exam

Notice: one unit of food or one unit of clothing (Input Problem)

So, just to say it.

It could be one unit of steel or one unit of glass (Input Problem)

or    It could be one unit of hemp or one unit of manure (Input Problem)

Take Away - Input Problems

Resources into the production of the good are variable (inputs) while the measurement of the good produced is fixed (one unit).

Take Away - Output Problems

Resources into the production of the good is fixed (equal resources) while the amount of the good produced is variable (output).

Comparative Advantage Cheat Sheet

Comparative Advantage (Output Problems)

Comparative Advantage - (Output Problems)

Couple of fun videos

The principles of Comparative Advantage - 60 Seconds Adventures in Economics

Comparative Advantage and the Tragedy of Tasmania - MR University

In teaching comparative advantage this last couple of days I have made some connections that might have been plain to many before me, but I remained clueless. (story of my life)

The biggest confusion seems to come from being able to discern the difference between output and input problems.

Absolute advantage  - A country is said to have an absolute advantage in the production of a good if it can produce the most goods with the same resources: or the same amount of goods, using the least amount of resources. (Efficiency is key) The definition does not assume trade and there is no analysis of opportunity cost.

The key here is that to produce using an equal amount of resources. (Output Problem)

2008 AP Exam

Notice the "use equal amount of resources" (Output Problem)

2005 AP Exam

Notice the "10 units of labor for country A and the 10 units of labor for country B"

"equal amount of resources" (Output Problem)

2008 AP Exam

Notice: "using all of their available resources" - (Output Problem)

This problem doesn't say explicitly that equal resources are used but it does supply the axis which label grain and steel (in tons) as what is produced using all available resources.

Implies: that an equal amount of resources are used.

2010

Notice: Using equal amounts of labor hours. (Output Problem)

2008 AP Exam (FRQ)

Notice: "Using equal amounts of resources" (Output Problem)

2004 AP Exam (FRQ)

Notice: "Using equal amounts of resources" (Output Problem)

I think I have beaten this horse enough.  I like to think that sometimes it is the small phrases or tips that we have students place in their brains that could possibly help them answer the question correctly.

Updated (Comparative Advantage Cheat Sheet)