Chapter 2 Flashcards
What factors, besides price, influence demand? (4)
Number of consumers
Consumer income or wealth
Consumer tastes
Prices of other, related goods
Demand choke price
Price at which quantity demanded of a good or service is 0
Inverse Demand Curve
Solving for price as a function of quantity demanded
Transfer
surplus that moves from consumer to producer or vice versa because of regulation
Deadweight loss
the reduction in total surplus that occurs as a result of a market inefficiency
Nonbinding price ceiling
a price ceiling set above the equilibrium market price
Nonbinding price floor
a price floor set below the equilibrium market price
What factors, besides price, influence supply? (3)
Production costs
Number of sellers
Sellers’ outside options (Price of good in other markets and prices of other, related goods)
supply choke price
price at which suppliers find it unprofitable to produce any of a good or service
inverse supply curve
solving for price a a function of quantity supplied
What determines the magnitude of change in equilibrium price and quantity when supply or demand curve shifts? (2)
- size of the shift
2. slope of the curve
When a good is highly demand elastic…
relatively small increases in price result in relatively large drops in quantity demanded
When a good is highly demand inelastic…
Relatively large increases in price result in relatively small drops in quantity demanded
What is the formula for price elasticity of demand?
Percentage change in quantity demanded divided by percentage change in price
What is the formula for price elasticity of supply?
Percentage change in quantity supplied divided by percentage change in price
What variables affect price elasticity of demand? (5)
- Availability of close substitutes
- Breadth of the market
- Necessity or luxury item
- Percentage of income spent on the good
- Time horizon of the analysis
What variables affect price elasticity of supply? (2)
1, The ease at which production capacity can be expanded
2, Time horizon of the analysis
Formula for linear elasticity of demand/supply
1/slope of inverse supply or demand curve x Price/quantity OR slope x price/quantity
How do you find the slope of a line?
coefficient of P in original equation or coefficient of Q in inverse equation
As you move down a demand curve, demand becomes…
less elastic
Where is a demand curve perfectly inelastic?
At the horizontal axis
What is the formula for income elasticity of demand?
percentage change in quantity demanded divided by percentage change in income or change in q/q over change in i/i
If income elasticity of demand is negative…
Good is inferior
If income elasticity of demand is positive…
Good is normal
income elasticity of demand for a luxury good
greater than 1
Income elasticity of demand for a necessity
between 0 and 1
Formula for cross-price elasticity of demand
Percent change in quantity demanded of one good divided by the percent change in price of another good
If cross-price elasticity of demand is negative
Goods are complements
If cross-price elasticity of demand is positive
Goods are substitutes
