Chapter 4 Flashcards
A consumers willingness to pay for a good is
the maximum price at which he or she would buy that good
define individual consumer surplus
the gain to an individual buyer from the purchase of a good; the difference between the price paid and what the buyer is willing to pay
total consumer surplus
the sum of individual consumer surpluses of all buyers in a market. Total area above price paid and the demand curve
define producer surplus
the difference between market price and the price at which firms are willing to supply the product
define individual producer surplus
the net gain to an individual seller from selling a good. It is equal to the difference between the price received and the seller’s cost
define total producer surplus
: the sum of individual producer surpluses of all the sellers in a market.
where on the graph is producer surplus found
bottom portion, below the price and above the supply curve
define total surplus
the sum of the producer and consumer surpluses
define the statement ‘markets are usually efficient’
there is no way to make some people better off without making other people worse off
markets are usually efficient because they maximize ________ ______
total surplus
what are 4 ways used to increase total surplus but are unsuccessful
reallocate consumption among consumers
reallocate sales among sellers
change the quantity traded
what are things that make competitive markets efficient
- allocate consumption to buyers who value it most
- allocate sales to sellers who value the right to sell(lowest price)
- all transactions are mutually beneficial (consumer values the good more than the seller does)
- no mutually beneficial transactions are missed
what does elasticity measure
the response to changes in prices or income
a demand is ________ when an increase in price reduces the quantity demanded a lot
elastic
a demand is _______ when an increase in price reduces the quantity demanded just a little
inelastic
price elasticity =
% change in quantity demanded / % change in price
what is the formula for the mid-point method to calculate the efficiency of demand
Ed = (△Q / Qavg) (Pavg / △P)
what are the other two equations that calculate demand efficiency that are not the mid-point method
initial: Ed = (△Q / Qo) (Po / △P)
second point: Ed = (△Q / Q1) (P1 / △P)
a good can have a price elasticity as low as ____ or as high as ____
zero
infinity
if a price elasticity < 1, the demand curve is _______
inelastic
if a price elasticity >1, the demand curve is _______
elastic
if a price elasticity =1, the demand curve is ________
unit-elastic
how to calculate total revenue
TR = PQ
total revenue = price times quantity sold
when a seller raises the price of a good, there are two countervailing effects
a price effect and a quantity effect
what is the price effect
after a price increases, each unit sells at a higher price, which tends to raise revenue
what is the quantity effect
after a price increase, fewer units are sold, which tends to lower revenue
when demand is _______, the price effect dominates the quantity effect
inelastic
when demand is ________, the quantity effect dominates the price effect
elastic
when demand is ______, the quantity effect equals the price effect
unit elastic
For price effect and demand effect, does Total revenue fall or rise
Price effect: TR rises
Quantity effect: TR falls
When the price for a necessity increases, does it change the quantity demanded
no
When the price for a luxury increases, does it change the quantity demanded
yes
fewer substitutes make it harder for consumers to adjust quantity when price changes, so demand is_________
inelastic
many substitutes make it easier for consumers to switch brands when prices change, so demand is ________
elastic
describe the third factor that determines the price elasticity of demand: The share of income spent on the good
It feels cheaper when we spend a smaller share of income on the good.
It feels more expensive when we spend a greater share of income on the good.
Fourth factor: Time elapsed since the price change: Less time to adjust means _______ elasticity
lower
What are the four factors that determine the price elasticity of demand
- whether the good is a necessity or a luxury
- The availability of close substitutes
- The share of income spent on the good
- Time elapsed since the price change
No subs in thomas
What does the cross price elasticity of demand measure
how sensitive the quantity demanded of good A is to the price of good B
equation for cross price elasticity of demand
% change in quantity of A demanded / % change in price of B
For substitutes, cross price elasticity of demand is _______
positive
For complements, cross price elasticity of demand is ________
negative
The income elasticity of demand measures
how sensitive the quantity demanded of a good is to changes in income
equation for income elasticity of demand
= %change in quantity demand / % change in income
The income elasticity of demand can be used to
distinguish normal from inferior goods
for normal goods, income elasticity is _________
positive
for inferior goods, income elasticity is ___________
negative
what is the price elasticity of supply
= %change in quantity supplied / % change in price
supply curve is _______ if a rise in price increases the quantity supplied a lot
elastic
supply curve is ________ if a rise in price increases the quantity supplied just a little
inelastic
what are the two factors that determine the price elasticity of supply
availability of inputs and time
Availability of inputs: If an increase in production is very expensive, then supply will be _______
inelastic
Availability of inputs: If production can be increased cheaply, then the supply will be _______
elastic
Time: ______-run elasticity of supply is usually higher than the ____-run elasticity
long
short
Time: Price elasticity of supply increases as producers have more _____ to respond to price changes
time
demand is perfectly inelastic when E =
0
demand is perfectly elastic when E =
infinity
