ECON 11 Flashcards
Aka minimum price policy
FLOOR PRICE (Pf )
Examples of floor prices
minimum wages
causes a surplus in the market
Pf
Pf will not have an impact (ineffective) if
set below the equilibrium
price.
Aka maximum price policy
PRICE CEILING (Pc )
causes a
shortage in the market.
Pc
Pc will not have an impact (ineffective) if
set above the
equilibrium price.
meant to stabilize the prices of basic necessities, by
prescribing measures against undue price increases during
emergency situations…
Republic Act 7581 (The Price Act
of 1992)
If Y = f(X), the elasticity measures the
responsiveness of
Y to changes in X.
Elasticity indicates the percentage change in Y in response to
a ______________ change in X.
one percent
Formula of Elasticity
See your answer in messenger hahhahaa
measures the
responsiveness of quantity demanded of a good to
changes in its own price.
Own price elasticity of demand
measures the
responsiveness of quantity demanded of a good to
changes in its own price.
Own price elasticity of demand
Formula of Own price elasticity of demand
see sa pm
Two ways of estimating elasticity
Point and arc elasticity
elasticity is measured for a
single point on the demand curve
Point elasticity
computed using two points along
a demand curve
Arc elasticity
obtained if demand function is
known.
Point elasticity
Implemented if there are a limited number of
observations
Arc elasticity
Perfectly inelastic
= 0
Inelastic
<1
Unit elastic
= 1
Elastic
> 1
Perfectly elastic
infinite
quantity sold multiplied by the price
Total revenue (TR)
quantity sold multiplied by the price
Total revenue (TR)
responsiveness of the demand for a good to changes in the
price of another good
Cross-price elasticity of demand
Substitutes
exy > 0
Complements
exy < 0
measures the
responsiveness of the demand for a good to a change in
income.
income elasticity of demand
Two types of taxes:
specific/excise tax vs ad valorem tax
tax per unit of the product
Specific/excise tax
effects of government taxes on
consumption and production.
TAX INCIDENCE
increase in the equilibrium price is likely to be _____ _______the
amount of the tax.
Less than
T or F. Tax will raise the equilibrium price
True
True of False. the burden of the tax (Who pays for the tax?) is generally shared by producers and consumers.
True
What is the case of specific tax when the specific tax shifts up the supply curve
by the amount that is equal to the tax.
Initial impact
T or F. Incorporating the demand side shows that producers will
most likely be able to raise prices by the amount of the
tax.
False, unable
T or F. Distribution of the tax burden depends on the own
price elasticity of demand.
T
If demand is less price elastic, the burden of the tax is
likely to shouldered more by the _________.
consumers
If demand is more price elastic, the burden of the tax is
likely to shouldered more by the __________.
producers
tax is borne solely by the
consumers
Perfectly inelastic demand
tax is borne solely by the producers
Perfectly elastic demand:
Consumers still lose because they are able to buy less of
the good. T or F
T
social science that deals with the
allocation of scarce resources to satisfy unlimited human wants.
Economics
Systematic observation of natural events and
conditions in order to formulate laws and principles.
Science
Seeks to explain events in a
reproducible way, and to use these reproductions to
make useful predictions.
Scientific method
focuses on natural phenomena,
including biological life
Natural science
Focuses on human behavior and
societies
Social science
BRANCHES OF ECONOMICS
Microeconomics & Macroeconomics
deals with the description and explanation of
economic phenomena.
Answers the question:“What is?”
Positive economics
involves value judgements.
Answers the question: “What should be?”
Normative economics
T or F. Not all positive statements are correct.
T
All normative economics are correct. T or F.
False
maximum amount a consumer will pay for an additional good or service
Marginal benefits
________ _________questions capture the need to make choice
basic economic
BASIC
ECONOMIC QUESTIONS
*What to produce?
*How much to produce?
*How to produce?
*For whom to produce?
The _______ is a useful tool for illustrating the choices
available to society and its constraints
PRODUCTION POSSIBILITIES FRONTIER (PPF)
demonstrates all the possible combinations
of the maximum amounts of two goods (or services)
that can be produced with a given amount of
resources
PRODUCTION POSSIBILITIES FRONTIER (PPF)
refers to physical capital like machinery,
production plants, etc.
‘Capital’
represents the value of the best foregone
alternative.
Opportunity cost
does not really say what
specific technology or set of techniques are being used
Implied by position in PPF
then we using the best technology available.
If on the PPF
there might be unemployment or we are not
using the best technology or both
If inside the PPF
2 extreme economic systems
Complete command economy & Completely unregulated market economy
Decisions are made by “authorities”.
Complete command economy
Markets determined the answers to the questions.
Markets defined in the next topic.
Completely unregulated market economy
institution that facilitates transactions
between buyers and sellers
A market
the various quantities of a good or service
that users/consumers are willing and able to buy.
Demand
This asserts that the quantity demanded of a good (Qd) is
inversely related to its own price (P)
Law of demand
The higher price of a good makes the consumption of a
competing good (substitute) more attractive.
Substitution effect
When price increases, the consumer’s real income (or
purchasing power) falls and so he/she tends to buy less.
Income effect
This represents a movement along the same demand curve.
Other factors held constant, this is caused by a change in the
own price of the good.
Change in quantity demanded
-This is a shift in the entire demand curve.
-This is caused by changes in other factors affecting demand
other than the own price. (More details later)
oChange in demand
Other factors which may affect demand
oPrices of related commodities
oConsumer incomes
oTastes and preferences
oNumber of consumers
oPrice expectations
Higher income leads to higher demand (rightward shift in
the demand curve)
Normal goods
Higher income leads to lower demand (leftward shift in the
demand curve)
Inferior goods
refers to the quantities of a good or service that
producers/firms are willing and able to offer for sale.
Supply
This states that quantity sold of a good or services is
positively related to its own price, ceteris paribus.
oHigher price means more goods/services will be sold.
oLower price means fewer goods/services will be sold.
Law of Supply
This is a movement along the same supply curve
This is due solely to a change in (own) price of the
good.
Change in quantity supplied
This is a shift in the entire supply curve
This is caused by changes in factors other than the
price of the good (more details later).
Change in supply
Other factors affecting supply
oPrices of resources/inputs
oPrices of related commodities
oTechnology
oNumber of producers
oProducer expectations
Resources can be used to produce several types of goods
OFAS: Prices of related goods in production
is a state in which the quantities that firms
want to sell is equal to the quantities that users want to buy.
Market equilibrium
is state of rest.
Equilibrium
Equilibrium condition:
Qs = Qd
Scenario 1: Price above P*
oIn this scenario, Qs > Qd .
surplus or excess supply
Scenario 2: Price below P*
oIn this scenario, Qs < Qd
shortage or excess demand
