Equilibrium and Elasticities (Weeks 7-9) Flashcards
The benefit that consumers derive from consuming a good, above and beyond the price they paid for the good
Consumer surplus
What is the graphical representation of consumer surplus?
The area below the demand curve and above the price at the equilibrium point
What two factors determine consumer surplus?
- The market equilibrium point
- Elasticity of demand
Quantity demanded is not very sensitive to prices
Inelastic demand
Quantity demanded is very sensitive to prices
Elastic demand
What is the relative steepness of the demand curve with very elastic demand? Inelastic?
Inelastic demand: very steep demand curve
Elastic demand: very flat demand curve
True or false: as demand becomes more inelastic, consumer surplus rises
True
True or false: as demand becomes more elastic, consumer surplus rises
False; as demand becomes more elastic, consumer surplus falls because the demand curve becomes flatter
True or false: elastic demand arises from the availability of very good substitutes
True
True or false: inelastic demand arises from the availability of very good substitutes
False; arrises due to a lack of substitutes (not sensitive to price because people with pay any amount)
The benefit that producers derive from selling a good, above and beyond the cost of producing that good
Producer surplus
How is producer surplus represented graphically?
The area above the supply curve and below the equilibrium price
The percentage change in supply for each percentage change in market prices
Price elasticity of supply
The percentage change in quantity demanded for each percentage change in prices
Elasticity of demand
What is the equation for elasticity of demand
Percentage change in price
Change in P/P
What is the equation for price elasticity?
Percentage change in price
Change in P/P
What are the two conditions for market equilibrium?
Marginal cost (MC) = Marginal benefit (MB)
Quantity demanded = Quantity supplied
When the market price has reached the level where quantity supplied equals quantity demanded
Equilibrium, also called competitive equilibrium
Price at which both sellers and buyers are satisfied
Equilibrium price, also called market-clearing price
True or false: the equilibrium changes only if a shock occurs that shifts the demand curve or supply curve
True
