Exam 2; 11/14 Flashcards
Elastic demand curves have…
An absolute value that is greater than one, requiring prices to be lowered
Inelastic demand curves have…
an absolute value that is less than one, requiring prices to be raised
Substitute goods will have…
Positive value
Complementary goods will have…
Negative value
Normal goods will have…
Positive value
Inferior goods will have…
Negative value
Statutory Burden:
Determines which curve shifts and in what direction depending on who is assigned to pay the tax/subsidy
Economic Burden:
The monetary burden created by the change in after-tax price for buyers and sellers
Tax Incidence:
Tax paid by buyers over(divided by) total tax, determined by price elasticity.
The more inelastic party bears ____ of the tax/subsidy
More
Price ceiling:
Maximum price sellers are allowed to charge
Binding price ceiling
price ceiling that occurs below the market equilibrium price
Price Floor
Minimum price sellers are allowed to charge
Binding price floor
Price floor that occurs above the market equilibrium price
Mandate
Minimum quantity that must be bought or sold
Binding Mandate
Mandate that occurs to the right of the equilibrium quantity
Quota
Maximum quantity that can be bought or sold
Binding quota
Quota that occurs to the left of the equilibrium quantity
Positive Analysis
Describes what is happening, explaining why or predicting what will happen, forecasting effects
Normative Analysis
Prescribes what should happen, involves value judgements
Optimal/Efficient Outcome
Outcome yielding the most economic surplus
Consumer Surplus
Marginal benefit minus price
Producer surplus
Price minus marginal cost
Deadweight loss
Economic surplus at efficient outcome minus actual economic surplus
5 Main Sources of Market Failure
- Market Power
- Externalities
- Information Problems
- Irrationality
- Government Regulations
Externality
A side effect(NOT a price change) of an activity that affects bystanders whose interests are not taken into account
Private interests
Costs and benefits you personally incur
Social interests
includes all costs and benefits
Marginal Private Cost (MPC)
The extra costs paid by the seller from producing one extra unit
Marginal External Cost (MEC)
The extra cost imposed on bystanders from producing one extra unit
Marginal Social Cost (MSC)
All marginal costs (MPC + MEC)
Marginal Private Benefit (MPB)
The extra enjoyment for the buyer from purchasing one extra unit
Marginal External Benefit (MEB)
The extra benefit accruing to bystanders from one extra unit
Marginal Social Benefit (MSB)
All marginal benefits (MPB + MEB)
Rational Rule for Society
Produce more of an item as long as its marginal social benefit is at least as large as the marginal social cost
Coase Theorem
If bargaining is costless and property rights are clearly established & enforced, then externality problems can be solved by private bargains
Excludable & Rival?
Private Goods
ex. Cars, cupcakes, airline seats, can of coke
Excludable & Nonrival?
Club Goods
ex. email, cable tv, satellite radio
Non-excludable & Rival?
Common Resources
ex. fish in the ocean, national parks, highways
Non-excludable & Non-rival?
Public Goods
ex. national defense, Public broadcasting, public education
Private/Asymmetric information
When one party to a transaction knows something the other doesn’t
Adverse selection of sellers
The tendency for the mix of goods to be skewed toward more low-quality goods when buyers are at informative disadvantage
Adverse selection of buyers
The tendency for the mix of buyers to be skewed toward more high cost buyers when sellers are at informative disadvantage
Moral Hazard
The actions you take because they are not fully observable and you are partially insulated from their consequences
Principal agent problem
The problems that arise when a principal hires an agent to do something on their behalf, but the principal cannot perfectly observe the agents actions
If negative externality…
Use corrective tax, supply curve shifts
If positive externality…
Use corrective subsidy, demand curve shifts
