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econ 201 > exam 2 > Flashcards

exam 2 Flashcards

1
Q

price elasticity of demand

A

measure how responsive buyers are to price change

what % △ QD in response to 1% price △

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2
Q

PED equation

A

%△ QD
———-
%△ P

ex:
uber cut price by 15%
QD for uber rose by 30%
|30%|
——- = |-2| = 2
|-15%|

  • ratio 2:1
    for every 1% increase in P
    QD decrease by 2%
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3
Q

elastic

A

QD is responsive to △P

  • P increase = large △ in QD
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4
Q

inelastic

A

QD is not responsive to △P

  • P increase = little △ in QD
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5
Q

unit elastic

A

% △ P will cause an equal % △ QD
- PED = 1
-ex:
↑ price 10% means △ QD will also be 10%

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6
Q

elastic demand curve

A

PED > 1

%△QD > %△P

  • flat curve
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7
Q

perfectly elastic demand

A

PED = ∞

%△QD is ∞ for any %△P

  • horizontal curve
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8
Q

inelastic demand curve

A

PED < 1

%△QD < %△P

  • steep curve
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9
Q

perfectly inelastic demand curve

A

PED = 0

%△QD is 0 for any %△P

  • vertical curve
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10
Q

Demand Elasticity Factor 1

A
  1. more competing products = greater elasticity
  • more substitute = more elastic demand will become (more choices)
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11
Q

Demand Elasticity Factor 2

A
  1. specific brand vs. broad category of good
  • specific brand have more elastic demand
  • ex:
    1. P of cheerios increase (specific brand)
  • people will substitute different cereals making it elastic
    2. P of breakfast cereals increase (category of breakfast)
  • demand is inelastic since they would have to find an alternative breakfast
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12
Q

Demand Elasticity Factor 3

A
  1. necessities have inelastic demand
  • things that you can’t go without, you will keep buying even if price increase
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13
Q

Demand Elasticity Factor 4

A
  1. consumer research = elastic demand
  • consumers are willing to search for a low cost alternative making demand more elastic
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14
Q

Demand Elasticity Factor 5

A
  1. demand get more elastic over time
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15
Q

midpoint formula

A

measure % △ between 2 point

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16
Q

% △ QD or QS equation

A

Q2 - Q1
—————— x 100
(Q2 + Q1) / 2

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17
Q

% △ P equation

A

P2 - P1
—————— x 100
(P2 + P1) / 2

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18
Q

% △ QD if nothing is given

A

PED x % △ P

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19
Q

total revenue

A

price x quantity

  • elastic demand: higher prices lead to less revenue

-inelastic demand: higher price lead to more revenue

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20
Q

Revenue - Elastic demand

A

price ↑ = revenue ↓

price ↓ = revenue ↑

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21
Q

Revenue - demand inelastic

A

price ↑ = revenue ↑

price ↓ = revenue ↓

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22
Q

cross - PED

A

% △ P of another good

  • positive for substitute
    (buy more good when price of another good ↑ )
  • negative for complement
    (good A price ↑ = good B QD ↓ )
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23
Q

cross - PED positive for substitute example

A

coke = $2
pepsi = $3

pepsi $ ↑ = buy more coke

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24
Q

cross - PED negative for complement example

A

cereal price ↑ 10%
QD for milk ↓ 6%
- 6 %
——- = -0.6
10 %

( -6 let us know its a complement)

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25
Q

income elasticity of demand (IED)

A

measure how responsive demand for a good is when income change

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26
Q

IED equation

A

% △ income

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27
Q

normal good

A

income ↑ normal good QD ↑

positive IED

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28
Q

inferior good

A

income ↑ inferior good QD ↓

negative IED

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29
Q

easy memorization

A

PED = price of this good (apple n apple

Cross - PED = price of another good
(apple n banana)

IED = price of income
(apple n paycheck)

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30
Q

Price elasticity of supply

A

measure how responsive sellers are to price change

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31
Q

PES

A

% △ P

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32
Q

perfectly inelastic supply

A

PES = 0

% △ QS = 0 for any % △ P

  • vertical curve
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33
Q

inelastic supply

A

PES < 1

% △ QS < % △ P

  • steep curve
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34
Q

perfectly elastic supply

A

PES = ∞

% △ QS is ∞ for any % △ P

  • flat curve
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35
Q

elastic supply

A

PES > 1

% △ QS > % △ P

  • flat curve
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36
Q

Supply Elasticity Factor 1

A
  1. inventories make supply more elastic
  • inventories provide flexibility to respond quickly to price change
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37
Q

Supply Elasticity Factor 2

A
  1. easily available variable inputs make supply elastic
  • input needed to expand production are easily available = elastic supply
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38
Q

Supply Elasticity Factor 3

A
  1. extra capacity = elastic supply
  • if a business have capacity, they can produce more output w out raising cost
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39
Q

Supply Elasticity Factor 4

A
  1. easy entry n exist = elastic supply
  • business able to easily enter or exit a market when price change
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40
Q

Supply Elasticity Factor 5

A
  1. supply is elastic over time
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41
Q

excise tax

A

Tax per unit

  • tax already included in the price
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42
Q

sale tax

A

addition tax to the price
(increase total price)

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43
Q

tax on seller

A

shift supply curve

tax = marginal cost to seller
-additional cost to each unit

MC ↑ (tax added) = left shift to supply curve

44
Q

tax affect on seller n buyers

A
  1. ↓ quantity sold
  2. ↑ price buyers pay
  3. ↓ seller profit
  4. seller n buyers bear economic burden
45
Q

statutory burden

A

burden of being assigned by the government to send a check of tax collected on behalf of the gov

46
Q

economic burden

A

burden faced by buyers and sellers due to tax changing total prices

47
Q

tax incidence

A

division of tax economic burden between sellers n buyers

48
Q

tax on buyers

A

tax on good ↓ MB - shifting demand curve left

49
Q

buyer bear larger share of tax incidence

A
  1. demand is inelastic
  2. supply is elastic
50
Q

buyer bear smaller share of tax incidence

A
  1. demand is relatively elastic
  2. supply is relatively inelastic
51
Q

Evaluating taxes step 1

A

determine which curve shifts

52
Q

Evaluating taxes step 2

A

increase or decrease in tax?

increase = left shift
decrease = right shift

53
Q

Evaluating taxes step 3

A

compare pre-tax w post-tax equilibrium

  • change in equilibrium price and quantity
54
Q

Evaluating taxes step 4

A

is supply or demand relatively elastic

55
Q

equation to determine who bear greater economic burden

A

tax = buyer price - seller price

buyer economic burden = buyer price - old price

seller economic burden = old price - seller price

PED > PES = buyer bear larger

PED < PES = buyer bear less

56
Q

subsidy

A

money granted by government to assist business

  • subsidy for consumers = ↑ QD
  • subsidy for sellers = ↑ QS
57
Q

price ceiling

A

max price sellers can legally charge (they cant charge a higher price)

  • shortage
  • goal: lower price

“you can only sell at __ price.”

58
Q

price ceiling negative

A
  • shortage never solved
  • lack of innovation
  • loss of incentive
  • increase bias (should i sell it to that person)
59
Q

price floor

A

Seller must charge above this minimum price

  • surplus
  • goal: increase price

“you can only sell above __ price”

60
Q

binding price ceiling

A

when set below equilibrium

61
Q

non-binding price ceiling

A

when set above equilibrium

62
Q

binding price floor

A

when set above equilibrium

63
Q

non-binding price floor

A

when set below equilibrium

64
Q

quantity regulation

A

max or min quantity that can be sold

65
Q

mandate

A

min quantity a good must be brought or sold

“must supply at least __ quantity”

66
Q

quotas

A

limit max quantity a good that can be brought or sold

“you can only supply __ quantity”

67
Q

binding mandate

A

when set to the right of equilibrium

68
Q

binding quotas

A

set to the left of equilibrium

69
Q

mandate & quota
vs.
price floor & ceiling

A

mandate & quota effect quantity

price floor & ceiling effects price

70
Q

positive analysis

A

Describe what is happening, why, and what will happen

71
Q

normative analysis

A

describes what should happen

72
Q

economic efficiency

A

more generated economic surplus = better outcome

73
Q

economic surplus

A

total benefits - total costs

74
Q

efficient outcomes

A

MB = MC (provide largest possible economic surplus)

75
Q

equity

A

measure fairness

76
Q

consumer surplus

A

buyer gain of economic surplus from buying something

  • gain when MB > price
77
Q

consumer surplus equation

A

MB - Price

78
Q

Area of triangle

A

1/2 x base x height

79
Q

producer surplus

A

Sellers gain economic surplus from selling something

  • gain when selling price > MC
80
Q

producer surplus equations

A

Price - MC

81
Q

voluntary exchange

A

buyers n sellers want to exchange money for goods

  • both enjoy gains from the trade
82
Q

economic surplus equation

A

MB - MC
(consumer surplus + producer surplus)

83
Q

3 central question

A
  1. who makes what?
  2. who gets what?
  3. how much gets brought n sold
84
Q

efficient production

(who makes what)

A

occur when producing a level of output at the lowest possible cost

  • require sellers to produce good at lowest MC
85
Q

efficient allocation

(who gets what)

A

occur when good are allocated to create largest economic surplus from allocations

  • requires each good to go towards the person that gains the most MB
86
Q

efficient quantity

(how much gets sold n brought)

A

quantity that are brought and sold to produce the largest possible economic surplus

87
Q

Rational Rule for Market

A

increase economic surplus by producing more items as long as MB > MC

88
Q

market failure

A

occur when the forces of supply n demand lead to inefficient outcome

89
Q

Market Failure Source 1

A
  1. market power undermines competitive pressures
    (When a business has too much control, it weakened the competitive pressures of the market)
  • when there’s limited competition, sellers has too much control over price. They take advantage and manipulate price and lower quality goods without fear of losing to other business
90
Q

Market Failure Source 2

A
  1. externalities create side effects
  • when buyers and seller choices have side effects on other who are not involved
91
Q

Market Failure Source 3

A
  1. information problem undermines trust

Private information can lead to lack of trust, leading people to buy or sell less than efficient quantity

-private information examples: sellers know more information about a product, and you feel like they’re hiding something so it leads to you not buying the product

92
Q

Market Failure Source 4

A

irrational leads to bad decisions

93
Q

Market Failure Source 5

A

gov impede market forces

  • government intervention can interfere with the flow of the market
94
Q

deadweight loss

A

measures economic surplus lost due to market failure

95
Q

deadweight loss equations

A

efficient quantity - actual quantity

96
Q

government failure

A

gov policies lead to worse outcome

  • gov interventions = inefficient
97
Q

gain from trades

A

benefits from reallocating goods to its better use

98
Q

absolute advantage

A

ability to do a task efficiently using less effort than others

99
Q

comparative advantage

A

ability to do tasks at a lower opportunity cost

100
Q

opportunity cost of tasks equation

A

hrs to finish task /
hrs to finish alternative task

101
Q

Role 1 of price

(power of price)

A
  1. price is a message
  • price is a message to sellers
    tells sellers how much buyers value their products
  • price is a message to buyers
    tells buyers the MC of sellers (how much it cost to produce goods)

= help coordinate better outcomes

102
Q

Role 2 of price

(power of price)

A
  1. price is an incentive
  • price is incentive for suppliers
    high price = incentive to increase productions
  • price is incentive for suppliers
    high price = incentive to buy less

= provide incentive for stranger to cooperate

103
Q

Role 3 of price

(power of price)

A
  1. price is a bundle of information
  • the process of buying n selling collects information
  • market price broadcast useful information
104
Q

prediction markets

A

market designs so prices can be interpreted as probabilities and use to make predictions

105
Q

internal markets

A

market within a company to buy n sell scarce resources

106
Q

knowledge problems

A

knowledge needs to make a good decision but not available to decision maker

  • market can solve knowledge problems
107
Q
A

econ 201 (3 decks)

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