Exam 2

Question 1

Elasticity

Answer 1

a measure of how much buyers and sellers respond to changes in market conditions

Question 2

price elasticity of demand

Answer 2

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

Question 3

Elastic

Answer 3

if the quantity demanded responds substantially to changes in price
When elasticity is greater than 1 : the quantity moves proportionately more than the price

Question 4

inelastic

Answer 4

if the quantity demanded responds only slightly to changes in the price
When elasticity is less than 1: the quantity moves proportionately less than the price

Question 5

Close substitutes

Answer 5

goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others

Question 6

Necessities

Answer 6

have inelastic demands

Question 7

luxuries

Answer 7

have elastic demands

Question 8

Time horizons

Answer 8

goods tend to have more elastic demand over longer time horizons

Question 9

Price elasticity of demand

Answer 9

percentage change in quantity demanded over percentage change in price

Question 10

quantity vs. price elasticity

Answer 10

since the quantity demanded of a good is negatively related to its price, the percentage change in quantity will always have the opposite sign as the percentage change in price

Question 11

Midpoint method

Answer 11

computes a percentage change by dividing the change by the midpoint or average of the initial and final levels
[(Q2 - Q1) / ((Q2-Q1)/2) ] / (P2 - P1) / ((P2-P1)/2)

Question 12

Unit elasticity

Answer 12

the quantity moves the same amount proportionately as the price

Question 13

Perfectly inelastic

Answer 13

vertical line: Elasticity equals 0

demand remains unchanged as price changes

Question 14

Inelastic demand

Answer 14

elasticity is less than 1 (steeper the slope, the more inelastic)

Question 15

Unit elastic demand

Answer 15

elasticity equals 0

Question 16

Elastic demand

Answer 16

elasticity is greater than 1 (shallower slope, the more elastic)

Question 17

Perfectly elastic demand

Answer 17

horizontal line: elasticity equals infinity

Price remains unchanged as quantity changes

Question 18

Total revenue

Answer 18

the amount aid by buyers and received by sellers of a good computed as the price of the good times the quantity sold

Question 19

revenue changes

Answer 19

if demand is inelastic, an increase in price causes an increase in total revenue
if demand is elastic, an increase in the price causes a decrease in the total revenue

Question 20

Income elasticity of demand

Answer 20

a measure of how much the quantity demanded of a good responds to a change in consumers’ income, computed as the percentage change in quantity demanded divided by the percentage change in income.

Question 21

Normal good

Answer 21

higher income raises the quantity demanded

positive income elasticities

Question 22

inferior goods

Answer 22

higher income lowers the quantity demanded

negative income elasticities

Question 23

Luxuries

Answer 23

tend to have large income elasticities because consumers feel that they can do without these goods altogether if their incomes are too low

Question 24

Cross-price elasticity of demand

Answer 24

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

Question 25

Price elasticity of supply

Answer 25

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

Question 26

Economists as scientists

Answer 26

develop and test theories to explain the world around them

Question 27

Economists as policy advisors

Answer 27

use their theories to help change the world for the better

Question 28

Price ceiling

Answer 28

a legal maximum on the price at which a good can be sold

Question 29

Price floor

Answer 29

a legal minimum on the price at which a good can be sold

Question 30

Not binding

Answer 30

if the price of equilibrium is below the ceiling the ceiling is nonbinding

Question 31

Binding constraint

Answer 31

if the equilibrium is above the price ceiling it is binding | causes a shortage

Question 32

Binding price floor

Answer 32

causes a surplus because there is more demanded at that price than supplied

Question 33

Tax incidence

Answer 33

the manner in which the burden of a tax is shared among participants in a market

Question 34

burden of tax

Answer 34

the burden of the tax falls on the side of the market that is less elastic

Question 35

Welfare economics

Answer 35

the study of how the allocation of resources affects economic well-being

Question 36

positive

Answer 36

what is

Question 37

normative

Answer 37

what should be

Question 38

Willingness to pay

Answer 38

the maximum amount that a buyer will pay for a good

Question 39

consumer surplus

Answer 39

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Question 40

marginal buyer

Answer 40

the buyer who would leave the market first if the price were any higher

Question 41

cost

Answer 41

the value of everything a seller must give up to produce a good

Question 42

producer surplus

Answer 42

the amount a seller is paid for a good minus the seller's cost of providing it

Question 43

efficiency

Answer 43

the property of a resource allocation of maximizing thee total surplus received by all members of society

Question 44

equality

Answer 44

the property of distributing economic prosperity uniformly among the member of society

Question 45

laissez faire

Answer 45

allow them to do

Question 46

market power

Answer 46

the ability to influence prices

Question 47

externalities

Answer 47

side effects

Question 48

market failure

Answer 48

the inability of some unregulated markets to allocate resources efficiently

Question 49

deadweight loss

Answer 49

the fall in total surplus that results from a market distortion, such as a tax