Exam 2 Flashcards
Elasticity
a measure of how much buyers and sellers respond to changes in market conditions
price elasticity of demand
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
Elastic
if the quantity demanded responds substantially to changes in price
When elasticity is greater than 1 : the quantity moves proportionately more than the price
inelastic
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
Close substitutes
goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others
Necessities
have inelastic demands
luxuries
have elastic demands
Time horizons
goods tend to have more elastic demand over longer time horizons
Price elasticity of demand
percentage change in quantity demanded over percentage change in price
quantity vs. price elasticity
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
Midpoint method
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)
Unit elasticity
the quantity moves the same amount proportionately as the price
Perfectly inelastic
vertical line: Elasticity equals 0
demand remains unchanged as price changes
Inelastic demand
elasticity is less than 1 (steeper the slope, the more inelastic)
Unit elastic demand
elasticity equals 0
Elastic demand
elasticity is greater than 1 (shallower slope, the more elastic)
Perfectly elastic demand
horizontal line: elasticity equals infinity
Price remains unchanged as quantity changes
Total revenue
the amount aid by buyers and received by sellers of a good computed as the price of the good times the quantity sold
revenue changes
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
Income elasticity of demand
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.
Normal good
higher income raises the quantity demanded
positive income elasticities
inferior goods
higher income lowers the quantity demanded
negative income elasticities
Luxuries
tend to have large income elasticities because consumers feel that they can do without these goods altogether if their incomes are too low
Cross-price elasticity of demand
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
Price elasticity of supply
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
Economists as scientists
develop and test theories to explain the world around them
Economists as policy advisors
use their theories to help change the world for the better
Price ceiling
a legal maximum on the price at which a good can be sold
Price floor
a legal minimum on the price at which a good can be sold
Not binding
if the price of equilibrium is below the ceiling the ceiling is nonbinding
Binding constraint
if the equilibrium is above the price ceiling it is binding
causes a shortage
Binding price floor
causes a surplus because there is more demanded at that price than supplied
Tax incidence
the manner in which the burden of a tax is shared among participants in a market
burden of tax
the burden of the tax falls on the side of the market that is less elastic
Welfare economics
the study of how the allocation of resources affects economic well-being
positive
what is
normative
what should be
Willingness to pay
the maximum amount that a buyer will pay for a good
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
marginal buyer
the buyer who would leave the market first if the price were any higher
cost
the value of everything a seller must give up to produce a good
producer surplus
the amount a seller is paid for a good minus the seller’s cost of providing it
efficiency
the property of a resource allocation of maximizing thee total surplus received by all members of society
equality
the property of distributing economic prosperity uniformly among the member of society
laissez faire
allow them to do
market power
the ability to influence prices
externalities
side effects
market failure
the inability of some unregulated markets to allocate resources efficiently
deadweight loss
the fall in total surplus that results from a market distortion, such as a tax
