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Econ 142 > Exam 2 (CH 4 and 5 and 6) > Flashcards

Exam 2 (CH 4 and 5 and 6) Flashcards

1
Q

Consumer Surplus

A

the difference between what consumers would be willing to pay and the market price

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2
Q

Consumer’s willingness to pay

A

is the max price at which he or she would buy that good

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3
Q

Consumer surplus is the are beneath the ______ and the area above the _______

A

demand curve; price

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4
Q

Consumer surplus ________ with a fall in price

A

rises

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5
Q

Producer surplus

A

the difference between the market price and the lowest price at which sellers are willing to supply the product (which is = cost of product)

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6
Q

Producer surplus is the are beneath the ______ and the area above the _______

A

price; supply curve

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7
Q

If the price increases, the producer surplus ______

A

rises

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8
Q

Total surplus

A

the sum of the producer and consumer surpluses

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9
Q

Price controls

A

legal restrictions on how high or low a market price may go

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10
Q

Price ceiling

A

a max price sellers are allowed to charge (usually set below the equilibrium)

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11
Q

Price floor

A

a minimum price buyers are required to pay (usually set above equilibrium)

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12
Q

If a price ceiling is set above equilibrium…

A

then it will have no effect (called nonbinding)

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13
Q

Binding or effective price ceiling

A

a price ceiling that forces price below equilibrium and has an effect

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14
Q

Deadweight loss

A

the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the market equilibrium quantity

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15
Q

Deadweight loss is measured in

A

dollars

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16
Q

Who wins and loses in rent control example?

A

Producers lose; some lucky renters gain; some unlucky but willing renters don’t get a place at all

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17
Q

If a price floor is set below the equilibrium …

A

then it will have no effect (nonbinding)

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18
Q

Binding or effective price floor

A

a price floor that forces price above equilibrium will have an effect

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19
Q

price floors encourage

A
  • Waste

- Black markets

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20
Q

Why are there price ceilings and floors?

A
  • benefit some people (who are more vocal than those harmed)
  • they’ve been around so long that people are used to them
  • Gov officials don’t understand economics
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21
Q

Price elasticity of demand

A

measures how responsive consumers are to changes in price

22
Q

If the demand curve is elastic

A

an increase in price reduces the quantity demanded a lot (and vice versa)

23
Q

If the demand curve is inelastic

A

same increase in price reduces QD by just a little

24
Q

Elasticity rule

A
  • Elasticity does not equal slope
  • If 2 linear demand (or supply) curves run through a common pain, then at any given Q, the curve that is flatter is more elastic
25
Q

Price Elasticity of demand Equation

A

(% change in QD) / (% change in P)

26
Q

If the price of oil increases by 10% and the QD decreases by 5% then what is the price elasticity of demand for oil?

A

(-5%) / (10%) = -0.5 (we usually drop the negative)

27
Q

Midpoint method for calculating % changes

A

% change in x = (change in x) / (average value of x) * 100

28
Q

Calculate average value of x

A

(starting value of x + Final value of x) / 2

29
Q

Cross-price elasticity of demand definition

A

measures how sensitive the quantity demanded of good A is to the price of good B

30
Q

Cross-price elasticity of demand for substitutes

A

cross-price elasticity of demand is positive

Ex: increase in price of 1 brand of cookie will increase the demand for the other brands

31
Q

Cross-price elasticity of demand for compliments

A

Cross-price elasticity of demand is negative

Ex: increase in the price of milk causes a decrease in the demand for Oreos

32
Q

When does cross-price elasticity of demand = 0?

A

when the products are not related

33
Q

Income elasticity of demand definition

A

measures how sensitive the quantity demanded of a good is to changes in income

34
Q

Income elasticity of demand for normal goods

A

Income elasticity of demand is positive

35
Q

Income elasticity of demand for inferior goods

A

Income elasticity of demand is negative

36
Q

Price elasticity of Supply definition

A

how sensitive producers are to changes in price of product

37
Q

If the supply curve is: elastic

A

a rise in price increases the quantity supplied a lot (and vice versa)

38
Q

If the supply curve is: inelastic

A

a rise in price increases the quantity supplied just a little (and vice versa)

39
Q

|elasticity| < 1

A

demand curve is inelastic

40
Q

|elasticity| > 1

A

demand curve is elastic

41
Q

|elasticity| = 0

A

demand curve is unit elastic

42
Q

Perfectly Inelastic Demand def

A

price elasticity of demand = 0; consumers are not at all sensitive to changes in price

43
Q

Perfectly Inelastic Demand (what does it look like on a graph?)

A

vertical line – any increase in price doesn’t change QD

44
Q

Perfectly elastic Demand def

A

price elasticity of demand = infinity; consumers are ultra sensitive to any change in price

45
Q

Perfectly elastic Demand (what does it look like on a graph?)

A

horizontal line – at exactly one price all customers are willing to buy any quantity

46
Q

What factors determine the price elasticity of demand?

A
  1. Availability of close substitutes
    - if there are a lot of substitutes = elastic
    - the fewer substitutes the more inelastic demand is
  2. Whether the good is a necessity or a luxury
    - Necessity: less sensitive to changes in P (inelastic)
    - Luxury: more sensitive to changes in P (elastic)
  3. Share of income spent on the good
    - Price changes when good feels cheap (inelastic)
    - Price changes when good feels expensive (elastic)
  4. Length of time elapsed since the price changed
    - Less time to adjust (inelastic)
    - More time to adjust = ability to adjust behavior and find close substitutes (elastic)
47
Q

Total Revenue equation

A

Price times quantity

48
Q

When demand is inelastic, what happens to total revenue?

A

total revenue will rise when the price rises (and vice versa)

49
Q

When demand is elastic, what happens to total revenue?

A

total revenue will fall when price rises

50
Q

When demand is unit elastic, what happens to total revenue?

A

total revenue does not change

Econ 142 (5 decks)

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