exam II Flashcards
define the paradox of value
questions what is most valuable to an individual
the paradox of value is _________ __________
context-dependent
give an example of paradox value
diamonds vs water
define exchange value
one good will be more valuable money-wise (ie :diamond)
define use value
one good will be more valuable use-wise (ie: water)
define utility
reconciles the exchange and use value differences
how well something satisfies a person’s wants and needs
utility is ___________ and _________-__________
subjective; context-dependent
how is utility measured
willingness to pay
define willingness to pay
determined by the marginal utility; not by any inheritance property of the good and not by the amount of labor needed to produce a good
define marginal utility and give an example
value resulting from 1 additional unit
ex: if stranded in a desert, one gains more happiness from water than diamonds
define the law of diminishing marginal utility
each additional quantity of consumption provides less utility than before
eventually one good will outweigh another
if utility is best measured by _________ __ ___, and each addition unit provides _____ utility than the unit before, then there should be a ________ relationship between price and quantity demand
willingness to pay; less; negative
define the law of demand
there is a negative relationship between price and quantity
what are the three reasons a curve slopes downwards
- diminishing utility of consumption
- income effects
- substitution effect
an increase in price leads to what?
a reduction in the quantity demand
define quantity demand
the exact quantity demanded at a specific price
Q(P)=
a-b(P)
a decrease in price does not lead to…
a higher demand
define demand
the function of price and quality
what does a change in price cause
a movement along the demand curve
what does a change in demand cause
a shift in the demand curve
what five things determine demand? describe them
- taste and preferences
as something becomes more popular, demand increases - population of potential buyers
as groups/ages/etc move/change, demand changes - income
normal- demand is positively related to income
inferior- demand is negatively related to income - price of complements/substitutions
- expectations
increase/decrease in an exception of future prices lead to an increase/decrease in demand today
define complements
price of y negatively relates to demand of x
define substitute
price of y is positively correlated to demand of x
define elasticity
degree to which a change in price will affect the change in quantity
what does elasticity represent
how much something will change
what is elasticity effected by
by the strength of preference and availability of substitutes
suppliers of inelastic products have _____ leverage than consumers
more
suppliers of elastic products have ____ leverage than consumers
less
define consumer surplus
the sum of the differences between a consumer’s maximum willingness to pay the market price
a way of measuring consumer welfare
define supply
reflects the minimum amount that owners are willing to be compensated for different qualities of a good
define the law of supply
there is a positive relationship between price and quantity supply
what is the supply curve
profits incentivize forms to produce more
upward slope
what are the four determinants of supply?
- cost of inputs
- productivity
- number of producers
- expectations
define producer surplus
sum of the difference between a producers minimum willingness to pay the the market price
where is the producer surplus found
between the supply curve and market price
define mondels in economics
the most basic and powerful model is supply and demand
define model
a representation used to understand the way in which a particular system works
define ceterius paribus
the assumption that all else is equal/constant
comparisons are in ___________ equilibrium
partial
define equilibrium
simultaneous interaction of supply and demand determine price for a good or service
what is the equilibrium key
buyers compete with buyers, and sellers compete with sellers
define price theory
as price changes so does demand
what purposes do higher prices serve
consumers will conserve their (usage of a) good
incentivizes suppliers to bring more to market
what purposes do lower prices serve
sends a strong signal that a product is not wanted
frees up scared resources for other goods
as demand increases, supply ________ and price __________
decreases; increases
as demand goes up, price _________ and quantity ___________
increases, increases
as demand decreases, price _________ and quantity __________
decreases, decreases
as supply goes up, price __________ and quantity ___________
decreases; increases
as supply goes down, price ________ and quantity __________
increases; decreases
as demand and supply go up, what happens to price and quantity
unknown price; increased quantity
as demand increases and supply decreases, what happens to price and quantity
price goes up, unknown quantity
as demand goes down and supply goes up, what happens to price and quantity
price goes down, unknown quantity
as demand and supply go down, what happens to price and quantity
unknown price; quantity decreases
how are principles of economics created
by spontaneous collaboration of people
no centralized commission is needed to:
figure out how to adjust a products price
decide which supermarkets in which cities will get how many products to sell
which company would be best to process the remaining supply
which consumers will ultimately be allowed to consume it
define free market
economic system in which prices are determined by unrestricted competition between individuals and firms
what causes unequilibrium
minimum wage
price gouging laws
rent control
zoning
define price control
arise from governmental intervention regarding the legality of certain activities
define price floor
legal minimum set on prices for a particular good or service, such as minimum wage
define price ceiling
legal maximum set on prices for a particular good or service, such as rent
define direct cost
associated with price controls about shortages and products
define indirect cost
associated with product quality, wait time, and substitution
define dead weight loss
binding price controls lead to fewer goods being sold in a market
what creates DWL
a reduction in number of mutually beneficial exchanges
price ceilings ________ amount of supplies
decrease
what are the four indirect effects of price control
- long-run supply/demand adjust
- enforcement cost increases
- quality declines
- black markets develop
describe the long-run supply/demand adjust
it is a price floor, but if it is above equilibrium quantity is a surplus.
describe enforcement cost increase
a small misdemeanor can cost millions of dollars, if not lives.
must be enforced by laws or people
describe quality declines
a price ceiling that is higher than the equilibrium
supply decreases
describe black markets
price controls replace lawful, competitive and mutually beneficial exchange with black markets
endanger both consumers and producers
define taxes
a wedge between price consumers pay and the price suppliers receive
what are taxes commonly represented by?
a decrease in supply or demand
what is the goal of taxes
studying tradeoff associated with different goods to minimize market distortion
what do taxes attempt to limit?
DWL
what is Pb
price paid by buyer
what is Ps
price received by seller
what does taxing in an elastic supply or demand generate?
the least revenue with creating the most DWL
what does taxing imply
goods with few substitutes should be more heavily taxed
what type of tradeoff is taxes
efficiency vs. equity
define tax incident
a degree to which individuals are burdened by the tax
as elasticity increases, tax burdens ____________
decrease
as inelasticity increases, tax burdens ___________
increase
what happens to tax cuts if elasticity is greater than demand
tax cuts will disproportionately help consumers
