Exam Two Flashcards
relationship between the quantity supplied of a particular good or service and the price
supply
specific amount of the good or service sellers are willing to offer for sale at a given price
quantity supplied
shows how much of a good would be supplied at different prices
supply schedule
shows relationship between quantity supplied and price
supply curve
price that matches quantity supplied and quantity demanded
equilibrium price
quantity bought and sold at equilibrium price
equilibrium quantity
when the quantity supplied exceeds the quantity demanded, when price is above equilibrium level
surplus
when the quantity demanded exceeds the quantity supplied, when price is below equilibrium level
shortage
price for all consumers and suppliers
market price
when the demand increases the
equilibrium price:
equilibrium quantity:
increases
increases
when the demand decreases the
equilibrium price:
equilibrium quantity:
decreases
decreases
when supply increases the
equilibrium price:
equilibrium quantity:
decreases
increases
when supply decreases the
equilibrium price:
equilibrium quantity:
increases
decreases
when demand decreases and supply increases the
equilibrium price:
equilibrium quantity:
decreases
is ambiguous
when the demand increases and supply decreases the
equilibrium price:
equilibrium quantity:
increases
is ambiguous
when demand and supply increase the
equilibrium price:
equilibrium quantity:
is ambiguous
increases
when demand and supply decrease the
equilibrium price:
equilibrium quantity:
is ambiguous
decreases
what does supply try to maximize
profit
what does demand try to maximize
satisfaction
difference between the maximum price consumers are willing to pay minus the price they actually pay
consumer surplus
total surplus
consumer surplus plus producer surplus
total surplus is a measure of
market efficiency
difference between the price received for a good and the minimum price sellers are willing to sell at
producer surplus
the actual cost of each unit in surplus is the
marginal costs based on opportunity cost
the maximum price at which a consumer would buy a good
willingness to pay
net gain to an individual buyer from the purchase of a good, difference between the buyer’s willingness to pay and the price paid
individual consumer surplus
sum of the individual consumer surpluses of all the buyers of a good in a market
total consumer surplus
both individual and total consumer surplus
consumer surplus
where is total consumer surplus on a graph
below the demand curve but above the price
lowest price at which a seller is willing to sell a good
seller’s cost
net gain to an individual seller from selling a good, difference between the price received and the seller’s cost
individual producer surplus
sum of the individual producer surpluses of all the sellers of a good in a market
total producer surplus
both individual and total producer surplus
producer surplus
where is total producer surplus on a graph
above the supply curve but below the price
as the price goes up, consumer surplus
decreases
as the price goes down, consumer surplus
increases
as price goes down, producer surplus
decreases
as price goes down, producer surplus
increases
decrease in total surplus caused by a decrease in equilibrium quantity
deadweight (social) loss
buyers and sellers meet at a specific price that benefits both
mutual gains
an efficient market allocates consumption of a good to potential buyers who
value it the most/are willing to pay the most
an efficient market allocates sales to potential sellers who
have the lowest cost
an efficient market ensures every consumer that buys a good values it
more than every seller who sells it
an efficient market ensures every potential consumer who does not buy a good values it
less than every potential seller who does not make a sale
rights of owners of valuable items to dispose of them as they choose
property rights
any piece of information that helps people make better economic decisions
economic signal
when some people could be made better without making other people worse off
inefficient
when a market fails to be efficient
market failure
type of market failure, when one firm can change the market price
market power
type of market failure, when actions have side effects on the welfare of others
externalities
type of market failure, when there are incomplete property rights
public goods and common resources
type of market failure, when there is wasted valuable human capital
discrimination
caveats to markets being efficient
- may not be fair/equitable
- only efficient under certain conditions (property rights, economic signals)
- not every individual is happy
side effects of actions that impose costs on or provide benefits for others but don’t have an economic incentive to take those costs or benefits into account
externalities
additional cost imposed on society as a whole by an additional unit of an externality
marginal social cost
additional gain to society as a whole by an additional unit of an externality
marginal social benefit
quantity of an externality that society would choose if all the costs and benefits were fully accounted for
socially optimal quantity
uncompensated cost that an individual or firm imposes on others
negative externality
benefit that an individual or firm confers on others without receiving compensation
positive externality
payment designed to encourage activities that yield external benefits
subsidy
external benefit that results when knowledge spreads among individuals and firms
technology spillover
good that supplier can prevent people who do not pay from consuming
excludable
when a unit of a good cannot be consumed by more than one person at the same time
rival in consumption
good that a supplier cannot prevent who do not pay from consuming it
nonexcludable
when more than one person can consume the same unit of a good at the same time
nonrival in consumption
excludable and rival in consumption
private good
nonexcludable and nonrival in consumption
public good
nonexcludable and rival in consumption
common resources
excludable and nonrival in consumption
artificially scarce good
with nonexcludable goods, many individuals are unwilling to pay for their own consumption and instead will use the good other people pay for
free-rider problem
with common resources, individual uses a good until their marginal benefit is equal to their marginal cost, ignoring that this depletes the amount of resources remaining for others
overuse
social cost of a negative externality
private cost plus external cost
social benefit of a positive externality
private benefit plus external benefit
a good continues to be produced until the marginal benefit of the last unit is
equal to the marginal cost
what effect is caused by the free-rider problem
inefficiently low or high production
type of market failure, when buyers and sellers do not have all the same information
private information
when there is a set of rules and everyone follows the rules
fairness
when not everyone has the same information
asymetrical information
demonstrates what is happening with the internal costs/benefits
private curve
legal restrictions on how high or low a market price may go
price controls
maximum price sellers are allowed to charge for a good
price ceiling
minimum price buyers are required to pay for a good
price floor
what times do price controls usually happen
times of crisis
inefficiency of price ceiling, some people that want the good badly are are willing to pay a high price don’t get it, someone who cares little and is willing to pay a low price gets it
inefficient allocation to consumers
inefficiency of price ceiling, people expend money, effort, and time to cope with shortages
wasted resources
inefficiency of price ceiling, sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price
inefficiently low quality
inefficiency of price ceiling, market in which goods or services are bought and sold illegally
black market
legal floor on the wage rate, market price of labor
minimum wage
price floor that benefits low income farmers who are subject to heavy fluctuation of demand/supply
agriculture price supports
inefficiency of price floor, quantity transacted is below the efficient level because the demand goes down and sellers cannot sell more goods than consumers are willing to buy
inefficiently low quantity
inefficiency of price floor, sellers who are willing to sell at the lowest price do not make the sale, sellers who are willing to sell at a higher price do make the sale
inefficient allocation of sales among sellers
inefficiency of price floor, unwanted surpluses are created and must be dealt with
wasted resources
inefficiency of price floor, when sellers offer high quality goods at a high price even though buyers would prefer a lower quality at a lower price
inefficiently high quality
for a price ceiling, the quantity exchanged is the quantity
supplied
for a price floor, the quantity exchanged is the quantity
demanded
price ceiling in the rental housing market
rent control
how responsive consumers are to a change in price, ratio of percent change in the quantity demanded to the percent change in the price
price elasticity of demand
when the price elasticity of demand is high, consumers are
very responsive to a change in price
when the price elasticity of demand is low, consumers are
less responsive to a change in price
when quantity demanded does not respond at all to changes in the price
perfectly inelastic demand
what kind of line and number is perfectly inelastic demand
vertical line, 0
when any price increase will cause the quantity demanded to drop to zero
perfectly elastic demand
what kind of line and number is perfectly elastic demand
horizontal line, infinity
what number is elastic
greater than 1
what number is inelastic
less than 1
what number is unit-elastic
equal to 1
total value of sales of a good, equal to price times quantity sold
total revenue
after a price increase, each unit sold sells at a higher price
price effect
after a price increase, fewer units are sold
quantity effect
in inelastic the quantity effect is
less than the price effect
in elastic the quantity effect is
greater than the price effect
with inelastic, when the price goes down the total revenue
goes down
with elastic, when the price goes down the total revenue
goes up
effect of the change in one good’s price on the quantity demanded of the other good
cross-price elasticity of demand
how to find cross-price elasticity of demand
% change in quantity of A demanded/ % change in price of B
in cross-price elasticity of demand, weak complements have a coefficient of
slightly less than zero
in cross-price elasticity of demand, strong complements have a coefficient that is
very negative
in cross-price elasticity of demand, close substitutes have a coefficient that is
positive
percent change in quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income
income elasticity of demand
how to find income elasticity of demand
% change in quantity demanded/ % change in income
in income elasticity of demand, when the coefficient is positive the good is
normal
in income elasticity of demand, when the coefficient is negative the good is
inferior
measure of the responsiveness of the quantity of a good supplied to the price of that good, ratio of the percent change in the quantity supplied to the percent change of the price
price elasticity of supply
when the price of a good has no effect on the quantity supplied
perfectly inelastic supply
what kind of line and number is perfectly inelastic supply
vertical line, 0
when a small increase or reduction in price will lead to a very large change in quantity supplied
perfectly elastic supply
what kind of line and number is perfectly elastic supply
horizontal line, infinity
factors that determine price elasticity of supply
availability of inputs, time
what does the quantity effect cause
total revenue to move in the same direction as quantity, elastic
what does the price effect cause
total revenue to move in the same direction as price, inelastic
at a high price a small change in price will result in
more responsiveness
at a low price a small change in price will result in
less responsiveness
necessities without no close substitutes are
inelastic
luxuries that are easy to do without are
elastic
if there are few alternatives to a good it is
inelastic
if there are a lot of close substitutes/alternatives to a good it is
elastic
if there is a more specific description of a good it is
elastic
if there is a less specific description of a good it is
inelastic
if more income is spent on a good it is
elastic
if less income is spent on a good it is
inelastic
if there has been more time since a price changed the good is
elastic
if there has been less time since a price changed the good is
inelastic
in income elasticity of demand, if the coefficient is more than one the good is
income elastic
in income elasticity of demand, if the coefficient is less than one the good is
income inelastic
