Midterm 1 Flashcards
Factors of production
Land, labor, capital (human and physical)
Law of demand
Higher price = lower quantity demanded
Demand curve sloping downward
Movement vs shift
Movement: going from one point in graph to another
Shift: change in quantity demanded/supplied as a result of a price change
3 principles of economics
Individual choices when resources are scarce
Opportunity cost
Decision at the margin
What causes shifts?
Change in…
Input price, price of related goods, technology, expectations, number of producers
Changed in equilibrium
When both supply and demand curves shift
Income effect
Change in quantity demanded as a result from change in consumer’s income
Substitution effect
Change in quantity demanded as a result of change in relative price of good
Inferior good
A good for which demand increases when income falls
Elasticity
Percent change in quantity demanded divided by percent change in price
Perfectly elastic demand
Very responsive to price change
Perfectly inelastic demand
Not very responsive to price change
As slope of demand curve gets larger…
It becomes more inelastic
Willingness to Pay
Max price at which consumer is going to buy the good
Reallocating among buyers
Lowers consumer surplus
Reallocating among sellers
Lowers producer surplus
Price ceiling
Maximum price
Inefficient allocation to consumers, waster resources, inefficiently low quality, black markets
Price floor
Minimum price
Inefficient allocation of sales among sellers, wasted resources, inefficiently high quality, illegal activity
Quantity controls or quotas
Limit number of sales at fixed quantity
Deadweight loss (lost if inefficiency)
Incidence of tax
How burden of tax is divided between consumers and producers
Benefits principle
People who benefit should pay taxes
I.e. Gas tax
