midterm 2 Flashcards
Demand
the amount of some good or service consumers are willing and able to purchase at each price
Price
what a buy pays for a unit of the specific good or service
Quantity demanded
the total number of units of a good or service consumers are willing to purchase given a price
Law of demand
keeping all variables that affect demand constant
Demand schedule
a table that shows a range of prices for a certain good or service and the quantity demanded at each
Demand curve
a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis
Supply
the amount of some good or service a producer is willing to supply at each price
Quantity supplied
the total number of units of a good or service producers are willing to sell at a given price
Law of supply
assuming all other variables that affect supply are held constant
Supply schedule
a table that shows the quantity supplied at a range of different prices
Supply curve
a graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis.
Equilibrium
the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change
quantity demanded = quantity supplied
Equilibrium price
the price where quantity demanded is equal to quantity supplied
Equilibrium quantity
the quantity at which quantity demanded and quantity supplied are equal for a certain price level.
Surplus or excess supply
at the existing price, quantity supplied exceeds the quantity demanded.
Shortage or excess demand
at the existing price, the quantity demanded exceeds the quantity supplied.
Ceteris paribus
Latin phrase meaning “other things being equal
-Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal.
Normal good
A product whose demand rises when income rises, and vice versa
Inferior good
A product whose demand falls when income rises, rises, and vice versa
Substitute
a good or service that we can use in place of another good or service.
Complements
goods or services that are often used together so that consumption of one good tends to enhance the consumption of the other
Shift in supply
when a change in some economic factor (other than price) causes a different quantity to be supplied at every price.
Inputs or factors of production
the combination of labor, materials, and machinery that is used to produce goods and services
Factors that affect supply:
- Natural conditions
- Input prices
- Technology
- Government policies
Price controls
laws that governments enact to regulate prices.
Price ceiling
- keeps a price from rising above a certain level
- a legal maximum price that one pays for some good or service
Price controls
laws that governments enact to regulate prices
Price ceiling
- keeps a price from rising above a certain level
- a legal maximum price that one pays for some good or service
Price floor
- keeps a price from falling below a given level.
- is the lowest price that one can legally pay for some good or service
Consumer surplus
- the amount that individuals would have been willing to pay minus the amount that they actually paid.
- the area above the market price and below the demand curve
Producer surplus
- the price the producer actually received minus the price the producer would have been willing to accept.
- the area between the market price and the segment of the supply curve below the equilibrium.
Social surplus/economic surplus/total surplus =
consumer surplus + producer surplus
Deadweight loss (DWL)
the loss in social surplus that occurs when a market produces an inefficient quantity
Elasticity
Economic concept that measures the responsiveness of one variable to changes in another variable
Price elasticity
the ratio between the percentage change in quantity demanded (Qd) or supplied (Qs) and the corresponding percent change in price
Price elasticity of demand
percentage in the quantity demanded of a good or service divided by the percentage
Price elasticity of supply
the percentage change in quantity supplied divided by the percentage change in price
Inelastic demand or inelastic supply
elasticities that are less than one, indicating low responsiveness to price changes.
Unitary elasticities
indicate proportional responsiveness of either demand or supply
Unit elastic
occurs when the supply and demand of a product changes proportionally to change in price
Infinite elasticity or perfect elasticity
- either the quantity demanded (Qd) or supplied (Qs) changes by an infinite amount in response to any change in price at all.
- the supply and demand curve are horizontal
- the quantity supplied or demanded is extremely responsive to price change
Zero elasticity or perfect inelasticity
- a percentage change in price, no matter how large, results in zero change in quantity.
-the vertical supply curve and vertical;e demand curve show that there will be zero percentage change in quantity supplied or demanded
Ed = 0. Perfectly inelastic
When the elasticity is equal to zero, the demand is perfectly inelastic and is a vertical line. In the very short run, people will have no substitutes if they run out of gas and would have to buy gas even if the price is doubled or tripled. There is no close substitute to the good. Slope of a vertical demand curve is infinity.
Ed<1. Inelastic
When the elasticity of demand is less than 1, the demand is inelastic and the demand curve is steep. There are very few substitutes for the goods such as necessities. Examples are food and clothing. Note that tobacco, alcohol and gambling are also inelastic. Why? Because these goods are highly addictive, a change in price will lead to a small change in quantity demanded.
Ed = 1. Unit elastic
When the elasticity of demand equals 1, the demand is unit elastic. Price and quantity demanded change by the same percentage. That is a 10% increase in the price will yield a 10% decrease in quantity demanded.
Ed>1. Elastic
When the elasticity of demand is greater than 1, the demand is elastic and the demand curve is flat. There are many substitutes for the goods such as luxuries. Examples are appliances, electronics and furniture.
Ed = infinity. Perfectly elastic
When the elasticity is equal to infinity, the demand is perfectly elastic and is a horizontal line. In this case, we have perfect substitutes. Let’s say if domestic and foreign cars are perfect substitutes, then an increase in the price of domestic cars will lead the buyers to switch to their perfect substitutes, foreign cars. Slope of a horizontal demand curve is zero.
If TR changes in the opposite direction from price
demand is elastic
If TR changes in the same direction from price
demand is inelastic
If TR does not change when price changes
demand is unit elastic
Tax incidence
manner in which the tax burden is divided between buyers and sellers
If demand is more inelastic than supply
consumers bear most of the tax burden
If supply is more inelastic than demand
sellers bear most of the tax burden.
Income elasticity of demand (Ei)
% change in quantity demanded/
% change in income
Cross-price elasticity of demand (Eab
the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price good B.
Private benefits
the benefits a person who consumes a good or service receives, or a new product’s benefits or process that a company invents that the company captures.
Social benefits
the value of all the positive externalities of the new idea or product (whether enjoyed by other companies or society as a whole), as well as the private benefits the firm that developed the new technology receives.
= private benefits + external benefits
Positive externalities or benefits
beneficial spillovers to a third party or parties
Private rates of return
the estimated rates of return go primarily to an individual.
The social rate of return on schooling is also positive
- better health outcomes for the population
- lower levels of crime
- a cleaner environment
- a more stable, democratic government
Social rate of return
when the estimated rates of return go primarily to society.
The appropriate public policy response to a positive externality, like a new technology
is to help the party creating the positive externality receive a greater share of the social benefits
Intellectual property rights: the body of law including patents, trademarks, copyrights, and trade secret law that protect the right of inventors to produce and sell their inventions.
- Patents - give the inventor the exclusive legal right to make, use, or sell the invention for a limited time.
- Copyright laws - give the author an exclusive legal right over works of literature, music, film/video, and pictures.
Increase in consumer surplus
lower price and consume more
Increase in producer surplus
higher price and produce more
Different government policies can increase the incentives to innovate:
- guaranteeing intellectual property rights
- government assistance with the costs of research and development (R&D)
- cooperative research ventures between universities and companies.
Non-exludable
it is costly or impossible to exclude someone from using the good, and thus hard to charge for it.
Government spending can provide direct financial support for R&D conducted at:
- colleges and universities
- nonprofit research entities
- sometimes by private firms
- government-run laboratories
Public good
good that is nonexcludable and non-rival, and is difficult for market producers to sell to individual consumers.
Non-rival
even when one person uses the public good, another can also use it. Examples: fire and police service and national defense
Quasi- public good
good that have characteristics of both private and public goods including partial excludability and partial rivalry. For example, football game on TSN is a quasi-public good but a game on CBC is a public good
Free rider
-those who want others to pay for the public good and then plan to use the good themselves.
-If many people act as free riders, the public good may never be provided.
Social pressures and personal appeals
can also reduce the number of free riders and to collect resources for the public good
Negative externality
a situation where a third party, outside the transaction, suffers from a market transaction by others
Positive externality
a situation where a third party, outside the transaction, benefits from a market transaction by others.
Additional external costs
additional costs incurred by third parties outside the production process when a unit of output is produced
social costs
costs that include both the private costs incurred by firms and also additional costs incurred by third parties outside the production process
Pollution
is a negative externality
Market failure
when the market, on its own, does not allocate resources efficiently in a way that balances social costs and benefits; externalities are one example of a market failure
Command-and-control regulation
- laws that specify allowable quantities of pollution and that also may detail which pollution-control technologies one must use.
-Requires that firms increase their costs by installing anti-pollution equipment.
Pollution charge
- tax imposed on the quantity of pollution that a firm emits.
- Gives a profit-maximizing firm an incentive to determine the least expensive technologies for reducing pollution.
- Firms that can reduce pollution cheaply and easily will do so to minimize their pollution taxes.
Marketable permit program (e.g., cap-and-trade)
-A permit that allows a firm to emit a certain amount of pollution.
-Firms with more permits than pollution can sell the remaining permits to other firms
Property rights
the legal rights of ownership on which others are not allowed to infringe without paying compensation.
Benefits of a cleaner environment:
(1) people may stay healthier and live longer;
(2) certain industries that rely on clean air and water, such as farming, fishing, and tourism, may benefit;
(3) property values may be higher;
(4) people may simply enjoy a cleaner environment in a way that does not need to involve a market transaction.
The Coase Theorem
the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own
Reducing pollution
-Is costly resources must be sacrificed
-The marginal costs of reducing pollution are generally increasing,
-The marginal benefits of reducing pollution are generally declining,
Game theory
a branch of mathematics that analyzes situations in which players must make decisions and then receive payoffs based on what other players decide to do
Prisoner’s dilemma
a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest
Dominant strategy
a strategy that is best for a player in a game regardless of the strategies chosen by the other players.
Biodiversity
the full spectrum of animal and plant genetic material
International externalities
externalities that cross national borders and that a single nation acting alone cannot resolve
