Midterm 2 Flashcards

1
Q

Price elasticity of demand

A

A measure of how much the quantity demanded of a good responds to change in price.
- demand is elastic is it responds substantially
- it’s not elastic if it only responds slightly.
= %change in Qd/% change in price

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2
Q

Determinants of elasticity

A
  1. Availability of close substitutes (more elastic)
  2. Necessities (in elastic) vs. Luxuries (elastic)
  3. Definition of the market (narrow-more elastic. Broad-less elastic)
  4. Time horizon (longer time horizon- more elastic)
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3
Q

Midpoint method

A

(Q2-Q1)/[(Q2-Q1/2] over (P2-P1)/[(P2+P1)/2

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4
Q

Elastic

A

Greater than one

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5
Q

Unit elasticity

A

If elasticity is exactly 1

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6
Q

Flatter the demand curve

A

Greater the price elasticity

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7
Q

Steeper the demand curve

A

Smaller the elasticity

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8
Q

Perfect in elastic

A

Demand curve is vertical and equals 0

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9
Q

Perfect elastic

A

Demand curve is horizontal and equals infinity

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10
Q

Total revenue

A

The amount paid by buyers and received by sellers of a good, computer as the price of the good times the quantity sold
PxQ

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11
Q

How Inelastic demand effects total revenue

A

Raises price, raises total revenue

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12
Q

How elastic demand affects total revenue

A

Raises price, lowers total revenue

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13
Q

Income elasticity of demand

A

A measure of how much the quantity demanded of a good responds to a change in consumers income

= % change in Qd / % change in income

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14
Q

Normal and inferior goods (income elasticity of demand)

A

Normal goods = positive
Inferior goods = negative
Luxury goods = large

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15
Q

Cross price elasticity demand

A

A measure of how much the Qd of one good responds to a change in price of another good

= % change in Qd of good 1 / % change in price of good 2

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16
Q

Positive or negative cross price elasticity

A

Positive if the two goods are substitutes

Negative if the two goods are complements

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17
Q

Price elasticity of supply

A

A measure of how much the quantity supplied of a good responds to the change in the price of that good

% Change in Qs/% change in price

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18
Q

Determinants of price elasticity of supply

A

The time period being considered (more elastic in the long run)

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19
Q

Price ceiling

A

A legal maximum on the price at which a good can be sold

Ex: rent control

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20
Q

Price floor

A

A legal minimum on the price at which a good can be sold

Ex: miminum wage

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21
Q

Not binding ceiling

A

If equilibrium is below ceiling, it has no effect on the price or quantity sold

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22
Q

Binding ceiling

A

If equilibrium is above ceiling, it can never reach ceiling, so the market price must equal the ceiling and a shortage will result

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23
Q

Not binding price floor

A

Equilibrium is above the floor, so it has no effect

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24
Q

Binding price floor

A

Equilibrium is below the floor so market price can never get there. Causes a surplus.

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25
If minimum wage is above the equilibrium level
Labor supplied > labor demanded = unemployment
26
Tax incidence
The manner in which the burden of a tax is shared among participants in a market
27
Where does the tax burden fall more heavily?
On the side of the market that is less elastic
28
Welfare economics
The study of how the allocation of resources affects economic well being
29
Willingness to pay
The maximum amount that a buyer will pay for a good
30
Consumer surplus
The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it - the area below the demand curve and above the price
31
Marginal buyer
The buyer who would leave the market first if the price were any higher - demand curve shows the willingness to pay of the marginal buyer
32
Cost
The value of everything a seller must give up to produce a good
33
Producer surplus
The amount a seller is paid for a good minus the sellers cost of providing it
34
Marginal seller
The seller who would leave the market first if the price were any higher
35
Total surplus
The sum of consumer and producer surplus | Value to buyers - cost to sellers
36
Efficiency
The property of a resource allocation of maximizing the total surplus received by all members of society
37
Equality
The property of distributing economic prosperity uniformly among the members of society
38
Result of tax on buyers
Decreases demand
39
Result of tax on suppliers
Increases supply
40
Total tax revenue
T x Q
41
Deadweight loss
The fall in total surplus that results from a market distortion, such as a tax
42
Determinants of deadweight loss
The price elasticities of supply and demand | - larger when more elastic
43
How to calculate deadweight loss
.
44
World price
The price of a good that prevails in the world market for that good. - used to determine whether a country will import or export
45
Under free trade, domestic price equals
World price
46
When a country becomes An exporter of a good
Domestic producers are better off and domestic consumers are worse off
47
How does trade raise the economic well being of a nation
Gains of winners exceed the losses of the losers
48
When a country becomes an importer of a good
Domestic consumers are better off and domestic producers are worse off
49
Tariff
A tax on imported goods
50
What does a tariff do
Reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade
51
How to determine the total welfare effects of a tariff
Add change in consumer surplus (negative) to the change in producer surplus and change in government revenue
52
Benefits of international trade
Increased variety of goods Lower cost through economies of scale Increased competition Enhanced flow of ideas
53
Arguments against trade
``` The jobs argument National security argument Infant-industry argument Unfair competition Protection as a bargaining chip ```
54
Externality
The uncompensated impact of one persons actions on the well being of a bystander
55
Negative externality
When the effect on a bystander is bad
56
Positive externality
When the effect of the bystander is beneficial or good
57
Negative externality graph
Social cost curve | Private value curve
58
Positive externality graph
Social value curve | Private value curve
59
Command and control policy or regulation
Remedies an externality by legally limiting a specific behavior
60
Trade able permit system
Remedies an externality by giving out permits to pollute and allowing firms to trade amongst themselves
61
Corrective subsidy
Subsidize firms with emissions reducing technology
62
Corrective tax
A tax equal to the negative external cost - preferred over regulation - efficient kind of taxes
63
Internalizing the externality
Altering incentives so that people take account of the external effects of their actions
64
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.
65
Why do private solutions not always work?
Transaction costs
66
Transaction costs
The cost that parties incur in the process of agreeing to and following through on a bargain
67
Elasticity
A measure of responsiveness of quantity demanded or quantity supplied to change in one of its determinants