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Econ 102 > Midterm 2 > Flashcards

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
Q

If minimum wage is above the equilibrium level

A

Labor supplied > labor demanded = unemployment

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26
Q

Tax incidence

A

The manner in which the burden of a tax is shared among participants in a market

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27
Q

Where does the tax burden fall more heavily?

A

On the side of the market that is less elastic

28
Q

Welfare economics

A

The study of how the allocation of resources affects economic well being

29
Q

Willingness to pay

A

The maximum amount that a buyer will pay for a good

30
Q

Consumer surplus

A

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
Q

Marginal buyer

A

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
Q

Cost

A

The value of everything a seller must give up to produce a good

33
Q

Producer surplus

A

The amount a seller is paid for a good minus the sellers cost of providing it

34
Q

Marginal seller

A

The seller who would leave the market first if the price were any higher

35
Q

Total surplus

A

The sum of consumer and producer surplus

Value to buyers - cost to sellers

36
Q

Efficiency

A

The property of a resource allocation of maximizing the total surplus received by all members of society

37
Q

Equality

A

The property of distributing economic prosperity uniformly among the members of society

38
Q

Result of tax on buyers

A

Decreases demand

39
Q

Result of tax on suppliers

A

Increases supply

40
Q

Total tax revenue

A

T x Q

41
Q

Deadweight loss

A

The fall in total surplus that results from a market distortion, such as a tax

42
Q

Determinants of deadweight loss

A

The price elasticities of supply and demand

- larger when more elastic

43
Q

How to calculate deadweight loss

A

.

44
Q

World price

A

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
Q

Under free trade, domestic price equals

A

World price

46
Q

When a country becomes An exporter of a good

A

Domestic producers are better off and domestic consumers are worse off

47
Q

How does trade raise the economic well being of a nation

A

Gains of winners exceed the losses of the losers

48
Q

When a country becomes an importer of a good

A

Domestic consumers are better off and domestic producers are worse off

49
Q

Tariff

A

A tax on imported goods

50
Q

What does a tariff do

A

Reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade

51
Q

How to determine the total welfare effects of a tariff

A

Add change in consumer surplus (negative) to the change in producer surplus and change in government revenue

52
Q

Benefits of international trade

A

Increased variety of goods
Lower cost through economies of scale
Increased competition
Enhanced flow of ideas

53
Q

Arguments against trade

A 
The jobs argument 
National security argument
Infant-industry argument
Unfair competition
Protection as a bargaining chip
54
Q

Externality

A

The uncompensated impact of one persons actions on the well being of a bystander

55
Q

Negative externality

A

When the effect on a bystander is bad

56
Q

Positive externality

A

When the effect of the bystander is beneficial or good

57
Q

Negative externality graph

A

Social cost curve

Private value curve

58
Q

Positive externality graph

A

Social value curve

Private value curve

59
Q

Command and control policy or regulation

A

Remedies an externality by legally limiting a specific behavior

60
Q

Trade able permit system

A

Remedies an externality by giving out permits to pollute and allowing firms to trade amongst themselves

61
Q

Corrective subsidy

A

Subsidize firms with emissions reducing technology

62
Q

Corrective tax

A

A tax equal to the negative external cost

  • preferred over regulation
  • efficient kind of taxes
63
Q

Internalizing the externality

A

Altering incentives so that people take account of the external effects of their actions

64
Q

Coase theorem

A

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
Q

Why do private solutions not always work?

A

Transaction costs

66
Q

Transaction costs

A

The cost that parties incur in the process of agreeing to and following through on a bargain

67
Q

Elasticity

A

A measure of responsiveness of quantity demanded or quantity supplied to change in one of its determinants

Econ 102 (3 decks)

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