review stuff, midterm 1 Flashcards
The size of a firm’s fixed cost of production does not affect the choice ________ but can alter the
choice ________.
. to shut down in the short run; to exit the industry.
opportunity cost
what you give up to get an item.
opportunity cost
what you give up to get an item.
- always compared to the next best, mutually exclusive alternative.
- don’t include costs that would’ve still been incurred
Reflected in the slope of the PPF.
=units of y sacrificed for 1 or more unit of x
Positive Questions/ claims
Descriptive.
Asks or claims how the world functions.
Can be answered by examining facts.
how the world is
Normative questions/ claims
Prescriptive.
how/ what the world ought to be.
answer depends on value judgements.
PPF:
- Feasible
- Efficient
- Specialized
- Feasible: able to produce that combination with current resources and technology.
- Efficient:
- Specialized:
PPF:
- Feasible
- Efficient
- Specialized
- Feasible: able to produce that combination with current resources and technology. on or inside ppf
- Efficient: can’t produce more of one good without producing less of another. on the ppf
- Specialized: producing only one good . on an axis
Specialization
International Trade
Caveats:
-Utility: Opp. cost is reduced if you enjoy the process
-Productivity: Opp. cost rises as you do more
-Security: comp. advantage may change
Demand will increase when:
population. .
consumers. .
substitute. .
complement. .
income. .
future. .
population increases.
consumers tastes change favorably.
substitutes increase in price. -goods that can replace one another
complement decrease in price. - goods that are more useful when used together.
income increases (for normal goods) inferior good exception.
buyers expect that the goods price will be higher in the future.
inferior good
when income falls, demand rises.
when income increases, buyers purchase less of this.
Supply increases when: sellers.. production technology.. price of input.. sellers expect in future.. substitute in production.. complement in production..
more sellers enter the market.
production technology improves.
price of input decreases.
sellers expect the good’s price to fall in future.
substitute in production decreases in price. - goods that compete for the same inputs.
complement in production increases in price. - goods that are produced simultaneously for the same inputs.
Shortage (or excess.. )
excess demand. at a given price, qty demand is greater than qty supplied.
Surplus (or exces..)
Excess supply.
at a given price, qty supplied is greater than qty demanded.
income elasticity of D
% change in Q / % change in income
cross-price elasticity of D
% change in Q of good 1 / % change in P of good 2
Demand elasticity
- Perfectly inelastic E=
- Perfectly elastic E=
- unit elastic E =
PI E = 0, vertical line
PE E = -infinity, horizontal line.
cant change price.
UE E = -1
Supply Elasticity
- Perfectly inelastic E=
- Perfectly elastic E=
- unit elastic E =
PI E = 0, vertical line
PE E = infinity, horizontal line.
cant change price.
UE E = 1
Inferior goods
normal goods
luxury goods
Inferior goods: E<0
normal goods: 01
Change in qty demanded vs change in demand
- Change in qty demanded: price change, (movement along)
- change in demand: shifts
Using elasticity to decide if complement, substitute, or unrelated.
complement: e = -#
substitute: e = +#
unrelated: e = 0
Good has more elastic demand when..
Close substitutes are available. Good is a luxury. Defined market is rather narrow. Measured over a larger period of time. A large fraction of income is spent on that good.
Good has more elastic supply when..
Inputs can be used in many goods.
Supply is measured over a long period of time.
market is narrowly defined.
Why tax something more inelastic?
less DWL
Marginal Cost
the value of everything sacrificed to produce one more unit of the good.
generally expect marginal costs to rise.
Total Welfare
CS + PS
Price ceiling
can’t go above.
binding when below equilibrium
not binding when above.
Price ceiling immediate effects.
- Harms sellers (reduces PS)
- helps some buyers, harms other who can no longer buy. (could raise or lower CS)
- Lowers total welfare.
Price ceiling long term consequences.
- Persistent shortages - rationing coupons, waiting in line
- Black markets: charged higher than equilibrium price because of the risk to seller.
Price Floor
can’t go below.
binding when above equilibrium
not binding when below.
Price floor immediate effects.
- Harms buyers (reduces CS)
- Helps some sellers, harms others who can no longer sell. (could raise of lower PS)
- Lowers total welfare
Price floor long term consequences
- Persistent surplus. must be disposed of so..
- “lower the price” giving backdoor discount
- convert it into unrelated good
- gov’t commits to buy any leftovers
- gov’t limits its production.
-Over investment in the industry. high profits for those who successfully sell
Tax Incidence
depends on elasticity.
- More elastic demand causes less incidence on the buyer.
- More elastic supply causes less incidence on the seller.
elasticity in Demand curve and tax burden
PI: paid entirely by the buyer
More inelastic: tax is paid more by buyers.
More elastic: tax is paid by sellers.
What does tax due to DWL
taxes reduce the amount sold, so it always creates some DWL.
more elastic demand or supply created greater DWL.
If you want more revenue tax the ______ good; if you want less DWL, tax the _____ good.
If you want more revenue tax the inelastic good; if you want less DWL, tax the inelastic good.
Economic Profit
Total Revenue - total Opp cost
