Test 1 Flashcards
Define cross price elasticity of demand
The cross price elasticity is the effect that a change in the price of one product has on the quantity demanded of another product
Cross price elasticity formula
%change in Qd (prod. B) / %change in Price (prod. A)
Change in Q/Change in P x p/q
If the cross price elasticity is positive, the products are considered
Substitutes
What is absolute advantage
Who (which country/person) can produce more of a given good when allocating all of their resources to it.
What is comparative advantage
Who can produce the food more efficiently, by giving up less. The person with the lower opportunity cost to produce a good has the comparative advantage
Why is identifying substitutes central to defining a market?
The way a market is defined depends on how substitutes are defined. For instance, if we define the market as “food”, then there are not really any substitutes. However, if we are more specific and define the market as “ice cream,” then other desserts could be substitutes, impacting this market.
Substitutes are essential, because a change in the price of one good shifts the whole demand curve of the market of the substitute good.
Define opportunity cost
What you give up when you make a decision. This includes cost, time, and the other choices you had to decide between (what you could have spent your time doing)
Define producer surplus
The amount of benefit the seller receives from selling their items, defined as the price minus cost of production. Graphically, it is the area above the supply curve below the price.
Define a quota on production
A limit on how much suppliers can produce/sell, usually set by the government. Graphically, it is a continuation of the supply curve that is virtual at the set quantity.
Define equilibrium price of a market
Under normal conditions, this is the price that goods will be sold at. It is where the supply and demand curves meet, which means that all goods produced by suppliers will be sold to consumers at this price, without any shortages or surpluses.
3 sources of comparative advantage
A higher level of technology relative to other nations in producing a particular good
A favorable natural resource and/or climate
A relative abundance of labor and capital
Deadweight loss refers to
Net losses in total surplus
