unit 2 Flashcards
what is a competitive market
there are many buyers and sellers of the same good/service but none can influence the price at which it is sold
supply/demand model
model of how a competitive market works
what is the law of demand
the higher the price for a good/service, the smaller the quantity demanded is for that good
what is a change in demand
shift of the demand curve, which changes the quantity demanded at any given price
what is the difference between quantity demanded and demand
demand refers to the entire curve (non price factor will change this), quantity demanded is a specific point on the curve (quantity associated w specific price)
what are 5 factors that will shift the demand curve
- change in taste
- change in price of related goods/services
- change in income
- change in number of consumers
- change in expectations
what are substitutes
when the rise in price of one good results to an increase of demand for another good
what are complements
rise in price of one good leads to the decrease in the demand for another good
what is a normal good
when a rise in income increases the demand for a good
what is an inferior good
rise in income means a decrease in demand
what is the law of supply
the price and quantity supplied of a good are positively related
what is quantity supplied
actual amount of a good or service people are willing to sell at a certain point
what are the 5 factors that will shift the supply curve
- input prices
- price of related goods/services
- producer expectations
- number of producers
- technology
what is an input
good or service that is used to produce another good or service
what is a surplus
when the quantity supplied is greater then the quantity demanded (when the price is above equilibrium)
what is a shortage
when the quantity demanded is greater then the quantity supplied (price is below equilibrium)
what are price controls
legal restrictions on how high or low a market price may go
price ceiling
max price sellers are allowed to charge for
price floor
minimum rice buyers are required to pay for a good or service
binding price ceiling
will cause a shortage
inefficiency in the form of wasted resources and low quality
binding price floor
will cause a surplus
inefficiency in the form of allocation of sales among sellers and low quantity
what is a black market
which goods or services are bought and sold illegally
what is a quota
an upper limit on the quantity of some good that can be bought or sold
what is a license
gives its owner the right to supply a good or service
what is a wedge
the price paid by buyers is higher then what is received by sellers
what is the quota rent
difference between demand and supply price at quota amount (earnings that is given to the license holder from ownership of the right to sell the good)
what is deadweight loss
the value of forgone mutually beneficial transactions
what is the substitution effect
the change in price of a good is the change in quantity demanded of another good (consumer substitutes the good that has become relatively cheaper for the good that is relatively more expensive)
what is the income effect
change in price of a good is the change in quantity demanded that results from a change in the consumers purchasing power when the price of a good changes
what is price elasticity of demand
the ratio of % change in quantity demanded to % change in price
what is the midpoint method
(change in quantity/average)/(change in price/average)
when is demand perfectly inelastic
quantity demanded doesn’t respond to any change in price
when is demand perfectly elastic
any price increase will cause the quantity demanded to drop to zero
what happens if price elasticity of demand is greater then 1
demand is elastic
what happens if price elasticity of demand is less then 1
demand is inelastic
what happens if price elasticity of demand is exactly 1
unit-elastic
what is total revenue
the total value of sales of a good or service – price x quantity sold
what is a price effect
after a price increases, each unit sold sells at a higher price which tends to raise revenuew
what is a quantity effect
after a price increase, fewer units are sold which tends to lower revenue
effect of elasticity on total revenue: unit elastic
fall in price has no effect on total revenue
effect of elasticity on total revenue: inelastic
price effect dominates quantity effect – fall in price reduces total revenue
effect of elasticity on total revenue: elastic
quantity effect dominates price effect – fall in price increases the total revenue
what factors affect price elasticity of demand
- availability of close substitutes
- proportion of income
- luxury vs necessity
- addictive or habit
- time
what is the cross price elasticity of demand
measures the effect of the change in one goods price on the quantity demanded of another good
how to calculate cross price elasticity of demand
%change in quantity of good A demanded / % change in price of good B
if two goods are substitutes, CPED is:
positive (a rise in price of one increases demand for other)
if two goods are complements, CPED is:
negative (rise in price of one good decreases demand for other)
what is the income elasticity of demand
% change in quantity of good demanded / % change in income
if income elasticity is greater then 1, it is
income elastic
if income elasticity is less then 1, it is
income inelastic
what is the price elasticity of supply
% change in quantity supplied / % change in price
if PES is zero
perfectly inelastic supply (change in price has no effect on quantity supplied)
what factors affect PES
- availability of inputs
- time
total consumer surplus
sum of all individual consumer surpluses
what is a sellers cost
the lowest price someone is willing to sell the good
what is total surplus
total net gain to consumers and producers from trading in a market (sum of CS and PS)
regressive tax
rises less than in proportion to income
(high income taxpayers pay a smaller amount of their income then low income taxpayers)
proportional tax
all taxpayers pay the same percentage of their income
progressive tax
high income taxpayers pay larger percentage of their income compared to low income taxpayers
excise tax
tax on sales of a good or service
tax incidence
distribution of tax burden
lump sum tax
tax of a fixed amount payed by all taxpayers (eg: poll tax)
administrative costs
are the resources used by the government to collect the tax
protectionism
practice of limiting trade to protect domestic industries
tarrifs
taxes on imports
import quota
limit on the quantity of a good that can be imported within a given period
