Unit Two Review Flashcards
A price control is ________.
A legal restriction on how high or low a price in a market may go
A tax on the sellers of a good will ____________.
raise the price buyers pay and lower the effective price sellers receive
An excise tax imposed on sellers in a market will result in which of the following?
An upward shift (to the left) of the supply curve: Because of increase cost of production for the sellers, the supply curve shifts upward and to the left by the amount of tax reflecting the higher prices that sellers are now required to cover.
How does deadweight loss occur?
Deadweight loss occurs when the quantity traded in the market is less than the quantity that would be exchanged in the absence of the tax.
How do you calculate total revenue?
TR (Total Revenue) = Quantity (Q) x Price (P)
Deadweight loss refers to ___________.
the loss of consumer and producer surplus from a tax
Excess supply occurs when _________.
the price is above the equilibrium price
Generally, each successive unit of a good consumed will cause marginal utility to __________.
decrease
What does PED stand for?
Price Elasticity of Demand
If a 2% change in the price of a good leads to a 10% change in the quantity demanded of a good, what is the value of price elasticity of demand?
- To find PED, you have to put the % change in quantity demanded over the % change in price. Then you just divide and have your answer.
If a coconut is a normal good and the price of coconuts increases, then the movement that would take place in the model could be _________.
a movement along the demand curve, not a full on shift.
What is the midpoint method?
% Change in quantity or Price
___________________________________ x100
Average of initial and final value
How do you calculate percent change in quantity and price?
%ΔQ= Q2-Q1
_______ x 100
Q1+Q2
_________
2
This formula is the same for price too (NO NEGATIVES)
If a tax is imposed on a market with elastic demand and inelastic supply, __________.
sellers will bear most of the burden
If a tax is imposed on a market with inelastic demand and elastic supply, then ___________.
buyers will bear most of the burden of the tax
If suppliers expect prices to rise next year for their product, then one would expect ________.
a shift in the supply curve for the product to the left this year
If the cross-price elasticity of two goods is positive, then those two goods are _________.
substitutes
If the market for corn is in equilibrium ____________.
the price is at a level where the quantity of corn produced is equal to the quantity of corn consumed
If there is an expectation on the part of coconut suppliers that the price of coconuts will be significantly higher in the very near future, then the movement in the model to reflect today’s market behavior would be ________.
there would be a decrease in supply due to the fact that producers chose to supply more of their goods (in this case coconuts) when they are worth more.
If a coconut is a normal good and the price of coconuts increases, then the movement that would take place in the model could be _________.
a decrease in quantity demand.
What is a surplus?
A surplus occurs when the quantity of a good or service supplied exceeds the quantity demanded, leading to an excess supply in the market.
What does PES stand for?
price elasticity of supply
A downward sloping demand curve can be explained by __________.
Diminishing Marginal Utility, The Substitution Effect, The Income Effect
Which of the following is an outcome of a binding price floor?
A surplus in the market, wasted resources
Suppose you manage a corner grocery store. If peanut butter is an inferior good, what do you suppose would happen to the price and quantity of peanut butter as incomes fall during an economic recession?
The price and quantity would both increase.
What is Excise Tax?
a tax on sales of a particular good or service
What is Tax Incidence?
is the distribution of the tax burden
Who bears the burden of a tax? Demand inelastic and supply elastic
Consumers
Who bears the burden of a tax? Supply inelastic and demand elastic
Producers
Who bears the burden of a tax? Both supply and demand elastic
Shared
When demand is unit elastic, price elasticity of demand ________.
equals 1, and total revenue does not change when price changes
What is the difference between MU/P and P/MU
P/MU = Price per Marginal Utility (This ratio represents the price of a good or service divided by the marginal utility derived from consuming an additional unit of that good or service.)
MU/P = Marginal Utility per Price (This ratio represents the marginal utility derived from consuming an additional unit of a good or service divided by the price of that good or service.)
What is the optimal consumption rule?
The optimal consumption rule, also known as the equal marginal principle, is a fundamental concept in microeconomics that guides consumers in maximizing their satisfaction (utility) given their budget constraints. (The same as the maximizing utility rule).
An excise tax will be paid mainly by producers when ___________________.
the price elasticity of supply is low and the price elasticity of demand is high
Other thing equal, a rise in price will result in which of the following?
Producer surplus will rise; consumer surplus will fall
What is a binding price ceiling?
A binding price ceiling is a government-imposed limit on the price of a good or service that is set below the equilibrium market price. When the price ceiling is set at a level below the equilibrium, it becomes relevant or “binds” because it influences and restricts the market price.
Producers may supply a good with an inefficiently low quality if the government imposes a/an _________.
binding ceiling price
What is a binding price floor?
A binding price floor is a government-imposed limit on the price of a good or service that is set above the equilibrium market price. In this context, “binding” means that the price floor has a significant impact on the market because it prevents the price from falling to the equilibrium level.
What is horizontal summation?
Horizontal summation refers to the process of adding up the quantities supplied by individual producers at each price level to find the total quantity supplied in the market. It is used to derive the market supply curve from the individual supply curves of different producers.
- The horizontal summation of individual demand curves for a particular product is referred to as _______.
market demand
What does “equal marginal utility per dollar” refer too?
According to this principle, to achieve maximum utility, a consumer should allocate their spending in such a way that the marginal utility per dollar is equal for all goods.
The optimal consumption rule states that total utility is maximized when all income is spent and ___________.
MU/P is equal for all goods
When demand is unit elastic, price elasticity of demand ________.
equals 1, and total revenue does not change when price changes
When marginal utility is zero, total utility is _________.
at its maximum
When the price of corn is rising, we would expect ________.
the quantity supplied of corn to be rising
Higher production costs lead too_________.
a decrease in the amount of the good supplied
Which of the following is an outcome of a binding price floor?
Surplus in the market and wasted products
Which of the following is correct for a price increase? When demand is ________, total revenue will _____________.
elastic; decrease
Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium?
Neither excess supply nor excess demand since it is not binding.
If a legal price floor is set above equilibrium price_________.
It becomes a binding price floor
What does SPLAT stand for?
S = Substitutes - Fewer substitutes/broader market = inelastic - More substitutes/narrow market = elastic
P = Proportion of Income - Large portion of income = elastic - Small portion of income = inelastic
L = Luxury of necessity - Luxury = elastic - Necessity = inelastic
A = Addictive - No = elastic - Yes = inelastic
T = Time horizon - More time = elastic - Less time = inelastic
The supply curve is likely to be most inelastic over what time period?
One month.
