week 3 Flashcards
what is cross-price elasticity of demand
the percentage change in quantity demanded of that good in response to a 1% price change of another good
what does it mean if cross-price elasticity of demand is positive or negative
positive if substitutes
negative if complements
what is income elasticity of demand
the income elasticity of demand is the percentage change in quantity demanded associated with a 1% change in consumer income
describes how responsive demand is to income changes
it is positive for normal goods
if the elasticity is greater than 1, sometimes the good is called a luxury good
it is negative for inferior goods
how do you calculate price elasticity of supply
measures sellers sensitivity to changes in price
ε = percentage change in quantity supplied/percentage change in price
what are the determinants of supply elasticity
flexibility of inputs
mobility of inputs
ability to produce substitute inputs
time
draw the graph for demand shift with elastic supply
draw the graph for demand shift with inelastic supply
what is positive economics
independent of ethical value system of the economist
what is normative economics
statements in economics that reflect or are based on the ethical value system of the economist, implicitly, explicitly or by omission
what is efficiency
in order to evaluate the economic impact of a policy, it is useful to have a notion of the economic gains buyers/sellers earn by trading in a market
what is consumer surplus
the difference between a buyers reservation price and the price actually paid
what is producer surplus
the difference between a sellers reservation price and the price received
how do you calculate total economic surplus
consumer surplus + producer surplus
what is the pareto efficient
no one can be made better off without making someone worse off
what are the assumptions for market equilbrium and efficiency
all benefits from consumption are captured by the demand curve
all costs from production are captured by the supply curve
info
low transaction cost
perfectly competitive market
what is deadweight loss
the reduction in total economic surplus
price ceilings cause a lost economic surplus
draw the graph for the labour market and minimum wage
what are the taxation and DWL graph
consumer surplus - A + B + C
producer surplus - D + E + F
tax revenue - none
total surplus - A + B + C + D + E + F
