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econ 1 midterm > week 3 (chapter 5 and 6) > Flashcards

week 3 (chapter 5 and 6) Flashcards

1
Q

prices

A

signals that guide the allocation of resources, and how things are going to be priced
-leads to price gouging

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2
Q

price gouging

A

taking advantage of consumers, charging different prices to different consumers

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3
Q

elasticity

A

how much one variable responds to a change in another variable

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4
Q

price elasticity of demand

A

how much the quantity demanded of a good responded to a change in price of that good

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5
Q

elasticity of demand

A

percentage change in quantity demanded / percentage change in price

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6
Q

elastic demand

A

quantity demanded responds substantially to change in price

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7
Q

inelastic demand

A

quantity demanded responds slightly to change in price
ex. gas, oil, sanitary products

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8
Q

what does the curve look like when the demand is elastic?

A

flatter

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9
Q

what does the curve look like when the demand is inelastic?

A

steeper

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10
Q

is the elasticity of demand always negative?

A

YES - but we use the absolute value for it

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11
Q

magnitude of the change in price reaction

A

< 1 = inelastic
> 1= elastic
= 1 unit elastic
= 0 perfectly inelastic
= infinity perfectly elastic

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12
Q

perfectly inelastic

A

= 0
customer sensitivity to price change is none
ex. food as a whole, clothes as a whole
things that you need
vertical

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13
Q

inelastic demand

A

< 1
customer sensitivity is relatively low, demand curve is steep
ex. 22% increase in price leads to 22% decrease in quantity demanded

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14
Q

unit elastic demand

A

= 1
customer sensitivity is intermediate
ex. a 22% increase in price leads to a 67% increase in quantity demanded

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15
Q

elastic demand

A

> 1
customer sensitivity is relatively high, and demand curve is flatter
ex. 22% increase in price leasd to 67% decrease in quantity demanded

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16
Q

perfectly elastic demand

A

= 0
customer sensitvity is extreme, and curve is horizontal
ex. at any price above a 4 dolalr quantity demanded is zero
no change in price, so the price stays fixed
ex. 1 dollar arizonas

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17
Q

determinants of elasticity

A
  1. availability of substitutes
  2. time horizon
  3. category of product
  4. luxuries vs. necessities
  5. purchase size
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18
Q

how to find percentage change

A

use the midpoint method

(q2-q1)/(q2+q1)/((p2-p1)/(p2+p1)/2) x 100

then to find the elasticty of demand by finding percentage change at first…

percentage of quantity demanded/percentage of price change

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19
Q

availability of substitutes

A

fewer substitues make it harder for consumers to adjust quantity when price changes
demand is more inelastic

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20
Q

time horizon

A

less time to adjust to find substitutes or make alterations means that there is lower elasticity
elasticity will become larger as time goes on

21
Q

category of product

A

the less specific the classification, the fewer substitutes there are (making demand inelastic) and vice versa
ex. the elasticity of demand is higher for lettuce (very specific) than it is for food in general (broad)

22
Q

necessities vs. luxuries

A

for necessities, we do not change quantity much as the price changes
for luxuries, we are more sensitive to price changes

23
Q

purchase size

A

we are less sensitive to price changes when the good feels cheap - lower price sensitivity

we are equally more sensitive to price changes when the good feels expensive - higher price elasticity

24
Q

linear demand elasticity

A

along the curve, the elasticity is different because prices are lower at one end than at the other

25
Q

how to calculate revenue

A

price x quantity
elasticity of demand affects revenue when good price changes
- if elasticity of quantity demanded is larger than the price, there is going to be a drop in revenue
- if elasticity of quantity demanded is smaller than the price, there is going to be a rise in revenue

26
Q

price elasticity of supply

A

how much the quantity supplied of a good responds to a change in price of that good
- directly proportional relationship between quantity supplied and price

27
Q

elastic supply

A

when quantity supplied responds slightly to change in price

28
Q

inelastic supply

A

when quantity supplied responds slightly to change in price

29
Q

determinants of elasticity

A
  1. change in per unit costs (input prices) with increased production
  2. time horizon
  3. share of market for inputs
  4. geographic scope
30
Q

change in per unit costs

A

if production costs more, there is going to be less sensitivity to changes in prices and vice versa

31
Q

time horizon

A

immediately following a price increase, producers can only expand output using their current capacity (making supply inelastic)

over time producers can expand their capacity (making supply elastic)

when prices change in the supply, it will be harder to find another supplier in the short term, but easier in the long run

more sensitivity to price in the short run, but less in the long run

32
Q

share of market for inputs

A

supply is elastic when the industry can be expanded without causing a big increase in the demand (and price) for the industry’s inputs)

supply inelastic when industry expansion causes a significant increase the demand/price for inputs

if there is a large market share of a good or industry, there is going to be way more sensitivity when there are changes in the price

more people in industry = less sensitivity to changes in price
less people in the industry = more sensitivity to changes in price

33
Q

geographic scope

A

the wider the scope of the market, the less elastic the supply

if you are focusing on one particular region any small change will drastically affect how much you are producing

34
Q

input prices

A

any sort of labor costs, manufacturing costs, paying workers, etc.

35
Q

income elasticity of demand

A

percent change in quantity demanded/percentage change in income

for normal goods, income elasticity > 0
- when income goes up we expect the demand to go up

for inferior goods, income elasticity < 0
- when income goes up, we expect the demand for that good to go down

36
Q

cross price elasticity

A

measures the response of the demand of one good change according to the price of another good

percentage change in quantity demand for good 1/ percentage change in price of good 2

substitutes = positive for demand and positive for price

complements = positive for demand and negative for price

37
Q

price ceiling

A

legal maximum on the price of a good or service
- used to maintain the purchasing power of consumers
- legal cap on prices

38
Q

what happens when the price ceiling is below the equilibrium price?

A

there is a binding constraint and causes a shortage of the supply because so many people want the good

39
Q

effects of price ceilings below equilibrium prices

A
  1. shortages
  2. reduction in product quality
  3. wasteful lines and other costs of search
  4. loss of gains from trade
  5. misallocation of resources
40
Q

misallocation of resources

A

prices controls distort signals and eliminate incentives leading to a misallocation of resources

the people who need it the most might not be able to get it, because of the surplus of the less expensive goods

41
Q

loss of gains from trade

A

price ceilings set below the market price cause quantity supplied to be less than the market quantity

price ceilings create deadweight loss by forcing quantity supplied below market quantity

buyers and sellers would both benefit from trade at a higher price but cant

42
Q

deadweight

A

the total of lost consumer and producer surplus when all mutually profitable gains from trade are not exploited

43
Q

wasteful lines and costs of search

A

if prices are not allowed to rise, buyers must compete with each other in other ways

ex. bribes, using bots to buy things

44
Q

reduction in product quality

A

when prices are controlled they cant profit off of supplying more expensive product

producers cut corners to find a cheaper solution, to where they can make a profit off of the ceiling

45
Q

price floor

A

a legal minimum on the price of a good or service (e.g. minimum wage)

46
Q

is a price floor below the equilibrium price binding?

A

NO - has no effect on the market outcome

47
Q

four effects of price floors

A
  1. surpluses of goods
  2. loss of gains from trade
  3. wasteful increases in quality
  4. misallocation of resources
48
Q

price floor causing wasteful increases in quality

A

higher quality raises cost and reduces seller proft
buyers get a higher quality but would prefer lower price

price floor encourages sellers to waste resources; higher quality than buyers are willing to pay for

49
Q

price floors affecting the misallocation of resources

A
  1. allows high cost firms to operate
  2. prevents low cost firms from entering the industry
    ex. regulation prevented southwest from entering the national market

econ 1 midterm (3 decks)

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