week 4 Flashcards
market demand
demand of a representative consumer who has an income that is just the sum of all the individual incomes
representative consumer
if the market behavior of an aggregate of different consumers is as if it were the market behavior of a number of identical hypothetical consumers, each with the same level of income.
aggregate demand
the total demand for all finished goods and services produced in an economy
discrete goods
those which are consumed in whole numbers and not in fractions
linear demand curves
a straight-line relationship between the price and quantity demanded
elasticity
an economic measure of the sensitivity of demand relative to a change in another variable: The percent change in quantity divided by the percent change in price
elastic demand
If a good has an elasticity of demand greater than 1 in absolute value
inelastic demand
If the elasticity is less than 1 in absolute value
close substitutes
similar products that target the same customer groups and satisfy the same needs, but have slight differences in characteristics
income elasticity of demand
used to describe how the quantity
demanded responds to a change in income
normal good
is one for which an increase in income leads to an increase in demand
→ The income elasticity of demand is positive
inferior good
s one for which an increase in income leads to a decrease in demand
→ The income elasticity of demand is negative
luxury good
s one for which the income elasticity is positive and larger than 1
→ A one percent increase in income leads to more than a one percent increase in the demand for a luxury good
market supply curve
the sum of the individual supply curves
optimization principle
people choose their consumption optimally from their budget sets;
Firms select the amount of output to produce to maximize profits;
The demand and supply curves represent the optimal choices of the agents involved.
equilibrium principle
we combine the behavior of consumers and firms to study the outcomes of their interaction in the market
market equilibrium
occurs when market supply equals market demand
equilibrium price
the price where the supply of the good equals the demand
excess supply
the price rises
excess demand
the price lowers
perfectly inelastic supply
fixed supply; eq. quantity is determined by the supply conditions; eq. price is determined entirely by demand conditions
perfectly elastic supply
quantity supplied is extremely sensitive to the price; eq. price is determined by the supply conditions; eq. quantity is determined entirely by demand conditions
demand shift
if the demand curve shifts to the right, eq. price and quantity must both rice and vice versa
supply shift
if the supply curve shifts to the right eq. price decreases and eq. quantity decreases and vice versa
quantity tax
tax levied per unit of quantity bought or sold
value tax
ax expressed in percentage unit, like VAT
passing along a tax: perfectly elastic supply
Industry has a horizontal supply curve
→ The industry will supply any amount desired of the good at some given price, and zero units of the good at any lower price
→ Price is determined by the supply and quantity by the demand curve
passing along a tax: perfectly inelastic supply
industry has a vertical supply curve
→ The quantity of the good is fixed
→ Price is determined by the demand
monetary equivalent of the utility
consuming n units of a good is the sum of the consumer’s reservation prices
gross consumer’s surplus
The utility from consuming n units of the discrete good is just the area of the first n bars which make up the demand function
net consumer’s surplus
The final utility of the consumer depends also on how much of all the other goods the consumer can buy
consumer’s surplus
difference between the price the consumer pays on the market for a given good and the highest price she would be willing to pay for that good
consumers’ surplus
equals the sum of surpluses across a number of consumers
continuous demand
The triangular area under the continuous demand curve is then approximately equal to the consumer surplus
changes in the consumer’s surplus (CS)
results from the implementation of some economic policy
producer’s surplus (PS)
the difference between the price for which a producer would be willing to provide a good and the actual price at which the good is sold
net producer’s surplus
the difference between the min price a firm would be willing to sell its product for and the price it sells it for
changes in producer’s surplus
the difference in the increased price and the min price, which increases the PS
social surplus (S)
the total gain to both consumers and producers by adding together consumer surplus and producer surplus
the real social cost of the tax
the difference between the value of the lost output and the revenue collected with the tax
deadweight loss of the tax
the lost value to the consumers and producers due to the reduction in the sales of the good
→ You cannot tax what is not produced and sold
