week 4 (GPT) Flashcards
What is individual supply?
The quantity of a good that a single producer is willing to sell at different prices.
What is market supply?
The sum of all individual supply(quanities) curves in the market.
What is individual demand?
The quantity of a good that a single consumer is willing to buy at various prices.
What is market demand?
The sum of all individual demand curves in the market.
What is horizontal summation in economics?
Adding quantities across consumers or producers at each price level to get market curves.
What determines market equilibrium?
It is the point where market demand equals market supply.
What is the equilibrium price?
The price at which quantity demanded equals quantity supplied.
What is excess supply (surplus)?
When quantity supplied exceeds quantity demanded at a given price.
What is excess demand (shortage)?
When quantity demanded exceeds quantity supplied at a given price.
How does a free market correct a surplus?
Sellers lower prices to attract buyers,
reducing supply and increasing demand.
How does a free market correct a shortage?
Buyers bid up prices, encouraging more supply and reducing demand.
What is consumer surplus?
The difference between the maximum a consumer is willing to pay and the market price.
What is producer surplus?
The difference between the market price and the minimum price a producer would accept.
Who receives zero consumer surplus?
The buyer whose reservation price is equal to the market price.
What is marginal utility?
The additional benefit gained from consuming one more unit of a good.
What is marginal cost?
The cost of producing one additional unit of a good.
What is the reservation price for a buyer?
The maximum price the buyer is willing to pay, equal to marginal utility.
What is the reservation price for a seller?
The minimum price the seller is willing to accept, equal to marginal cost.
What is deadweight loss?
The total surplus lost due to market inefficiency or deviation from equilibrium.
What is Pareto efficiency?
A state where no one can be made better off without making someone else worse off.
What is a Pareto improving transaction?
A trade that makes at least one party better off without hurting anyone else.
What does the invisible hand refer to?
The market’s ability to reach equilibrium naturally through self-interested behavior.
What is economic profit?
Profit above the normal opportunity cost of all resources used.
What happens in the long run if firms earn economic profit?
New firms enter, increasing supply and lowering price until profits disappear.
Why does perfect competition lead to zero economic profit in the long run?
Because easy entry drives down prices to the point where price equals average cost.
What is a price ceiling?
A government-imposed maximum price that can be charged for a good or service.
When is a price ceiling effective?
When it is set below the equilibrium price.
What is the main goal of a price ceiling?
To protect consumers by making essential goods more affordable.
What is a common example of a price ceiling?
Rent control or caps on essential goods like milk.
What happens to quantity supplied under a price ceiling?
It decreases, leading to a shortage.
What is a price floor?
A government-imposed minimum price that must be paid for a good or service.
When is a price floor effective?
When it is set above the equilibrium price.
What is a common example of a price floor?
Minimum wage laws or agricultural price supports.
What happens to quantity demanded under a price floor?
It decreases, causing a surplus.
Who benefits from a binding price ceiling?
Consumers who are still able to purchase the good at the lower price.
Who loses from a binding price ceiling?
Consumers unable to purchase the good and producers earning lower revenues.
What is deadweight loss in the context of price ceilings?
The lost economic surplus when output is restricted below the efficient equilibrium.
Who benefits from a price floor?
Producers who can still sell at the higher price.
Who loses from a price floor?
Consumers who pay more and producers unable to sell due to surplus.
What is deadweight loss in the context of price floors?
Lost surplus from reduced transactions between buyers and sellers.
What is a better alternative to price ceilings or floors to help the poor?
Direct transfers like subsidies, pensions, or welfare payments.
What is taxation in economic terms?
A government-imposed fee that affects market prices and output.
What is an indirect tax?
A tax levied on goods or services rather than income, like GST or excise tax.
Who shares the burden of an indirect tax?
Both consumers and producers depending on elasticity.
How does a tax affect supply?
It shifts the supply curve upward (or left), increasing prices and reducing quantity.
What is tax incidence?
The distribution of the tax burden between consumers and producers.
What determines who bears more of the tax burden?
Relative price elasticity of demand and supply.
When does the consumer bear more of the tax burden?
When demand is inelastic relative to supply.
When does the producer bear more of the tax burden?
When supply is inelastic relative to demand.
What is deadweight loss from a tax?
The loss of total surplus due to reduced market transactions caused by taxation.
Why do governments prefer taxing inelastic goods?
Because it results in less deadweight loss and more stable revenue.
