ECON 142: Exam 2
41 Cards in this Set
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What are externalities?
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Unintended costs or benefits caused by a transaction that isnt part of the transaction
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What does an external cost do to the graph?
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Shifts supply up
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What does an external benefit do to the graph?
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Shifts demand up
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What is market failure?
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a situation where the market fails to produce the efficient level of output
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What are non-rival goods?
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one person consuming the good does not mean you can't consume the same good
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What type of good is a public good?
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non-rival good
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What are rival goods?
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Once one person has consumed the good it can't be consumed again by someone else
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What does non-exclusion mean?
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It is impossible from excluding others from consuming the good whether they have paid for it or not
(Public goods are non-exclusive).
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What is price elasticity?
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It is the measurement of how much the quantity demanded changes as a result of a change in price (the bigger the response, the bigger the elasticity)
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If the quantitiy demanded did not change after a change in price of a good, is the good elastic or inelastic?
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Inelastic
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If the quantitiy demanded changed after a change in price of a good, is the good elastic or inelastic?
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Elastic
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What do more substitutes do to the responsiveness of a good?
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The good is more responsive
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What do less substitutes do to the responsiveness of a good?
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The good is less responsive
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Are luxury goods responsive or unresponsive?
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Responsive
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Are necessity goods responsive or unresponsive?
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Unresponsive
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If the markert is defined as broadly is the good unresponsive or responsive?
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Unresponsive (regarding market definition)
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If the market is narrowly defined is the good unresponsive or responsive?
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Responsive (regarding market defintion)
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If the good is a large part of your budget is the good responsive or unresponsive?
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Responsive (regarding budget)
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If the good is a small part of your budget is the good responsive or unresponsive?
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Unresponsive (regarding budget)
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What four things do you need to calculate price elasticity?
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original price, new price, original quantity demanded and the new quantity demanded
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What is the formula for price elasticity of demand?
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(change in quantity/average quantity)/(change in price/average price)=
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What does it mean if the price elasticity is above one (in absolute value)?
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The good is elastic with this data
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What does it mean if the price elasticity is below one (in absolute value)?
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The good is inelastic with this data
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What is the Social Cost?
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Private Cost + External Cost
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What did Mr. Pigou do?
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Came up with the idea of using taxes and subsidies to deal with externalties
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What is the formula for Cross Price Elasticity?
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% change in quantity demanded for one good / % percent change in price of another good
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If the cross price elasticity is positive how are the goods related?
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The goods are substitutes (cross price)
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If the cross price elasticity is negative how are the goods related?
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The goods are complements (cross price)
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If the cross price elasticity is zero how are the goods related?
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The goods are not related in any way
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What is the formula for Income Elasticity of Demand?
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% change in quantity demanded / % change in income
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What is the formula for Price Elasticity of Supply?
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(change in quantity supplied / average quantity) / (change in price / average price)=
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Does healthcare cause positive or negative externalities?
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Positive Externalities (in regards to healthcare)
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What kind of good is healtchare?
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Rival and excludable (not a public good)
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Why are healthcare costs going up? (3 reasons
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Services do not see big increases in productivity, the population is aging and distored economic incentives (most people only pay for part of their healthcare through copays and deductibles)
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What is the formula to calculate how much of a tax a supplier will pay (percent)?
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Price elasticity of supply / (price elasticity of demand - price elasticity of supply)
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What is the formula to calculate how much of a tax a buyer will pay (percent)?
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Price of elastiticity of demand / (price of elasticity of demand - price of elasticity of supply)
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What is Asymmetric information?
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When one pary of a transaction knows less info than the other party
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What is adverse selection?
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When one party in a transaction takes advantages of the other party's lack of info
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What is risk pooling?
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A way of reducing adverse selection (like requiring everyone to have car insurance or health insurance)
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What is moral hazard?
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Actions one takes after entering a transaction that take advantage of the other party's lack of info
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What is the principle agent problem?
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When one party acts on another party's behalf and pursues their own interests as opposed to the interests of the consumer (copays and deductibles are ways of dealing with this)
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ECON 142: Exam 2