20 Cards in this Set
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If we wanted to test whether blackberries and iphones are substitutes, we would calculate the ___________ and get a _________ #
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Cross price elasticity; positive
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suppose that in the same time period, there is a drought affecting the supply of pineapples and a discovery that pineapples assist in the avoidance of cancer. How will this combination of events effect the equilibrium?
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Equilibrium price increase and the change in equilibrium quantity is ambiguous
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if the price elasticity of supply is 0.5, supply is?
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inelastic
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Elastic means
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Demand is sensitive to price changes
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Inelastic means...
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-demand is less sensitive to a change in price
-basically a necessity item
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if the demand for good z is inelastic, then decrease in price of z will cause? (revenue)
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decrease
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if the demand curve is linear and downward sloping
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a movement down the demand curve would result in more inelastic demand
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Factors effecting elasticity of demand
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Availability of substitutes
Relative importance
Necessity vs luxuries
change over time
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Relationship between price elasticity and revenue
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If elastic then increase in price reduces revenue
If elastic then decrease in price increases revenue
If inelastic then increase in price increases revenue
If inelastic then decrease in price reduces revenue
If unit elastic then increase in price doesn't affect revenue
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midpoint formula?
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Ed= Q1-Q0/QA X PA/P1-P0
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Income Elasticity
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EI=%changeDx/%changeI
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Elasticity along linear demand curve
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-Midpoint = unit
-Above = elastic
-Below = inelastic
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Cross Price Elasticity of Demand
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(% Change in Qd good one) / (% change in P of good two)
If good 2 is a substitute, elasticity is positive.
If good 2 is a complement, elasticity is negative.
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Price Ceilings
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Set below the equilibrium price
Rationing Problem
Black Markets
Example: Rent Control
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Price Floors
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Governments set minimum on market price. Causes surpluses.
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Surplus
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quantity supplied exceeds quantity demanded
*forces price down
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shortage
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price ceiling
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When the gov't intervenes in a perfectly competitive market, we say that the result is inefficient. The best explanation why intervention is in efficient is?
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Both buyers and sellers would be willing to engage in more trades if the gov't did not intervene.
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Supose that the gov't sets the price for water and the market for water is always experiencing shortages. one can infer that?
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gov't has established a price ceiling for water
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if the gov't imposes an ineffective price ceiling, we expect consumer surplus to?
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stay the same
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ECON 106: EXAM 2