54 Cards in this Set
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Elasticity
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A measure of how much buyers and sellers respond to changes in market conditions.
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The law of demand states...
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that a fall in the price of a good raises the the quantity demanded.
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Price Elasticity Demand
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-Measures how much much Q^d responds to a change in P.
-Measures how willing consumers are to buy less of the good as its price rises.
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Availability of Close Substitutes
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Goods w/ substitutes = more elastic
Ex: Butter & Margarine - Increase in price of butter = quantity of butter sold falls
Eggs have no substitute = demand less elastic quantity of eggs sold never drops
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Necessities vs. Luxuries
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Goods w/ substitutes = more elastic
Ex: Butter & Margarine - Increase in price of butter = quantity of butter sold falls
Eggs have no substitute = demand less elastic quantity of eggs sold never drops
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Necessities vs. Luxuries
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Necessities have inelastic demands: like going to the doctor. You don't stop going because price rises.
Buying a sailboat is a luxury & has elastic demand .
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Narrowly defined markets are
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more elastic
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Broadly defined markets are
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fairly inelastic
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Price elasticity of demand is closely related to the slope but not equal because...
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slope is a ratio of two changes and elasticity is a ratio of two % changes.
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Demand is elastic when
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elasticity is greater than 1 (relatively flat)
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Demand is inelastic when
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elasticity is less than 1 (relatively steep)
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Demand is unit elastic when
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elasticity equals exactly 1 (intermediate slope)
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Demand is perfectly inelastic when
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elasticity is 0 (vertical)
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Demand is perfectly elastic when
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elasticity is infinity (horizontal)
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Total Revenue
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the amount paid by buyers and received by sellers of a good.
Revenue = P x Q
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Slope is defined as..
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rise over run
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Change in price is
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rise
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Change in quantity is
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run
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Income elasticity of Demand
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Measures how the quantity demanded changes as consumer income changes.
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Higher income raises the quantity demanded of what good?
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normal goods
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Higher income lowers the quantity demanded of what good?
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inferior goods
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Cross-Price elasticity of demand
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measures how the quantity demanded of one good responds to a change in the price of another good.
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Substitutes
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goods that are typically used in place of one another.
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Complements
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goods that are typically used together.
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Elasticity of supply
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measures how much the quantity supplied responds to changes in price.
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When supply falls supply shifts to the
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left (demand stays the same)
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Drug interdiction reduces the supply of drugs
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supply shifts left & demand remains the same.
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Drug education reduces the demand for drugs
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demand shifts left & supply stays the same.
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Price ceiling
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a legal maximum on the price of a good or service.
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Price floor
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a legal minimum on the price of a good or service.
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Taxes
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Taxes
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A price ceiling above the eq'm price is..
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not binding (no effect on the market outcome)
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The eq'm price is above the ceiling therefore..
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the ceiling is a binding constraint (causes a shortage)
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In the long run supply and demand are more
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price-elastic (so the shortage is larger)
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Tax incidence
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how the burden of a tax is shared among market participants.
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Allocation of resources refer to:
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-how much of each good is produced
-which producers produce it
-which consumers consume it
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Welfare economics
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studies how the allocation of resources affects economic well-being.
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Willingness to pay
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is the the maximum amount the buyer will pay for that good. Measures how much the buyer values the good.
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Consumer Surplus (CS)
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is the amount a buyer is willing to pay minus the amount the buyer actually pays: CS = WTP - P
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Cost
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is the value of everything a seller must give up to produce a good. (i.e., opportunity cost)
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Marginal seller
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the seller who would leave the market if the price were any lower.
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Producer surplus (PS)
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the amount a seller is paid for a good minus the seller's cost: PS = P - cost
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Two reasons for the fall in PS.
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1. Fall in PS due to sellers leaving market
2. Fall in PS due to remaining sellers getting lower P
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PS is the area between..
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P and the S curve
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CS =
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Value to buyers - amount paid by buyers
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PS =
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Amount received by sellers - cost to sellers
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Total Surplus =
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CS + PS
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Efficiency Total Surplus =
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value to buyers - cost to sellers
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Efficiency
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the property of a resource allocation of maximizing the total surplus received by all members of society.
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Equality
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the property of distributing economic prosperity uniformly among the members of society.
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A tax..
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-drives a wedge between the price buyers pay and the price sellers receive.
-raises the price buyers pay and lowers the price sellers receive.
-reduces the quantity bought and sold.
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CALCULATE: Revenue from tax:
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T x Q
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CS is
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above eq'm
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Deadweight loss
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the fall in total surplus that results from a market distortion, such as a tax.
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EC 210: TEST 1