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Economics Test 2
Terms in this set (41)
Consumer Surplus (single unit)
CS=reservation price-price paid
consumer's reservation price
highest price a consumer is willing to pay
consumer surplus (all unit)
(1/2) x height of CS x base of CS
lowest price seller is willing to accept
Producer surplus (single unit)
PS=price received - reservation price
Producer surplus (all unit)
(1/2) x height of PS x base of PS
binding price floor
set above market equilibrium (when govt. thinks price is too low)
non-binding price floor
below market equilibrium and has no effect
effects of binding price floor
the supply goes up
the demand goes down
binding price ceiling
set below market equilibrium price (when prices are too high)
effects of binding price ceiling
decrease in supply
why are taxes placed on markets
to increase tax revenue
Price after tax
what seller's give to their workers
if a restaurant shuts down, you aren't concerned as an economist because...
business failure means that it wasn't the most efficient producer in the market
EPA estimates the number of lives saved by pollution control and multiplies that by the dollar value of each life saved. Recently they've been counting older people's lives less than younger people's. Why?
older people have fewer years to produce to society so their lives are worth less.
markets fail to efficiently allocate scare resources
most important feature of economic model
able to make good predictions
normative economic statement
not potentially testable or provable
as good becomes more expensive, their income cannot stretch as far, so they have to reduce purchases in order to continue to purchase other things
as supply decreases...
price increases and decrease in quanity
Government agencies value a human life saved...
in different ways.
making decisions on the margin
they consider only those costs that are incurred when they make the decision but are avoided if they they do not make the decision
The Economic Organisation of a POW camp was about 3 things...
1. There was no production in the camp, but the supply increased
2. markets naturally develop whenever there is a need to allocate limited resources
3. Markets work better when there is more information available
why does firms need to understand consumer demand
because as they increase prices, consumer demand falls
how does economy achieve economic efficiency
goods produced go to those who value them the most
decreases in demand when income increases!
increases in demand when income increases
suppose you own a phone and youre trying to define how much the phone is worth to you...
least amount money you would have to be paid in order to get you to sell the cell phone
price elasticity of demand
change in quantity
change in price
less responsive to price change
more responsive to price change
price elasticity of demand is always...
products less than 1
products equal to 1
unit price elastic
products more than 1
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