1st Econ Exam

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Terms in this set (...)

absolute advantage
the ability to produce a good using fewer inputs than another producer
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
-if one firm has a CA in one of two goods, it doesn't have a CA for the other good
law of demand
the claim that the quantity demanded of a good falls when the price of the good rises, other things equal
substitutes
increase in the price of one causes an increase in demand for the other
complements
an increase in the price of one causes a fall in demand for the other
demand curve shifters
# of buyers
income
prices of related goods
tastes
expectations
law of supply
the quantity supplied of a good rises when the price of the good rises, other things equal
supply curve shifters
# of sellers
expectations
change on input prices (labor etc.)
technological improvement
movements along the fixed curve result from changes in price
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elasticity
numerical measure of the responsiveness of quant. demanded or supplied to one of its determinants
price elasticity of demand
sensitivity of consumers to changes in price
price elast. of supply
sensitivity of sellers to changes in price
pe of d
abs(%change in Qd / %change in P)
-how much qd responds to change in p
midpoint method
(end value - start value)/midpoint x 100%
What determines price elasticity of demand?
Price elasticity is higher when close substitutes are available
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Price elasticity is higher for narrowly defined goods than broadly defined ones
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Price elasticity is higher for luxuries than for necessities
relevant time horizon is short for inelastic, long for elastic
Price elasticity is higher in the long run than the short run
perfectly inelastic demand
= 0 , vertical line
inelastic demand
=<1 steep
unit elastic
=1 intermediate slope
elastic demand
>1 flat
perfectly elastic
=infinity, horizontal
when D is elastic, a price increase causes revenue to fall and a decrease causes it to rise
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when D is inelastic, a price increase causes revenue to rise and a decreases causes it to fall
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pe of s
abs(%change in Qs / %change in P)
perfectly inelastic s
=0 vertical line
inelastic
=<1 steep
unit elastic
=1 intermediate
elastic
=>1 flat
perfectly elastic
=infinity, horizontal
*income elasticity of demand
%change in Qd / %change in income
-for normal goods, IE > 0
-for inferior, <0
*cross-price elasticity
%change in Qd for good 1 / %change in price of good 2
-for substitutes, CPE>0
-for complements, CPE<0
-if 0, products aren't related
in the long run, supply and demand are more price-elastic
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A tax on buyers shifts the d curve down (left) by the amount of the tax
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A tax on sellers shifts the s curve up (left) by the amount of the tax
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elasticity and tax incidence
supply is more elastic than demand -> buyers bear most of the burden of the tax
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demand is more elastic than supply -> sellers bear most of the burden of the tax
companies that make luxuries pay most of the luxury tax
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taxes always lower equilibrium quantity
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consumer surplus = the amount a buyer is willing to pay minus the Price (what they actually pay)
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producer surplus = the amount a seller is paid minus the seller's willingness to sell
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Total surplus = CS + PS
-TS is always lower with a tax
market eq'm quantity maximizes total surplus
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DWL and elastic. of supply
when supply is inelastic, it's harder for firms to leave the market when the tax reduces Price received. so the tax only reduces Q a little, DWL is small
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when supply is elastic, easier for firms to leave market when the tax reduces price. so the tax reduces q a lot, greater DWL
DWL and elast. of demand
when demand is inelastic, harder for consumers to leave the market when the tax raises price. so the tax only reduces q a little and DWL is small
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when demand is elastic, easier for buyers to leave the market when the tax increases price, the more q falls, and the greater the DWL
-when tax rates are low, raising them doesn't cause much harm, lowering not much benefit.
but when high, raising them is very harmful and cutting them very beneficial
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tariff
a tax on imports
arguments for restricting trade
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jobs argument
trade destroys jobs in the industries that compete against imports.
total unemp. doesn't rise as imports rise b/c job losses from imports are offset by job gains in export industries
protection-as-bargaining-chip
US can threaten to limit imports of French wine unless France lifts their quotas on American beef
-suppose F refuses, US has two bad options to choose from: - restrict imports from France->reduces welfare in US
-or dont restrict imports, reduces US credibility