Upgrade to remove ads
Only $35.99/year

Exam 2

Terms in this set (63)

a measure of response (one thing changes, another responds) and a measure of strength of the response in % terms
elasticity
% change in response variable / % change in what caused response
elasticity
Price elasticity of demand for good i is defined as what (equation)
Eii = % change in quantity demanded / % change in price
when elasticity ratio is
greater than 1:
less than 1:
equal to 1:
Greater than 1: elastic
Less than 1: inelastic
Equal to 1: unit elastic
when the percentage change in the quantity demanded exceeds the percentage change in price
elastic demand
when the percentage change in the quantity demanded is less than the percentage change in price
inelastic demand
when the percentage change in the quantity demanded equals the percentage change in price
unit elastic demand
When numerator > denominator, price and revenue (TR) move in the ___________ direction
opposite
When numerator < denominator, price and revenue (TR) move in the ___________ direction
same
When numerator = denominator, price increases or decreases, but there is _____________ in TR
no change
what is the arc (midpoint) formula for price elasticity of demand
E = (Q1-Q2 / Q1 + Q2) / (P1-P2 / P1 + P2)
what 3 factors affects the relative size of the coefficient of price elasticity
-number of good substitutes
-length of time consumers have to adjust
-proportion of your budget that the expenditures comprise for good x
Higher number of good substitutes available = _________ (more or less) elastic we would expect price elasticity of demand to be
more
is the good normal, inferior, or luxury if the income elasticity of demand for the good is > 0
normal
is the good normal, inferior, or luxury if the income elasticity of demand for the good is < 0
inferior
is the good normal, inferior, or luxury if the income elasticity of demand for the good is > 1
luxury
(substitutes, complements, or unrelated) the price elasticity of demand for good x is > 0
substitutes
(substitutes, complements, or unrelated) the price elasticity of demand for good x is < 0
complements
(substitutes, complements, or unrelated) the price elasticity of demand for good x is = 0
unrelated
What causes the price elasticity of supply to be higher?
The more easily additional inputs used in a production process can be acquired
Elasticities of supply would be ________ (larger, smaller) for goods that involve limited natural resources and/or huge capital inputs
smaller
if the good is luxury, is it more or less elastic
more
The _________ period is the time period in which producers cannot increase their use of economic resources in order to increase quantity supplied
immediate
If demand is inelastic, increasing prices will _________ total revenue
increase
Elastic demand curves tend to be __________ than inelastic demand curves
flatter
Because an inverse relationship exists between the price and the quantity demanded, the price elasticity of demand is _________ (positive, negative)
negative
When the proportion of income spent on a good or service is relatively small, demand is relatively more _______ (elastic, inelastic)
inelastic
When demand is _________, consumers are less responsive to changes in prices (elastic, inelastic)
inelastic
Price and total revenue move in the __________ direction when demand is elastic
opposite
do these changes in price increase or decrease total revenue?
Price falls, demand is inelastic =
Price rises, demand is elastic =
Price rises, demand is inelastic =
Price falls, demand is elastic =
Prices falls, demand is of unit elasticity =
decrease
decrease
increase
increase
remain unchanged
The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy
consumer sovereignty
total profits = what - what
total revenue - total costs
maximum combined consumer and producer surplus
efficiency
the difference between the maximum that a consumer would be willing to pay for a unit of a good and the amount he or she actually pays
consumer surplus
the difference between what producers receive for a unit of a good and the minimum they would be willing to accept
producer surplus
-Consumer surplus __________ as the price of the good falls
-Producer surplus ___________ as the price of the good falls
increases
decreases
Why does consumer surplus arise?
All consumers pay the equilibrium price even though they would be willing to pay more
Why does producer surplus arise?
Different producers have different production costs
Graphically, consumer surplus is the area below the _________ curve and above the equilibrium price, from __________ to the quantity traded
demand
zero
-Raise revenues
-Support particular activities (highways)
-Penalize particular activities (smoking)
-Redistribute income
taxes
The entity actually making payments to the government may not bear the real burden of the tax in question
tax incidence
Real burden shows up as:
-Higher prices to consumers
-Lower revenues to businesses (firms)
total tax = what x what
tax per unit x new equilibrium Q
amount by which price is higher, multiplied by by the new quantity
consumers burden
amount by which revenue is lower, multiplied by the new quantity
producers burden
The more ________ the supply, the greater the burden on consumers
elastic
The more _________ the demand, the greater the burden on consumers
inelastic
does a tax on producers shift the supply curve to the right or left
left
the difference between the economic surplus when the market is at its competitive equilibrium and the economic surplus when the market is not in equilibrium
deadweight loss
the minimum price- you can't go below it
price floor
What would be the effect of a price floor set above equilibrium?
(surplus or shortage)
surplus
a maximum rent set below where the market would have set the price through the forces of supply and demand
binding rent control
process by which prices direct existing supplies of a good or service to users who value it most highly
rationing function of prices
process by which prices signal resources to enter into the production of goods and services whose price exceeds the cost of production and away from production of goods whose prices lie below productions costs
allocative function of prices
After the demand curve increases: the size of the shortage __________
increases
Effective rent controls in the long run will ________ the return on capital invested in rental units
lower
tax on goods that are being imported into the country
tariff
when a state, nation, or person can produce a product at a lower opportunity cost than some other state or nation or person
comparative advantage
when a state, nation, or person can produce more of good x using the same resources
absolute advantage
selling products in a foreign market at a price below average cost
dumping
selling something (like a ticket outside of a concert) above the stated value (its illegal)
scalping
any arrangement that people have for trading with one another (consists of buyers and sellers for a good or service) people come together to trade
market
property legally acquired; protected from invasions or intrusions by others
private property
Recommended textbook explanations

Economics: Principles in Action (California)

1st EditionArthur O'Sullivan, Steven M. Sheffrin
831 explanations

Economics: Today and Tomorrow

3rd EditionRoger LeRoy Miller
707 explanations

Principles of Economics

5th EditionN. Gregory Mankiw
506 explanations

Economics New Ways of Thinking, Applying the Principles Workbook

2nd EditionScott Wolla
956 explanations