Economics 21-35 (stop at 'an isolated economy')

What do Competitive markets tend to gravitate toward?

the equilibrium quantity and price.

What is an effective way of allocating resources?

competitive markets

What are the two characteristics of a competitive market?

1. extremely effective method of allocating resources and 2. it maximizes the benefits buyers and sellers receive from exchange

what can a market for a good in equilibrium tell?

the price conveys important information for potential supplies about the value consumers place on that good. At the same time,, the price informs potential demanders about the opportunity cost of supplying the good.

What do competitive market equilibrium insures?

that the available supply goes to those buyers who value the good most highly, and that is provided by those suppliers who have the lowest costs of supplying the good.

What does the height of the market demand curve reveal?

it reveals the marginal buyer's willingness to pay. The marginal buyer is the buyer who, at that price, is just indifferent between buying the good in question or not buying it.

What is consumer surplus?

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

How can we measure the consumer surplus?

we can use the total area below the demand curve and aboe the market price as a measure of total consumer surplus.

What does the total consumer surplus area show?

This area, then, provides a monetary measure of how much benefit all of the buyers in a particular market receive from participating in that market

What does the height of the supply curve measures?

the height of the supply curve measures the opportunity cost to the marginal seller.

What is producer surplus?

if the market price exceeds this opportunity cost, the difference is a monetary measure

How can we find the area of the producer surplus?

the combined surplus of all supplies using the area above the supply and below the market price is the produce surplus

What is total surplus?

the combination of consumer surplus and producer surplus provides a measure of the total benefits that market participants receiver from their transactions

What is one goal of a benevolent social planner?

to maximize this combined surplus, since this is the outcome that produces the greatest overall good.

What does an outcome that maximizes total surplus satisfy what economist criterion of?

Pareto efficiency

what would an market planner need to know to achieve an efficient outcome?

a market planner would need to know the value each consumer places on the good in question, and the cost of producing each unit, and would have to determine how much should be produced, by whom, and to whom it should be

given.

How does a competitive market achieve efficient outcomes?

through the self-interested actions of its participants, responding only to the signals provided by the market price

What is one example of a new invention making it easier on suppliers?

Bovine Growth Hormone (BGH)

How much does BGH help?

it allows dairy farmers to increase milk production by 10-20%

What other subtle effects does new technology offer?

they are called externalities

How did policymakers try to reduce smoking?

the demand for cigarettes through public education campaigns and the inclusion of warning labels on packages of cigarettes

How does this affect the market for cigarettes?

As a result, the intersection of the supply and demand curves shifts down and to the left along the market supply curve for cigarettes. After this shift, the equilibrium price and quantity both decrease.

What does the price elasticity of demand do?

measures how much the quantity demanded responds to a change in price.

what is the formula for price elasticity of demand?

Price elasticity of demand = (Percentage change in quantity demanded)/(Percentage change in price)

what is the ratio of the price elasticity of demand?

negative like the law of demand

What does the price of elasticity of demand reflect?

how responsive consumers are to changes in the price of a good.

When is demand said to be elastic?

if a one percent change in price results in a greater than one percent change in the quantity demanded

when is demand said to be inelastic?

if a one percent change in price results in a less than one percent change in the quantity demanded

when is demand said to be unit elastic?

if a one percent change in price results in a one percent change in the quantity demanded.

Why do economists use elasticity?

because it provides a measure of the responsiveness of demand to price changes that is independent of the units of measurement.

What is an important activity of applied economics?

measuring the actual elasticity of demand for particular products

What are the factors that can affect the price of elasticity of demand?

Substitutes, Necessities, market definition, and time horizon

What is substitutes?

Goods with close substitutes will tend to have relatively high price elasticities of demand because it is easy for consumers to switch from one product to another. For example, the price elasticity of demand for a particular cola drink is likely quite high because consumers can easily switch to a different brand if the price rises.

What are necessities?

items that are regarded as necessities will generally have lower price elasticities of demand than luxuries. Many people must drive to and from work and use their cars to run important errands. As a result, the demand for gasoline has a low price elasticity of demand.

What is market definition?

The price elasticity of demand will depend on how we define the market. The broader the market definition, the fewer close substitutes there will be and the lower the elasticity of demand. The price elasticity of demand for soft drinks will be lower than the price elasticity of demand for any particular brand of cola.

What is time horizon?

Fully adjusting to changes in prices may take time. Take the example, of gasoline prices considered earlier. At first

there is not much people can do to reduce their

consumption when the price of gasoline rises.

But, over time people will buy more fuel-

efficient cars, move closer to their work, and make other changes that will allow them to more significantly reduce their demand.

What is elasticity related to?

the slope of the demand curve

What is a constant slope of a linear demand curve?

∆P/∆Q = e

What is the Greek letter ∆ use to denote?

change in price and quantity along the demand curve

What is the ratio ∆Q/∆P equal to?

1/e, that is also a constant

what happens in a perfectly inelastic demand?

quantity demanded does not depend on price at all, also looks like a graph like x=0

What does a perfectly elastic demand graph look like?

the curve is completely flat like y=1

what is the formula to calculate the price elasticity of supply?

price elasticity of supply = (Percentage change in quantity supplied)/(Percentage change in price)

what are the factors that can affect the price of elasticity of supply?

Ease of entry and exit, scarce resources, and time horizon

What is ease of entry and exit?

If it is easy for new businesses to begin supplying a product or for those in the market to leave, then supply will

tend to be more elastic. The supply of airline

flights on a particular route is quite elastic

because airlines can easily shift planes from one

route to another to respond to changes in prices.

What is scarce resources?

If an input required to produce a good is scarce, then the supply will be inelastic. For example, the supply of beachfront

vacation homes is highly inelastic because the

amount of beachfront property is limited.

What are time horizon?

The longer the time horizon is, the greater the elasticity of supply will be. Over short time horizons, firms may not be able to hire and train additional workers or add the

necessary equipment to increase production.

Over a longer horizon, they can do this more

easily.

What is something that is perfectly inelastic?

The supply of Van Gogh sunflower paintings because there is not way to produce more of these

what is the formula to calculate total revenue?

Total Revenue = equilibrium price times equilibrium quantity

What major food crops has the US farm policy established minimum prices?

corn and wheat

What else has the federal govern and most states established?

a minimum wage, and some communities has gone further, seeking to legislate that employers pay a "living wage."

When did the middle eastern oil supplies interrupted and heating oil prices shot up?

1979

what is two effects of rent control?

one is to increase the consumer surplus of some renters while reducing the producer surplus of landlord and thus negatively affecting other renters. second is that the total surplus is reduced since rent control prevents some mutually beneficial transactions from taking place.

what is deadweight loss of the tax?

Deadweight loss is the fall in total surplus that results when a tax distorts market outcome.

How does an exchange makes people better off?

it does so by encouraging specialization. When individuals or countries specialize in the activity they do the best, the overall economic pie increases

what reason is why our modern economy is characterized by such a high degree of interdependence?

these gains from trade