ECO 110 Exam 2

What happens to total revenue if demand is elastic and there is an increase in price

decreases

What happens to total revenue if demand is inelastic and there is an increase in price

increases

What happens to total revenue if demand is unit elastic and there is an increase in price

no change

Factors that influence price elasticity of demand

is the good a necessity, time horizon, share of income spent on the good, convenience, avaliability of substitutes

Factors that influence price elasticity of supply

time horizon, change in per unit cost associated with production

Falling per unit cost

Firms are willing to supply more when price rises, more elastic supply

Rising per unit cost

Firms are less willing to supply more when price rises, less elastic supply

Consumer Surplus

The difference between what an individual is willing and able to pay and what they actually pay for a product or service

Producer Surplus

The amount a producer receives for their product minus the minimum amount they must receive to supply the product or service

Why do markets fail causing government intervention

markets don’t produce enough of a good or service valued by society, markets produce too much of a good that harms society, market outcomes are perceived to be unfair

What is a price floor, why do governments establish them

The minimum amount businesses can charge for a service, helps producers

What is a price ceiling, why do governments establish them

The maximum amount businesses can charge for a service, helps consumers

Effects of price ceiling on the market

permanent shortages, wasteful lines and other search costs, misallocation of resources, reduction in wellbeing, reduction in product quality

Why does a price ceiling cause a misallocation of resources

Goods and resources become less accessible and harder to supply

Why does a price floor cause a misallocation of resources

The benefit to businesses of their last worker hired is greater than the minimum price the last worker must receive in order to work

Dead weight loss

Loss of consumer and producer surplus that is not transferred to someone else

Binding price floor

When price floor exceeds equilibrium

Non-binding price floor

When price floor is set below equilibrium

Binding price ceiling

When price ceiling is set below equilibrium

Non-binding price ceiling

When price ceiling is above equilibrium

What do consumer and producer surplus measure

wellbeing