Microeconomics Exam 2

price elasticity of demand

measures how much the quantity demanded changes in response to a change in price

will always be negative

elastic demand

if the absolute value of price elasticity of demand is greater than one, demand is _____ with respect to price

• consumers change their behavior a lot when price changes

• a one percent change in price produces a more than one percent change in the quantity demanded

inelastic demand

if the absolute value of price elasticity of demand is less than one, demand is _____ with respect to price

• consumers don’t change their behavior very much when price changes

• a one percent change in price produces a less than one percent change in the quantity demanded

unit elastic demand

if the absolute value of price elasticity of demand is equal to one, demand is _____ with respect to price

• a one percent change in price produces a one percent change in the quantity demanded

price elasticity of supply

measures how much the quantity supplised changes in response to a change in price

elastic supply

if price elasticity of supply is greater than one, supply is ______ with respect to price

• if price changes by one percent producers will change the quantity supplied by more than one percent

inelastic supply

if price elasticity of supply is less than one, supply is _____ with respect to price

• if price changes by one percent, producers will change the quantity supplied by less than one percent

unit elastic supply

if price elasticity of supply equals one, supply is _________ with respect to price

• if price changes by one percent, producers will change the quantity supplied by one percent

determinants of sensitive consumers to price

• whether the good is a necessity - the more consumers need the good, the less elastic demand will be

• share as income spent on the good - the greater the proportion of income spent on a good the more elastic demand will be

• convenience

• availability of subsidies

  • time horizon - the longer the time frame the more elastic demand will be

factors influencing price elasticity of supply

• time horizon - the shorter the time frame, the more inelastic supply will be + producers may want to adjust production, but are unable to do so

• changes in per unit cost associated with in course production - a higher price means more revenue for producers, but it may not mean higher profits

  • profits = total revenue - total costs

• increases in the number of units produced can cause:

  • falling per unit costs, constant per unit costs, rising per unit costs

falling per unit costs

firms will be willing to supply more when price rises = more elastic supply

rising per unit costs

firms will be less willing to supply more when price increases = 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/service

• what we use as a measure of well-being of consumers/buyers in the market

negative

if individuals can purchase something for less than their maximum willingness to pay, this frees up income to be spent on other things

consumer surplus cannot be ______, it will be zero if consumer doesn’t buy it

producer surplus

the amount a producer receive for their product (price) minus the minimum amount they must receive to supply the product/service

• supply curve doesn’t start at zero

economic principles

1. people respond to incentives

2. markets are usually a good way to organize economic activity

3. government can sometimes improve market outcomes

government intervention

taxes, subsidies, licensing requirements, regulations, price ceilings, price floors

elasticity

measure of how much buyers and sellers respond to changes in market conditions

elastic

demand for a good is ______ if quantity demanded responds a substantially to price changes

inelastic

demand for a good is ______ if quantity demanded responds slightly to price changes

close substitutes

goods with ___________ tend to have more elastic demand

flatter

_____ the demand curve = greater price elasticity of demand

steeper

_____ the demand curve = smaller the price elasticity of demand

perfectly

______ inelastic = vertical demand curve, quantity demanded stays the same

total revenue

amount paid by buyers and received by sellers of a good, calculated as price of good times quantity sold (P times Q)

income elasticity of demand

measures how the quantity demanded changes as consumer income changes

normal goods

have positive income elasticities

inferior goods

income and quantity demanded move opposite directions and have negative income elasticities

midpoint method

divide change by the average of initial and final levels

cross price elasticity of demand

measures how quantity demanded of one good responds to a change in the price of another

• depends on whether the two goods are substitutes or compliments

welfare economics

study of how the allocation of resources affects economic well being

willingness to pay

maximum amount a buyer will pay

marginal buyer

buyer who would leave the market first if price were any higher

cost

value of everything a seller must give up to produce a good

marginal seller

seller who would leave the market first if the price were lower

total surplus

sum of consumer surplus and producer surplus

efficiency

property regarding a resource allocation of maximizing the total surplus received by all members of society

equality

property of distributing economic prosperity uniformly among the members of society

price ceiling

maximum price by law that can be charged for a good/service

price ceilings create

1. permanent shortage

2. wasteful lines and other search costs (people pay with their time instead of money)

3. reduction in consumer and producer well-being or welfare

4. missallocation of resources

5. reduction in product, quality

dead weight loss

loss of producer and/or consumer surplus that is not transferred to anyone else

move market equilibrium

reducing demand and increasing supply

price floor

the minimum price by law that sellers must receive for a good/service

price floors create

1. permanent surplus (higher unemployment)

2. loss of producer and consumer well-being/surplus

3. misallocation of resources (just right amount of labor is not being hired)

4. value to business of the last worker hired is greater than the cost of hiring that worker