Lecture Notes Review: Elasticity and Market Surplus

Flashcards covering key concepts from the lecture, including different types of elasticity (price, income, cross-price), consumer and producer surplus, and their real-world applications.

What is a major statistic regarding global food waste?

One third of all food produced worldwide, totaling $1 trillion annually, is wasted, and 25 percent of all calories produced are never consumed.

How do consumers' actual purchasing behaviors often differ from their stated values regarding environmental or local support?

Consumers often express care for local or environmental issues but are ultimately price-sensitive, valuing price over other attributes in their purchase decisions.

What is 'perfectly inelastic demand' and what does its demand curve look like?

Perfectly inelastic demand means the quantity consumed does not change regardless of price, and its demand curve is vertical.

What is 'relatively inelastic demand' and provide an example?

Relatively inelastic demand means there are small changes in consumption for very large price changes. Examples include necessities like insulin or electricity in demanding conditions.

What is 'perfectly elastic demand' and what does its demand curve look like?

Perfectly elastic demand means consumers are willing to consume at one price only; any deviation, even a small one, results in no consumption. Its demand curve is horizontal.

What is 'relatively elastic demand'?

Relatively elastic demand means small changes in price result in very large changes in the quantity consumed, indicating high price sensitivity.

Explain the difference between slope and elasticity along a linear demand curve.

The slope of a linear demand curve is constant at all points, but elasticity varies along the curve, becoming more inelastic as one moves down and right.

What does a 'unitary elastic' demand mean?

Unitary elastic demand means consumers care about price and quantity equally, where the percentage change in quantity demanded equals the percentage change in price, resulting in an elasticity of one.

What is 'price elasticity of supply' and why is it always positive?

Price elasticity of supply measures the responsiveness of quantity supplied to a change in price. It is always positive because the supply curve is upward sloping; as prices go up, quantity supplied goes up.

What factors can constrain a supplier's ability to respond to price changes (i.e., affect supply elasticity)?

Constraints include the ease of acquiring inputs (e.g., skilled labor, specific raw materials) and the setup of the production process.

What is 'income elasticity of demand' and what does an income elasticity less than zero signify?

Income elasticity of demand measures the response of quantity demanded to a change in consumer income. An income elasticity less than zero signifies an inferior good, where consumption decreases as income increases.

How are normal goods categorized based on income elasticity of demand?

Normal goods are categorized into necessities (income elasticity between 0 and 1, consumption changes little with income) and luxury goods (income elasticity greater than 1, consumption changes significantly with income).

What is 'cross price elasticity of demand' and what do positive and negative values indicate?

Cross price elasticity of demand measures the responsiveness of quantity demanded of one good to a change in the price of another good. Positive values indicate substitute goods, while negative values indicate complementary goods.

In the context of Ford F-150 sales, how would a 10% fall in the price of a Chevy Silverado (substitute, cross price elasticity = 1.5) affect F-150 sales?

F-150 sales would fall by 15% (1.5 * -10%).

In the context of Ford F-150 sales, how would a 20% increase in the price of gasoline (complement, cross price elasticity = -0.8) affect F-150 sales?

F-150 sales would fall by 16% (-0.8 * 20%).

What is 'consumer surplus'?

Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good and the actual market price they have to pay.

What is 'producer surplus'?

Producer surplus is the difference between the actual market price a producer receives for a good and the minimum price they would have been willing to accept to supply it.

Why is market equilibrium considered efficient or optimal?

Market equilibrium is efficient or optimal because it maximizes the total surplus, meaning it achieves the highest possible sum of consumer and producer surplus.