Economics test 1 review

What is price elasticity of demand?

The responsiveness of demand to changes in price, with inelastic demand showing little change and elastic demand showing significant change.

What are some solutions to address positive externalities of consumption?

Subsidies, direct government provision, positive advertisement, and legislation.

What are some solutions to mitigate negative externalities of consumption?

Bans on goods, indirect taxes, and negative advertisements.

What are positive externalities of production?

Benefits generated by the production of goods and services that positively affect society, such as investments in research and flood defenses.

What are some solutions to address positive externalities of production?

Subsidizing firms and direct government funding.

What are negative externalities of production?

Negative effects on society caused by the production process, such as pollution and resource depletion.

What does a YED greater than 1 indicate?

The good is income elastic, meaning demand increases more than proportionately with income, typical for luxury goods.

What does a YED equal to 0 indicate?

The good is perfectly inelastic, meaning changes in income do not affect demand, typical for essential medications.

What is a price ceiling?

A maximum price set to make goods affordable, which can lead to excess demand or shortages.

What are positive externalities of consumption?

Benefits that consumers receive from goods and services that also positively impact others, such as vaccines, education, and healthcare.

What occurs when there are positive externalities of consumption?

Underallocation of resources occurs, leading to too little consumption.

What are negative externalities of consumption?

Situations where consumption benefits the consumer but negatively affects others, such as smoking and loud music.

What happens when negative externalities of consumption are present?

Overallocation of resources occurs, leading to too much consumption.

What occurs when there are positive externalities of production?

Underallocation of resources occurs, resulting in too little production.

What happens when negative externalities of production are present?

Overallocation of resources occurs, leading to too much production.

What are potential solutions for negative externalities of production?

Carbon taxes, legislation, and tradable emission permits.

What is income elasticity of demand (YED)?

A measure of how demand for a good changes in response to income changes, calculated as % change in quantity demanded / % change in income.

What does a YED less than 1 indicate?

The good is income inelastic, meaning demand increases less than proportionately with income, typical for necessities.

What is a price floor?

A minimum price set above equilibrium to protect producers, which can lead to surpluses.

What is the formula for aggregate demand (AD)?

AD = C + I + G + (X - M), where C is consumption, I is investment, G is government spending, X is exports, and M is imports.

What are the goals of fiscal policy?

To achieve low and stable inflation, low unemployment, stable economic growth, equitable income distribution, and external balance.

What is expansionary fiscal policy?

A policy involving increased government spending and lower taxes, used during recessions.

What is contractionary fiscal policy?

A policy involving decreased government spending and higher taxes, used to cool off an overheating economy.

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