Intro to Microeconomics: Midterm 2 (Jaqua)

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the percentage change in quantity demanded divided by the percentage change in price

when is demand elastic?

if quantity demanded responds substantially to changes in the price (value is greater than 1)

when is demand inelastic?

if quantity demanded responds only slightly to changes in the price (value is less than 1)

what influences price elasticity of demand?

1. availability of close substitutes

2. necessities versus luxuries

3. definition of the market

4. time horizon

availability of close substitutes

if close substitutes, more elastic because it is easier for consumers to switch

if less substitutes, less elastic

necessities versus luxuries

necessities elastic

luxuries inelastic

definition of the market

narrowly-defined markets, more elastic

broadly-defined markets, less elastic

time horizon

goods tend to have more elastic demand over time

midpoint method

(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]

unit elasticity

demand or supply with a price elasticity coefficient that is equal to 1

perfectly inelastic

demand curve or supply curve is vertical

perfectly elastic

demand curve or supply curve is horizontal

if demand is inelastic

increase price will increase total revenue

if demand is elastic

increase price will decrease total revenue

if demand is unit elastic

total revenue remains constant when the price changes

at points with low price and high quantity

the demand curve is inelastic

at points with high price and low quantity

the demand curve is elastic

normal goods

positive income elasticity

inferior goods

negative income elasticity

cross-price elasticity of demand

a measure of how much the quantity demanded of one good responds to a change in the price of another good, computed as the percentage change in quantity demanded of the first good divided by the percentage change in the price of the second good

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

when is supply elastic?

if the quantity supplied responds substantially to changes in the price

when is supply inelastic?

if the quantity supplied responds only slightly to changes in the price

in the long run

supply is more elastic than in the short run

for low levels of quantity supplied

the elasticity of supply is high

price ceiling

a legal maximum on the price at which a good can be sold

price floor

a legal minimum on the price at which a good can be sold

when is a price ceiling binding?

when it is below the equilibrium price

when is a price floor binding?

when it is above the equilibrium price

true or false: subsidies are more efficient than price controls

true

true or false: all governments, regardless of size, use taxes as a way to raise revenue for public projects

true

tax incidence

the manner in which the burden of a tax is shared among participants in a market

what happens when a politically powerful group persuades a government to make a rule about prices?

they benefit while others are harmed

differences between shortages in competitive markets vs. shortages in markets w/ price ceilings

temporary vs. permanent

dead weight lost

goes to no one; goods not supplied or bought due to the price ceiling loss of efficiency (trades that don't happen)

triangle directly left of the equilibrium price

dead weight lost

middle rectangle

government revenue

top left rectangle

consumer surplus

bottom left rectangle

producer surplus

example of price ceiling

rent control

example of price floor

minimum wage

farm subsidies

you can sell to the government guaranteed at a minimum price

subsidy

negative tax

who pays taxes

people, not corporations; tax burdens are measured by the change in resources that people enjoy

tax burdens are...

shared

whoever bears more burden...

had more surplus to begin with

externality

the uncompensated impact of one person's actions on the well-being of a bystander

negative externality

if the impact on the bystander is adverse

positive externality

if the impact on the bystander is beneficial

true or false: the market equilibrium is not efficient where there are externalities

true

welfare economics

in the absence of government intervention, the price adjusts to balance the supply and demand

what causes negative externalities?

markets produce a larger quantity than socially desirable

social cost

private cost + external cost

optimum quantity

where the demand curve crosses the social cost curve

external cost

difference between the supply curve and the social cost curve

internalizing the externality

altering incentives so that people take account of the external effects of their actions

what causes positive externalities?

markets produce a smaller quantity than socially desirable

taxes and subsidies related to externalities

tax negative externalities

subsidize positive externalities

technology spillover

the impact of one firm's research and production efforts on other firms' access to technological advance

command-and-control policy

regulate behavior directly

market-based policy

provide incentives so that private decision makers will choose to solve the problem on their own

regulation

type of command-and-control policy where government can either require or forbid certain behaviors

corrective tax

a tax designed to induce private decision makers to take account of the social costs that arise from a negative externality

ideal corrective tax or subsidy

equals the external cost of an externality

coase theorem

the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own

transaction costs

the costs that parties incur in the process of agreeing to and following through on a bargain

examples of market failures

monopolies, externalities

oligopoly/oligosony

few sellers/buyers

monopoly/monopsony

one buyer/seller, act like they have influence over the price of goods

in a market with a monopoly

there is no supply curve

marginal revenue

revenue gained by producing next unit

marginal cost

cost to produce next unit

what happens when you tax monopolies?

increases dead weight lost

common causes of monopolies

- government protection (patents)

- natural monopolies (high fixed cost of setting up and low marginal cost)

- scarce resources or input

- trade secret/technology/cost advantage

- network effect

internalities

decision makers ignore some of the costs or benefits of their own decision

incompatible use with externalities

both people cannot enjoy, have to decide who gets to reap the benefits

missing market

harm is not traded in a market, everyone burdens another without feeling the cost of their own actions; proposes creating a property rate and trading it

true or false: zero externalities are the goal

false, the good is too useful

no double dividend

to reap the first benefit, you must reduce another tax

climate dividend

reduce taxes in order to give you cleaner air; specifically, raise taxes on gas and lower on everything else

industrial organization

the study of how firm's decisions about prices and quantities depend on the market conditions they face

total revenue

the amount a firm receives for the sale of its output; QxP

total costs

the market value of the inputs a firm uses in production; explicit plus implicit costs; fixed plus variable costs

explicit costs

input costs that require an outlay of money by the firm

implicit costs

input costs that do not require an outlay of money by the firm

economic profit

total revenue - total cost

accounting profit

total revenue - explicit costs

marginal product (of a worker)

the increases in output that arises from an additional unit of input

as the number of workers increases

marginal product declines

diminishing marginal product

the property whereby the marginal product of an input declines as the quantity of the input increases

total-cost curve gets steeper as the amount produced rises, whereas...

the production function gets flatter as production rises

fixed costs

costs that do not vary with the quantity of output produced

variable costs

costs that vary with the quantity of output produced

average total cost

total cost divided by the quantity of output

average fixed cost

fixed cost divided by the quantity of output

average variable cost

variable cost divided by the quantity of output

marginal cost formula

change in total cost / change in quantity

wherever the marginal cost is less than the average total cost

average total cost is falling

wherever the marginal cost is greater than the average total cost

average total cost is rising