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Untitled Flashcards Set
1/22/2025 Day 1 -
This chapter …
Definition of economics
What 4 principles guide the choices made by individuals?
What 4 principles govern how individual choices interact?
What 3 principles illustrate economy wide interactions
5 basic questions of economics
Analyzing different Economic structures
First Principles
Definition of Economics
Economics - the study of the consumption, production, and distribution of goods and services
To allocate the resources efficiently, we need to make “optimal decisions”
Decision making units
Government
Household
Firm
Which are all subject to scarcity
Criteria of making optimal decisions
Having all relevant information
Having the incentive to act on it
To be an informed citizen requires a basic understanding of economics.
Difference between micro and macro - on quiz
Micro - the part of economics concerned with decision making by individual consumers, workers, households, and business firms (cost and profits)
Macro - Examines the economy as a whole, or its basic subdivisions or
Aggregates, such aggregate income, aggregate consumption, inflation, unemployment, and real GDP.
Individual choice pt 1
Choices are necessary bc resources are scarce
factors of production- land, labor, capital, entrepreneur
Resource - includes factors of production
Components use to produce goods and services for consumption or use
Scarce resources -
A resource is scarce when there is not enough of the resource available to satisfy all various ways a society wants to use it
Which is why we need to make choices
When we make choices we incur a cost
True cost of something is its opportunity cost
Opportunity cost- what you must give up in order to get something
To obtain more of one thing society and individuals must forgo the opportunity of getting the next best thing
Opportunity cost=explicit costs+implicit costs
Assessment - in camera roll
Ex- $25k and 1500
Im - 20x15 hours$15
26500+number = opportunity cost
There are diff types of decisions
A choice between two alternatives
Or
A much more complex choice that requires us (how much?)
“How much” is a decision at the margin
People respond to incentives, exploiting opportunities to make themselves better off.
Incentive - anything that offers rewards to people who change their behavior.
Which policy would more effectively reduce pollution
Educating manufacturers about climate change or offering them financial rewards for reducing pollution?
Assessment
Suppose Costco offers unlimited free samples on the weekends and consumers respond by eating samples until they are full without buying the product. Economists would refer to this and an example of…
Efficiency
Equity
Bad incentives
Marketing
Gains from trade
Trade allows us all to consume more than we otherwise could
Gains from trade arise from specialization
Specialization; he situation in which each person specializes in the task they are good at performing
Assessment
In most fat-food chains there is one person to take the order, another to make each item of food, and another to bag the items up. This is referred to as…
A. equilibrium
B. marginal
C. trade-offs
D. Specialization
Markets move towards equilibrium
Bc people respond to incentives markets move toward equilibrium
Equilibrium - an economic situation in which no individual would be better off doing something different
Assessment
Answer - A
Day 2 - 1/27/2025
Resources should be used efficiently to achieve society's goals
Economy is efficient: if it takes all opportunities to make some people better off without making other people worse off
Equity - a condition in which everyone gets their “fair share” (there are many definitions of equity.)
Equity and efficiency are often at odds
Markets usually lead to efficiency, but when they don’t, can government intervention improve societys welfare?
Equity and efficiency are often at odds
efficiency : all the opportunities to make people better off have been exploited
People normally take the opportunities to make themselves better
There are many definitions of equity
Equity and efficiency are often at odds
Equity is subjective
What is fair?
One persons spending is another persons income
During recessions a drop in business spending leads to
Less income
Less spending…
And further drops in business spending layoffs and rising employment
GDP=C+Ig+G+Xn
11. Increases in the economy's potential lead to economic growth overtime
Economic growth: the increase in real GDP and living standards over time
Economy’s potential: the total amount of goods and services it can produce
Five basic questions in economics
What goods and services will be produced
How will the good and services be produced
Who will get the goods and services
How will the system accommodate change
How will the system promote progress
Economic systems
Free market
Ex. Pizza places right next to each other
Pizza | Pizza | Pizza | Pizza |
Private property intellectual
Owned by an entrepreneur
Land labor and capital
Intellectual property (patents, copyrights, trademarks)
Legal system that protects private property
Free enterprise:freedom of households to create their own business and operate for profit
Access to capital
Financial intermediaries
Banks
Competition
Firms compete for your dollars
Follow market discipline
Having all relevant information, running out of a certain flavor/kind of something tells the business that you like it and would like to buy and have the business to produce more of it
Reaching equilibrium, no overproduction and no underproduction
Direct labor land capital and material to a certain thing
Everytime you search for a product/service you will find it
Entrepreneurs
Products and services
Profit motive
Loss test
Stores can go bankrupt if they cannot provide their products adequately
Free Market Economy (Tenets)
Invisible hand
The pursuit of self interest benefits of society
Incentives
Are what choices and decisions are based on
Alternate system
Command Economy system (Tenets)
Government → money flows to pizza store from government
T | Pizza | Pizza | Pizza | Pizza | T |
No Private property
Government ownership of property (pizza places)
No entrepreneurs
Absence of Private Property and intellectual Property
No competition
Government monopoly
No market discipline
Government tells how many of what to make
No guarantee to gauge what consumers want
No profit motive
No loss test
Do whatever and still get paid
Do not and cannot go bankrupt
Socialism
A central planning board (appointed by the government dictates all…
Production goals (product, services, and physical capital
Allocation of resources (labor, land, and capital)
Wages and prices
Socialism is a government “monopoly”
Government owned enterprises cannot go bankrupt
Economic systems -
The definition of wealth differs between socialism and capitalism
Socialism
Is more concerned with the distribution of wealth
How do we slice the pie
Capitalism
Is more concerned with the creation of wealth
Let's make the proverbial pie as large as possible
Zero sum fallacy
When someone makes money someone else must be losing it
Day 3 1/29/2024
Welfare vs work
Welfare
GDP/population= GDP per capita
Economic growth and prosperity?
Capitalism teaches people to work more
Socialism teaches people to demand more
The demise of the command system?
Coordination Problem: it was difficult (if not impossible) or central planners to effectively coordinate the allocation of resources and satisfaction of wants of millions of consumers resource suppliers, and business.
Incentive problem - with central planners determining what and how much will be produced, and how much resource suppliers would receive, there was little incentive to innovate, contain costs, or otherwise improve the quantity of goods and services.
Incentive: anything that offers rewards to people who change their behavior.
Terms to remember
Incentives:
All decisions are motivated by incentives
Profit motive (Greed?)
Unintended consequences
Are outcomes of a purposeful action that are not intended or foreseen
Incentives-
People usually respond to incentives, exploiting opportunities to make themselves better off.
In the United States, restaurant customers have the option of adding a tip to the restaurant bill. In much of Europe a tip is added automatically.
Where would you expect waiters to be more attentive?
Important!!
Pitfalls to sound reasoning
Biases
Loaded terminology
Post hoc fallacy
Predicated on cause sequence
Fallacy of composition
Correlation not causation
A goes up b goes up
B goes down a goes down
More evidence is needed for causation
Positive versus normative economics
Positive economics
Positive economics is a stream of economics that focuses on the description, quantification, and explanation of economics developments, expectations, and associated phenomena
Attempts to establish a cause and effect relationship
Descriptive
Normative economics
Normative economics focuses on the ideological, opinion-oriented, prescriptive, value judgements, and “what should be” statements aimed toward economic development, investments projects, and scenarios. Makes prescriptions about the way the economy should work.
Subjective
More value based assumptions than empirical data
People thoughts and feelings
Prescripted
Positive economics is about description (factual); normative economics is about prescription
Circular flow diagram - not on exam
CHAPTER 3
Competitive market/supply and demand
This chapter we will learn
What is a competitive market?
What are supply and demand curves?
How do supply and demand curves lead to an equilibrium price and equilibrium quantity in the market?
What are shortages and surpluses and why do price movements eliminate them?
Competitive markets
A competitive market has many buyers and sellers of the same good or service, none of whom can influence the price
Price takers → no influence on price
Accept and charge market price
The supply and demand model is a model of how a competitive market behaves
The five key elements of this model:
The demand curve
The supply curve
Factors that shift the demand curve and factors that shift the supply curve
The market equilibrium
Changes in the market equilibrium
SUPPLY
Supply remresents the behavior of sellers
A supply schedule shows how much of a good or service would be supplied at different prives
A supply curve shows the quantity supplied at various prices
The quantity supplied is the quantity that producers are willing and able to sell at a particular price.
The Law of Supply: higher prices for a good leads suppliers to supply greater quantities & lower prices leads suppliers to supply less of the product. (other things equal)
Quantity supplied: the law of supply
Law of Supply: The positive relationship between price and quantity of a good supplied:
An increase in market price, ceteris paribus, will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied
What to take from a supply curve
Vertical intercept (y-axis)
Law of supply
And …
Day 4
Supply curve - supports firms that are willing and able to supply goods and services.
Price does not cause supply curve to shift, it causes movement of supply
Increase and decrease in the quantity supplied
Understanding shifts of the supply curve
Five important supply shifters include changes in:
input prices.
the prices of related goods or services.
technology.
expectations.
the number of producers
Input prices
Increase in the price of an input makes the production more costly for sellers, supply decreases.
A fall in the price makes the production less costly for sellers. Supply increases
Assessment
What will happen to the number of new businesses if the government reduces the fees and red tape associated with new business licenses? What happens if the fees rise?
Changes in prices of related goods
Inputs used in production have opportunity costs
Sellers will choose to use inputs whose profit is the highest
Sellers will supply less of a good if its profitability falls and vice versa
There are substitutes and complements in production processes.
Complement in pork processing? Lard.
Substitute in corn production? Cotton.
What will happen to supply and the supply curve if the price of lard/cotton changes?
Changes in technology
More often than not firms move towards more innovative and cost effective products
Expectations
Very hard for firms to tell
The expectations of a higher price of a good in the future decreases current supply of the good if their sellers can store the good (vise versa)
If you expect prices to go up you're likely to keep products till then
If you expect them to depreciate you want to sell quickly
Changes in number of producers
Entry - implies more sellers in the market, increasing supply
Exits - implies fewer sellers in the market, decreasing supply
Demand
Demand represents the behavior of buyers.
A demand schedule is a table showing how much of a good or service consumers will want to buy at different prices.
A demand curve shows the quantity demanded at various prices.
The quantity demanded is the quantity that buyers are willing (and able) to purchase at a particular price.
The law of demand: a higher price for a good leads people to demand a smaller quantity of that good, other things equal.
Inverse relationship
Demand schedule ^^^
As price falls quantity demand rises
Even if there was no price to a certain good or service there is always a max amount of what will be used
When you want to change one's behavior you change their incentive
Demand curves
Increase in demand means a shift rightward
Decrease in demand means a shift leftward
5 factors that change the demand curve
Change in the prices of related goods and services
Substitutes
if two goods are similar/interchangeable if a decrease in the price of one leads a decrease in demand for the other (vice versa)
Substitutes usually serve a similar function: coffee and tea, muffins and doughnuts, train rides and air flights.
Compliments
If a decrease in the price of one good leads to an increase in the demand for the other (or vice versa).
Complements are usually consumed together: smartphones and apps, cars and gasoline.
Changes in income
The effect of the changes in income ondemands depends on the nature of the good in question
A normal good : demand increases when income increases
An inferior good : demand decreases when income increases
What happens to demand and the demand curve if income increases/decreases?
Changes in tastes
Tastes and preferences are subjective and vary among consumers.
Seasonal changes or fads have predictable effects on demand.
What happens to demand for boots in October?
Change in expectations
If consumers have a choice about the timing of a purchase, they buy according to expectations.
Buyers adjust current spending in anticipation of the direction of future prices in order to obtain the lowest possible price.
If prices for the newest Xbox consoles are expected to drop right before Christmas, what will happen to sales during November?
Changes in number of consumers
As the population of an economy changes, the number of buyers of a particular good also changes, thereby changing its demand.
What happens to the demand for diapers in Russia as birth rates drop?
Answer - B !
Day 5 2/5/2025
Supply, demand, and market equilibrium
When Qs=Qd at a certain price the market is in equilibrium
That is the amount consumers would purchase at this price is matched exactly by the amount of producers wish to tell
Finding the equilibrium price and quantity
The price at which this takes place is the equilibrium price, also referred to as the market-clearing price. The quantity of the good or service bought and sold at that price is the equilibrium quantity.
Why do all sales and purchases in the market take place at the same price?
Where consumers don't have time to compare prices (as in a tourist trap) different stores have different prices
In well-established markets, there is a uniform price
Uniform price is also called the market price
Why does the market price fall if it is above the equilibrium price?
There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level
Surpluses do not last: sellers will reduce price so they can move goods off the shelves
Price above its equilibrium level creates a surplus
This surplus will push the price down until it reaches the equilibrium price of $13.25
Why does the market price rise if it is below the equilibrium price?
There is a shortage when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
Shortages do not last: sellers will realize that they can charge higher prices.
Price below its equilibrium level creates a shortage
This shortage will push the price up until it reaches a certain equilibrium price
What happens when the demand curve shifts
A decrease in demand leads to a movement along the supply curve to a lower equilibrium price and lower equilibrium quantity.
What will happen to equilibrium price and quantity if demand increases?
A decrease in supply leads to a movement along the demand curve to a higher equilibrium price and lower equilibrium quantity.
What will happen to equilibrium price and quantity if supply increases?
2 Assesments
Simultaneous shifts of the demand and supply curve
If the increase in demand is relatively larger than the decrease in supply, the equilibrium price and quantity fall.
If the decrease in supply is large relative to the increase in demand, the equilibrium quantity falls as the equilibrium price rises.
Assessment
Answer - C.
Easier to graph when the function is in respect of p
Find cross point
Set equations equal to one another
d=10
CHAPTER 4
What you will learn in this chapter
What is consumer surplus
What is producer surplus
What is total surplus, and why is it used to illustrate the gains from trade in a market?
What accounts for the importance of property rights and economic signals in a well-functioning market?
Why can a market sometimes fail and be inefficient?
Measuring market efficiency
The analysis of consumer surplus and producer surplus helps us calculate
How much benefit producers and consumers receive from the market
And
How the welfare of consumers and producers is affected by changes in prices
Measure efficiency
Consumer surplus - the difference between market price and what consumers (as individuals or the market) would be willing to pay
A consumer's willingness to pay for a good is the maximum price at which they would buy that good
Individual consumer surplus: the gain to an individual buyer from the purchase if a good: the difference between the price paid and what the maximum price the buyer is willing to pay
Total consumer surplus: the sum of the individual consumer surplus to refer to both individual and total consumer surplus
total consumer surplus (take area of yellow triangle)
Day 6 2/10/2025
Assessment
One shirt bc the amount he is willing to pay for the second shirt is less than the actual price.
$7 ($35-$28)
Marginal utility = change in total/change in quantity
½ (5,000-2,010)(1200) = 1.794 million
Answer - B.
Producer surplus - the difference between market price and the price at which firms are willing to supply the product.
Area below the price of a supply curve
andrew is most efficient
Total producer surplus is $45
Total surplus - the sum of the producer surplus and consumer surpluses.
At equilibrium total surplus is maximized!!! (maximum efficiency)
The efficiency of markets
Competitive markets are usually efficient:
That allocates consumption of the goof to the potential buyers who most value it.
They allocate sales to the potential sellers who most value the right to sell the good (e.g., who have the lowest cost).
They ensure that all transactions are mutually beneficial: Every consumer who makes a purchase values the good more than every seller who makes a sale.
They ensure that no mutually beneficial transactions are missed: Every potential buyer who doesn’t make a purchase values the good less than every potential seller who doesn’t make a sale.
Three caveats to efficiency
Although a market may be efficient it isn't necessarily fair
Markets sometimes fail to deliver efficiency
Even when the market equilibrium maximizes total surplus this doesn't mean that it results in the best outcome for every individual consumer or producer.
Equity and efficiency
Efficiency is important but society also cares about equity
Sometimes societies choose to have government intervene in markets to increase equity even though it reduces efficiency
Why markets typically work so well
Well functioning markets are effective because of
Property rights : are the rights of the owners of valuable items, whether resources or goods, to dispose of those items as they chose
Economic signals: is any piece of information that helps people make better economic decisions
Prices are most important in a market economy bc they convey information abt other peoples costs and their willingness to pay
Economic signals matter
Prices translate complex information into an easy signal for producers
Profits rise in industries when consumers want more of that industries product
Profits decline in industries when consumers want less of that industries products
The high price of ice in post-katrina New Orleans made it more attractive for firms to provide ice where society needed it most.
Why private property matters
Property rights are the rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose.
Private property rights create and protect incentives to trade with others and to innovate.
Say you were given property by your family what do you do with it?
Appraise it see how much it is
What do you do after you find the value
Rent land
Sell it
Build a house to live
Build a house to rent
Strip mall (rent)
Build and rent apartments
Build condos and sell them
Which do you choose?
The one with the highest yield of return depending on the market.
Inverse demand function has a negative slope
Inverse supply function has a positive slope
When solving must find price and quantity
Set both equations equal to each other to find Q then plug Q in to find price
Example
10- .2Q = 2+.2Q
8=.2Q
Q=40
p=-.2(40) +10 (demand)
P= .2Q +2 (supply)
CHAPTER 5 Price controls and Quotas: meddling with markets
What you will learn in this chapter
What is a market intervention, and why are price controls and quantity controls the two main forms it takes?
Why do price and quantity controls create deadweight losses and make markets less efficient.
Who benefits and who loses from market interventions?
Why are economists often skeptical of market interventions?
And why do governments undertake market interventions even though they create losses to society?
Prices and markets
Prices convey valuable information
Prices are the primary mec humanism that market participants use to communicate with one another
Buyers signal their willingness to pay
Sellers signal their willingness to sell
Equitable rationing mechanism
Interference in markets has consequences
Distorted price signals cause resources to be misallocated
If prices are distorted, they cannot give good information to buyers and sellers.
Example : cabs in the city
Quota of how many cabs could be in the city made it hard to hail a cab
Uber and lyft was created to ease this
They were able to start it bc of private property
Why governments control prices
Price controls: legal restrictions on how high or low a market price may go. There are two main types:
Price ceiling: maximum price sellers are allowed to charge for a good or service (usually below equilibrium price)
If put higher than equilibrium price is useless
Price floor: minimum price buyers are required to pay for a good or service (usually set above equilibrium)
If put below equilibrium price is useless
Interference in markets has consequences
Price ceilings
Maximum price set by the government that can be changed on a good. Only effective if set equilibrium price
Prevents prices from performing its rational function in a free market system.
Chronic shortages
Example - Bc of rent control policies, an affordable and available rental apartment is hard to find in NYC
Price ceiling model
Without government intervention, the market for apartments reaches equilibrium at point E with a market rent of 1,000 per month and 2 million apartments rented.
Price ceiling model
This price ceiling creates a persistent shortage of 400,000 units: 400,000 households who want apartments at the legal rent of $800 but cannot get them.
Criteria of designated rent control apartments
Location (area)
Age of the buildings
Day 7 2/12/2024
How price ceilings cause inefficiency
Price ceilings cause predictable side effects
Inefficiently low quantity
Inefficient allocation to customers
Wasted resources
Inefficiently low quality
Black markets
Inefficiently low quantity graphed
Dead Weight: Is the area of the shaded triangle corresponding to the amount of total surplus lost due to the inefficiently low quantity transacted.
Inefficient allocation to customers
Inefficient allocation
Price control lead to misallocation of apartments: people who badly need a place to live may not find one, but some apartments may be occupied by people with much less urgent needs
Under rent control, people usually get apartments through luck or personal connections
Wasted resources
People expend money, effort, and time to cope with shortages caused by the price ceiling.
Back in 1979, U.S. price controls on gasoline led to shortages that forced millions of Americans to wait in line at gas stations for hours each week.
The opportunity cost of the time spent in lines—the wages not earned; the leisure time not enjoyed—constituted wasted resources.
Rent control creates missed opportunities
Inefficiently low quality
Inefficient low quality
At the controlled price, sellers have more customers than goods
In a free market, this would be an opportunity to profit by raising prices
Buth when prices are controlled sellers cannot raise prices
Sellers respond to this problem in two ways
Reduce quality
Reduce service
Landlords of rent-controlled housing have no incentive to provide better conditions
Shadow markets
Black market
is a market in which goods or services are bought and sold illegally—either because they are prohibited or because the equilibrium price is illegal.
Shadow markets encourage disrespect for the law in general and worsens the position of those who are honest.
Shadow markets can diminish some of the inefficiencies, but in the end, society as a whole is made worse.
So why are there price ceilings?
Government officials often do not understand supply and demand
Venezuela’s food shortages show how price controls disproportionately hurt the people they were designed to benefit.
Assessment
$25
Assessment
Anytime there is a price ceiling question is on the exam - ask yourself if it is binding/effective (below equilibrium)
Binding so the answer is B.
Price floor
Is a minimum price set by the government for the sale of a product or service. Only effective if set above the market price.
Only effective above equilibrium
Prevents prices from performing it’s rationing function in a free market system
Chronic surpluses
Examples
Minimum wage laws
Agriculture prices
Modeling a price floor
Inefficiently low quantity
Non-binding price floor
Ex. how many units will be transacted (10 million at equilibrium)
Ex. minimum wage
How price floors causes inefficiency
Price floors cause predictable side effects
Deadweight loss
Inefficient allocation of sales among sellers
Waste of resources
Inefficiency high quality
Temptation to break the law by selling below legal price
Inefficient allocation of sales among sellers
Price floors can lead to inefficient allocation of sales among sellers
Sellers who are willing to sell at the lowest price are unable to make sales
Sales go to the sellers who are only willing to sell at a highest price
Wasted resources: price floors
Price floors encourage waste
Ex. To deal with the surplus generated by agricultural price floors, the U.S. government sometimes buys back the excess and donates or destroys it.
Inefficiently high quality
Price floors encourage sellers to offer goods of inefficiently high quality— the quality that is higher than buyers are willing to pay for
Ex. When transatlantic airfares were set by international treaty, airlines could not offer lower prices, so they offered expensive services instead. Most flyers, however, would prefer lower airfares and less food.
Illegal activity
Price floors encourage shadow markets
There are willing sellers (and buyers) at illegal prices so they are tempted to break the law and trade with each other.
Unintended Consequence:
The generous minimum wage in many European countries has contributed to a high rate of unemployment and the flourishing of an illegal labor market.
So why are there price floors?
Same as price ceilings:
They do benefit some people (who are typically better organized and more vocal than those who are harmed by them).
Government officials often do not understand supply and demand analysis.
Assessment
Answer - A
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
!!!!!!!!!!!!!!!!
2/17/2025
Controlling quantities
Government sometimes control quantity instead of price
Quota : an upper limit set by the government on the quantity of some good that can be bought or sold: also referred to as quantity control
Anytime you lower the quantity you increase price
Quota limit: the total amount of a good under a quota or quality control that can be legally transacted
License: the right conferred by the government to supply a good
The market for taxi rides in the absence of government control
Effect of a quota on the market for taxi rides
Demand price: the price of a given quantity at which consumers will demand that quantity
Supply price: the price of a given quantity at which producers will supply that quantity.
Effects of a quota on the market for taxi rides
The wedge, or Quota rent: the difference between the demand price and the supply price at the quota limit. Equal to the market price of the license when the license is traded
Consumers are willing to pay $6 and cab companies are only willing to offer cabs for $4 so drivers begin to charge $6 and make that $2 profit
ASSESSMENT
Answer: C!!! (.5*4*2) = 4
The costs of quantity controls
Like price controls quotas impose losses on society
Deadweight loss (some mutually beneficial transactions don't occur)
Incentives for illegal activities
Unlicensed cabs are a side effect of quantity controls … but also an opportunity for alternate models like Uber.
ASSESSMENT
At P3 which represents consumer surplus?
A
At P3 what is dead weight
C and F
What represent Producer surplus
B E and G
P1 Consumer Surplus
A B E
P1 PS
G
P1 Dead weight
CF
CHAPTER 6 Elasticity
What you will learn in this chapter
Why is elasticity used to measure the response to changes in prices or income?
What are the different elasticity measures, and what do they mean?
What factors influence the size of these various elasticities?
Why is it vitally important to determine the size of the relevant elasticity before setting prices or government fees?
Price Elasticity of Demand
Cross Price Elasticity
Income Elasticity
Elasticity of Supply
Taken for a ride
Taken for a ride: $1,772.41 for driving nine miles in an ambulance for a non emergency treatment.
How are ambulance services able to charge thousands of dollars whether or not an ambulance is actually needed?
The answer is price responsiveness of consumers to price—the price elasticity of demand
Price elasticity of demand
Price elasticity of demand: is the measure of responsiveness:
A demand is elastic when an increase in price reduces the quantity demanded a lot
A demand is inelastic when an increase in price reduces quantity demand just a little
The degree of responsiveness or sensitivity of consumers to a change in price is measured by concept of Price Elasticity of Demand
Calculating the price elasticity of demand
Price elasticity of demand = the percentage change in quantity demanded divided by the percentage change in price
ABSOLUTE VALUE
Price elasticity of demand = (percent change in quantity demanded) / (percent change in price)
The midpoint method
Interpreting the price elasticity of demand
Classification of price elasticity of demand:
A good can have a price elasticity as low as zero or as high as infinity.
If the |Ed| < 1, the demand curve is inelastic.
If the |Ed| > 1, the demand curve is elastic.
If the |Ed| = 1, the demand curve is unit elastic.
|Ed| = absolute value of elasticity of demand
ASSESSMENT
Answer: C
Estimating elasticities
Economists (and many others) are interested in price elasticity of demand
Estimating elasticity is crucial to understanding and predicting market outcomes.
Some estimated price elasticities of Demand
Two extreme cases of price elasticity of demand
Interpreting the price elasticity of demand
Classification of price elasticity of demand:
In absolute terms a good can have a price elasticity as low as zero or as high as infinity.
If a price elasticity <1, the demand curve is inelastic.
If a price elasticity >1, the demand curve is elastic.
If a price elasticity =1, the demand curve is unit-elastic.
-.20/+.20 = -.1 (absolute) = .1
Positive going up and negative going left
Elasticity and total revenue pt 1
Total revenue: price times quantity sold.
Sellers need to know how elastic demand is so they can plan
Total revenue by area
Price effect and quantity effect (not on first midterm but on second)
When a seller raises the price of a good, there are two countervailing effects:
A price effect: After a price increase, each unit sells at a higher price, which tends to raise revenue.
Lower revenue
A quantity effect: After a price increase, fewer units are sold, which tends to lower revenue.
Higher revenue
Effect of a price increase on total revenue
Elasticity and total revenue
When demand is and inelastic, the price effect dominates the quantity effect
So an increase in price will cause only a slight reduction in the quantity demanded
In this instance total revenue will rise when the price rises ( and vice versa)
When demand is elastic, the quantity effect dominates the price effect.
So an increase in price will cause significant reduction in the quantity demanded.
In this instance, total revenue will fall when the price rises.
When demand is unit-elastic, the quantity effect equals the price effect.
So an increase in price exactly balances the reduction in the quantity demanded.
In this instance, total revenue doesn’t change.
What happens if tire prices go up? TR will not change.
ASSESSMENT
Answer: A
ASSESSMENT
Answer: A
2/24/2025
Rent control and creative healthcare 51 and 52
Average tax rate = ( tax liability) / income
EXAM
Ch -1
5 tenets that clarify/ distinguish demands vs free system
Criteria in making optimal decisions
2
Understand principles but don't need to memorize by number
Calculate opportunity cost
Explicit and implicit
Normative and positive economics
Given statement and must define as either
5 terms that cause wrong or irrational decisions
Biases
Falsey of composition
Causation vs
CH -3
Determinants of supply and demand curves
Substitutes and compliments and their relationship (multiple)
Prices above equilibrium
Surplus
Below equilibrium
Shortage/deficit
CH -4
Consumer and producer surplus from graph or chart
Graph area of triangle
Ch - 5
Floor ceilings and quotas
Binding
Not binding
shortages/surpluses
Calculate surplus and shortage
Calculate deadweight
As a consequence of floors, ceilings and quotas
Consumer and producer surplus
W floors ceilings and quotas
Inverse demand and supply function
Then floor or ceiling
Surplus or shortage
Deadweight
Total surplus or cs or ps
One question two functions that feed off of each other
Floors ceilings and quotas
Expect graph
Know percentage and midpoint formula
Elongated demand function
Ch- 7
Know how to determine tax
Price consumers pay / received
How much producer pays and how much consumers pay
Know how to calc government revenue
Calculate deadweight
Determine tax liability depending on income
Government taxes inelastic products such as gas, addictive products (cigarettes, vapes, alcohol, etc)
Progressive, regressive, or proportional tax
Article - rent control
Black markets, low quality, alternative policy (incentivies landlords)
Canadian healthcare system - why was there a shortage ( pay was set by government)
Economics Overview
Definition: Economics is the study of consumption, production, and distribution of goods and services, emphasizing optimal decision-making due to scarcity.
Decision Making Units: Government, households, firms.
Key Principles:
Microeconomics: Focuses on individual decisions by consumers and businesses.
Macroeconomics: Examines economy-wide phenomena like GDP, inflation, and unemployment.
Opportunity Cost: The true cost of a choice, calculated as explicit plus implicit costs.
Gains from Trade: Result from specialization and allow greater consumption.
Market Equilibrium: Achieved when quantity supplied equals quantity demanded; affected by shifts in supply/demand.
Types of Economic Systems:
Free Market: Emphasizes private property and competition.
Command Economy: Government controls production and prices, leading to potential inefficiencies.
Elasticity: Measures the responsiveness of demand/supply to price changes, crucial for pricing strategies.
Market Interventions: Price controls (ceilings and floors) can cause inefficiencies and deadweight losses but are sometimes implemented for various societal reasons.
Economics Overview
Definition: Economics is the study of consumption, production, and distribution of goods and services, emphasizing optimal decision-making due to scarcity.
Decision Making Units: Government, households, firms.
Key Principles:
Microeconomics: Focuses on individual decisions by consumers and businesses.
Macroeconomics: Examines economy-wide phenomena like GDP, inflation, and unemployment.
Opportunity Cost: The true cost of a choice, calculated as explicit plus implicit costs.
Gains from Trade: Result from specialization and allow greater consumption.
Market Equilibrium: Achieved when quantity supplied equals quantity demanded; affected by shifts in supply/demand.
Types of Economic Systems:
Free Market: Emphasizes private property and competition.
Command Economy: Government controls production and prices, leading to potential inefficiencies.
Elasticity: Measures the responsiveness of demand/supply to price changes, crucial for pricing strategies.
Market Interventions: Price controls (ceilings and floors) can cause inefficiencies and deadweight losses but are sometimes implemented for various societal reasons.
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