Shared Flashcard Set

Details

Microeconomics: Topic III
Demand and Supply Analysis (Ceilings, Floors, Elasticity, Short Run, Long Run, etc.)
97
Economics
Undergraduate 2
02/25/2013

Additional Economics Flashcards

 


 

Cards

Term
Economic policies may have ultimate effects that differ from the intended effects is the definition of...
Definition
The Principle of Unintended Circumstances
Term
The intended effect of a price ceiling
Definition
it reduces the product's price
(benefits the consumers)
Term
the unintended effect of a price ceiling
Definition
it creates a shortage of the product
Term
What is an example of a price ceiling?
Definition
Gasoline Price controls (think 1970s)
Term
The intended effect of a price floor
Definition
to raise the product's price
(benefits the producers)
Term
The unintended effect of a price floor
Definition
it creates a surplus of the product
Term
What are some examples of price floors?
Definition
minimum wage and agricultural price supports
Term
A measure of the responsiveness of the quantity demanded of a good to a change in its price is the definition of...
Definition
Price Elasticity of Demand
Term
When the quantity of a good demanded does not change in response to price change, demand is...
Definition
Perfectly Inelastic
Term
When price is raised by 10% and quantity demanded drops 30%, what is the price elasticity of demand?
Definition
0.30/0.10 = 3.00

(%changeQ/%changeP)
Term
Economists would classify the demand for a product that has an price elasticity of 3.00 as...
Definition
elastic
Term
If the price elasticity is 3.00, what will happen when price increases?
Definition
total revenues will decrease
Term
If the price increased from $3.00 to $3.50, and sales decreased from 25 to 20 units, what is the price elasticity of demand?
Definition
(5/45)/(0.50/6.50) = 1.44

(change in Q/total Q)/(change in P/total P)
Term
When the price raises from $5 to $6, yet there is an increase in revenue from $4800 to $6000, what is the demand?
Definition
price inelastic
Term
Generally speaking, the smaller the # of close substitutes for a good...
Definition
the less elastic the demand for the good
Term
Other things being equal, the value price of elasticity of demand will _________ as consumers' incomes spent of the good increases
Definition
increases
Term
A measure of the responsiveness of the demand for a good to a change in income when all other things remain the same is the definition of...
Definition
Income Elasticity of Demand
Term
Economists would classify non-fed ground beef, with an income elasticity of demand value of -1.94 as...
Definition
an inferior good
Term
A measure of the responsiveness of the demand for a good (X) to a change in price of a substitute/complement (Y), defines what?
Definition
Cross Elasticity of Demand
Term
A measure of the responsiveness of the quantity supplied of a good to a change in price when all other things remain on sellers' plans remain the same, defines what?
Definition
Price Elasticity of Supply
Term
What is the most important determinant of price elasticity of supply?
Definition
the amount of time producers have to adjust to a price change
Term
What is the shortest economic time period?
Definition
the immediate run
Term
In what economic time period are some resources available and some resources are fixed?
Definition
the short run
Term
Supply is least elastic when?
Definition
in the immediate run
Term
Supply is most elastic when?
Definition
in the long run
Term
The analysis of the gasoline market between 9/10/01 and 9/11/01 was set in what time period?
Definition
the immediate run (it was only a time span of 2 days)
Term
(From 9/11 gas market analysis) The lines at the gas pumps and price gouging resulted from...?
Definition
an increase in demand with perfectly inelastic supply
Term
The effect of an excise tax imposed on producers of a good results in...?
Definition
a downward shift of that good's supply curve
Term
An excise tax will ultimately be paid by whom?
Definition
by both the producers and the consumers
Term
When the demand curve for a good is more elastic than the supply curve for that good (i.e. the demand curve is flatter), we predict that who will be be paying more from an excise tax?
Definition
the good's producers
Term
According to economic analysis, it costs money to produce goods and services because...
Definition
the resources from which these goods/services are produced cost money to purchase
Term
An increase in productivity (i.e. an increase in output per unit of input) will...
Definition
decrease the cost per unit of output
Term
What is an explicit cost?
Definition
a cost that is paid in money
Term
Accounting profit equals...
Definition
total Revenues - explicit costs
Term
The opportunity cost of an input is the value of that input...
Definition
in its next-best alternative use
Term
why do goods and services cost money to produce?
Definition
because the economic resources from which they are produced cost money to purchase
Term
What happens when there is an increase in productivity (i.e. more output per unit of input)?
Definition
a decrease of cost per unit of output
Term
What is the opportunity cost of an input?
Definition
the value of that input in its next best alternative use
Term
Economists assume that ___________ approximate the opp. cost of these inputs
Definition
market prices (costs) of inputs
Term
Acounting Profit =
Definition
total revenues - explicit costs
Term
Economic Profit =
Definition
accounting profit - implicit costs
Term
Explicit Costs
Definition
costs paid in money (aka accounting costs)
Term
Implicit Costs
Definition
An opp. cost incurred by a firm when it uses a factor of production for which it does not make a direct monetary payment
Term
Why is Implicit Cost (Used to Calculate Economic Profit) Relevant to Economists?
Definition
Because implicit costs estimate the value of owner or firm contributed resources, so it helps economic profit provide a more complete profit picture than just an accounting profit
Term
Principle of Unintended Consequences
Definition
-government policy actions that have ultimate effects that aren't what was intended (ex:price ceilings/floors)
-relates to Murphy's law (whatever can go wrong, will)
Term
What are some problems with equilibrium price?
Definition
Sellers might think it's too low, while buyers may think it's too high
Term
Price Ceiling
Definition
government regulation that places an upper limit on the price at which a particular good/service may be traded
Term
What are some examples of price ceilings?
Definition
-rent ceilings
-gasoline price controls (1973-1980)
-usury (interest rates) laws
Term
The effects of a Price Ceiling
Definition
Intended effect: lower prices, more demand for the product

Unintended effect: shortages, black markets form, alternative rationing schemes
Term
Price Floor
Definition
a government regulation that places a lower limit on the price at which a particular good/service may be traded
Term
The effects of a Price Floor
Definition
Intended effect: seller's revenue will increase due to higher selling price

Unintended effect: surpluses, wasted products, higher taxes/subsidies to manage the surpluses
Term
Price Elasticity of Demand
Definition
a measure of the responsiveness of the quantity demanded of a good to change its price (when all other influences on the buyers remain the same)
Term
What is a formula for calculating Elasticity of Demand (Ed)?
Definition
Ed=(% change in quantity demanded)/(% change in price)
Term
What is the calculation-based (midpoint) formula for calculating Elasticity of Demand?
Definition
Ed=(change in quantity demanded/quantity 1+quantity 2)/ (change in price/price 1+price2)
Term
Elastic
Definition
Responsive
Term
Inelastic
Definition
Unresponsive
Term
When is the demand elastic?
Definition
when the %change in Q > %change in P
-Ed > 1
Term
Elastic demand has a _____ curve
Definition
relatively flat
Term
Inelastic Demand
Definition
when the %change in Q < %change in P
-Ed < 1
Term
Inelastic demand has a _____ curve
Definition
steep sloping
Term
Perfectly Elastic Demand
Definition
quantity demanded changes by an infinite amount in response to any change in price
-Ed = infinity
Term
Perfectly elastic demand has a _____ curve
Definition
horizontal
Term
Perfectly Inelastic Demand
Definition
quantity demanded does not change when price changes
-Ed = 0
Term
Perfectly inelastic demand has a _____ curve
Definition
vertical
Term
For most demand curves, Ed ______ as price increases
Definition
increases
Term
Total Revenues equals...
Definition
Total Revenues = Price * Quantity
Term
According to the Law of Demand, price and quantity are _______ related
Definition
inversely
Term
When demand is price elastic, an increase in price will cause a/n _______ in total revenues
Definition
decrease/drop
Term
When demand is price inelastic, an increase in price will cause a/n _______ in total revenues
Definition
increase/rise
Term
What happens to total revenues when a price is unitary elastic?
Definition
a change in price will have no effect of TR
Term
Proportion of Income Spent
Definition
the value of Ed increases as the share of consumers' budgets spent on goods increases
Term
What are the determinants of Price Elasticity of Demand?
Definition
-proportion of income spent
-availability of substitutes
-time elapsed since price change
Term
Availability of Substitutes
Definition
the value of Ed increases as the number of close substitutes for the good increases
Term
Time Elapsed Since Price Change
Definition
the value of Ed increases as consumers have more time to adjust to price changes
Term
Income Elasticity of Demand (Ei)
Definition
A measure of the degree of responsiveness of the demand for a good to a change in income
Term
Ei > 0
Definition
Normal Good
Term
Ei < 0
Definition
Inferior Good
Term
0 < Ei < 1
Definition
Income Inelastic Goods(Necessity)
Term
Ei > 1
Definition
Income Elastic Goods (Luxuries)
Term
Cross-Elasticity of Demand (Ec)
Definition
A measure of the responsiveness of the demand for a good (X) to a change in the price of a substitute/complement good (Y)
Term
Ec > 0
Definition
Substitutes
Term
Ec < 0
Definition
Complements
Term
Ec = 0
Definition
Independent
Term
Price Elasticity of Supply (Es)
Definition
The degree of responsiveness of sellers to a change in price
Es=%changeQ/%changeP
Term
What is the most important determinant of Es (elasticity of supply)?
Definition
the amount of time producers have to adjust to price changes
Term
How to economists classify time periods?
Definition
based on the producers ability to adjust to output by variability of resources
Term
Variability of Resources
Definition
the more time producers have to adjust to price changes, the more time they can vary their inputs/outputs
Term
What are the economic time periods?
Definition
-Immediate Run
-Short Run
-Long Run
Term
Immediate Run
Definition
(aka the momentary period or market period)
-the shortest time period
-all resources are fixed
-perfectly inelastic supply
Term
Short Run
Definition
the supply company (the firm) has enough time to change its employment of some resources (ex:labor) but doesn't have time to change employment of other s (ex: capital)
-can only change output within the existing limits
-some resources are fixed, while some are variable
Term
Long Run
Definition
time period is long enough for sellers to change all resources used in the production of a good/service
-firms can enter or leave markets if they wish
-all resources are variable
Term
Tax Incidence
Definition
the division of the burden of a tax between the buyer and the seller
-ex: tax imposed on cigarette producers
Term
What happens when an excise tax is imposed?
Definition
-manufacturing costs rise, supply curve shifts left
-suppliers increase price of cigarettes
-this causes a reduction in revenues and less supply of cigarettes
-the decrease in revenues represents how much the suppliers paid in tax, whereas the increase in price represents how much the buyer paid in tax
Term
other examples besides an excise tax that increase costs
Definition
-crude oil
-legal settlements
Term
When will sellers be paying more in a tax than buyers?
Definition
when demand is more elastic (flat) than supply
Term
When will buyers be paying more in a tax than sellers?
Definition
when supply is more elastic (flat) than demand
Term
who is the only winner when it comes to excise taxes?
Definition
the government (receives tax revenues)
Supporting users have an ad free experience!