Term
| Price Elasticity of Demand |
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Definition
| measures how much Quantity Demanded responds to a change in Price. It measures the price-sensitivity of buyers’ demand. |
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| The midpoint is the number halfway between the start & end values, also the average of those values. End minus start over midpoint times 100%. |
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Term
| Price Elasticity of Demand depends on... |
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Definition
The price elasticity of demand depends on:
1. the extent to which close substitutes are available
2. whether the good is a necessity or a luxury
3. how broadly or narrowly the good is defined
4. the time horizon: elasticity is higher in the long run than the short run. |
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Term
| Price elasticity of supply |
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Definition
| measures how much Quantity Supplied responds to a change in Price. |
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| a legal maximum on the price of a good or service. Example: rent control. If the price ceiling is below the eq’m price, it is binding and causes a shortage. |
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| a legal minimum on the price of a good or service. Example: minimum wage. If the price floor is above the eq’m price, it is binding and causes a surplus. The labor surplus caused by the minimum wage is unemployment. |
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Term
| If buyers’ price elasticity > sellers’ price elasticity... |
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Definition
| buyers can more easily leave the market when the tax is imposed, so buyers will bear a smaller share of the burden of the tax than sellers. |
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Term
| If sellers’ price elasticity > buyers’ price elasticity... |
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Definition
| sellers will bear a smaller share of the burden of the tax than buyers. |
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Term
| What does a tax on a good do? |
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Definition
| it places a wedge between the price buyers pay and the price sellers receive by the amount of the tax, and causes the eq’m quantity to fall. |
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Definition
| the division of the burden of the tax between buyers and sellers. It depends on the price elasticities of supply and demand. |
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Term
| the allocation of resources refers to: |
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Definition
1. how much of each good is produced
2. which producers produce it
3. which consumers consume it |
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| the study of how the allocation of resources affects economic well-being |
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| the maximum amount the buyer will pay for that good. |
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is the amount a buyer is willing to pay minus the buyer actually pays:
CS = WTP – P |
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| is the value of everything a seller must give up to produce a good (i.e., opportunity cost). It includes cost of all resources used to produce good, including value of the seller’s time. |
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Definition
PS = (amount received by sellers) – (cost to sellers)
PS measures the benefit sellers receive from participating in the market. |
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Definition
TS measures the total gains from trade in a market.
TS= CS + PS = (value to buyers) – (cost to sellers) |
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Term
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Definition
1. Raising or lowering the quantity of a good would not increase total surplus.
2. The goods are being produced by the producers with lowest cost.
3. The goods are being consumed by the buyers who value them most highly. |
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Term
| The market eq’m is efficient when: |
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Definition
1. The eq’m Q maximizes total surplus.
2. The goods are produced by the producers with lowest cost,
3. consumed by the buyers who value them most highly. |
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| a single buyer or seller can influence the market price, e.g. monopoly |
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| side effects of transactions, e.g. pollution |
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| the fall in total surplus that results from a market distortion, such as a tax. |
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| The coolest/nicest/best looking person I have ever seen/met in my entire lifetime. |
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