# Shared Flashcard Set

Econ Test #4
Elasticity
69
Economics
Undergraduate 1
04/20/2010

## Cards Return to Set Details

Term
 Elasticity
Definition
 A measure of the responsiveness of quantity supplied to one of its determinents
Term
 The price elasticity of Demand
Definition
 a measure of how much the quantity demanded of a good responds to a change in the price of that good
Term
 Formula for Price Elasticity of Demand
Definition
 % Change in QD % Change in P
Term
 Elastic
Definition
 Is QD responds substantially to a change in price
Term
 Inelastic
Definition
 If QD responds only slightly to a change in P
Term
 4 things that determine elasticity
Definition
 1. Availability of Substitutes 2. Necessities versus Luxuries 3. Definition of the market 4. Time horizon
Term
 Availability of Substitutes
Definition
 goods with close subs tend to have more elastic demand because it is easier for consumers to switch from that good to the next
Term
 Necessities vs Luxuries
Definition
 N: Inellastic L:Ellastic HOWEVER- determining what is what depends on the intrinsic properties of the good (pref of the buyer)
Term
 Definition of the market
Definition
 narrowly defined markets tend to have more elastic demand than broadly defined markets because it is easier to find close subs for narrow goods
Term
 Time Horizons
Definition
 Goods tend to have more elastic demand over longer time horizons Ex: gasoline
Term
 Describe the Midpoint Method
Definition
 1. finds the distance between two points on the demand curve [(Q2-Q1)/(Q2+Q1/2)] [(P2-P1)/(P2+P1/2)]
Term
 How can we tell the elasticity of a supply or demand
Definition
 1) e>1 = Elastic e<1 = inelastic 2) the flatter the curve the more elastic
Term
 Total Revenue
Definition
 The amount paid by buyers & receved by sellers of a good computed as the P of the good times the Q P X Q = TR
Term
 When Demand is Inelastic what happens to price and total revenue? Elastic?
Definition
 INELASTIC: they move in the same direction. If price v then TR v. If price ^ then TR ^ ELASTIC: They move in different directions. If price v then TR increases. If price ^ total revenue decreases
Term
 Why is the slope of a linear curve constant and elasticity is not?
Definition
 Because slope is a ratio of change in two variables where as elasticity is the ratio of percentage change
Term
 Income elasticity of Demand
Definition
 a measure of how much the QD of a good responds to a change in consumers income
Term
 Equation for income Elasticity of Demand
Definition
 % change in QD % change in Income
Term
 Normal Goods have ________ income elasticity. Why?
Definition
 positive, because as income gets larger so does our QD
Term
 Inferior goods have _________ income elasticity. Why?
Definition
 Negative, because as income increases then % change in decreases
Term
 Cross price elasticity of demand & FORMULA
Definition
 a measure of how much QD of one good responds to a change in a price of another C-P=%Change in QD of good 1 % Change in QD of good 2
Term
 Control on Prices: basic principle
Definition
 buys of any good always want a lower price while sellers always a higher one
Term
 Price Ceilings
Definition
 a legal maximum on the price at which a good can be sold
Term
 Price floor
Definition
 A legal minimum on the price at which a good can be sold
Term
 Non-binding price ceiling
Definition
 allows the market prices to move naturally towards equilibrium. P< the ceiling
Term
 Binding price ceiling
Definition
 When the market price is = or greater than the price ceiling. Then QD>QS there is a shortage. Next comes a system of rationing has to occur
Term
 Non-binding price floor
Definition
 naturally the price is set higher than the equilibrium price
Term
 Binding price floor
Definition
 when the price set by the market is below the price floor there is a surplus and sellers are unable to sell all they want at the market price
Term
 What happened in Santa Monica after rent control laws were enforced
Definition
 property owners had to abandon their buildings because they could no longer afford to keep them running. So they were left empty and decaying rather than even bother to sell
Term
 In NYC rent-control discouraged
Definition
 new construction
Term
 Rent control
Definition
 a system in which the local government tells building owners how much they can charge
Term
 How did rent-control originate?
Definition
 temporary measure during wartime where landlords couldn't increase rents of those tenants renewing their lease
Term
 what is the objective of rent control?
Definition
 keep rents below the levels that would be observed in freely competative markets, this meant imposing extensive regulations to prevent increase or evading laws
Term
 3 vital functions of freely competitive housing markets
Definition
 1: allocated existing scarce housing among competing claimants 2: it promotes the efficient maintentence of existing housing and stimulates to production of new housing, where appropriate 3: it rations usage of housing by demanders, thereby preventing waste of scare housing
Term
 Rent Control prevents rental prices from...
Definition
 effectivley performing the 3 vital functions of having a freely competative housing market
Term
 How does rent control discourage new construction
Definition
 it depresses the most important long-run determinant of profitability (RENT)
Term
 How does rent control lead to the deterioration of the existing supply of rental housing
Definition
 1: property owners cant recover through higher rents costs of maintenance repairs and capital improvements 2:eventually, taxes, utilities exceed depressed rental rates and apartment is abandoned
Term
 How does rent control impede the process of rationing scarce housing
Definition
 tenant mobility is restricted (larger # of people are staying in smaller spaces) GRIDLOCK
Term
 the effects of rent control force landlords and tenants to...
Definition
 evade the rules discriminate
Term
 Proponents of minimum wage say
Definition
 low-income workers are underpaid and therefore unable to support themselves and their families
Term
 Opponents of minimum wage say...
Definition
 low-wage and low-skilled youths dont have their families to support so it merely enriches a few teenagers at a far greater expense of many others who cant get jobs
Term
 Typically minimum wage is ____ to ____ % manufacturing wages
Definition
 40-50%
Term
 what is the argument agaisnt those who say minimum wage prevents exploitation of employees and helps people support their families
Definition
 -2/3 min wage workers are single -1/2 are teenagers *MW only benefits middle upper class teens who are at least in need of assistance at the same time that is costs the jobs of thousands of disadvantaged minority youths
Term
 In the short run what do firms do when MW increases..but
Definition
 do not cut their workforce but overtime the higher costs due to higher pay for their workers force smaller firms out of business or drop in employement
Term
 How do opponents claim firms will react to higher minimum wage
Definition
 -discriminate agasint race or sex -unwilling to train unskilled workers -less generous with fringe benefits
Term
 price elasticity of supply
Definition
 a measure of how much the quantity supplied of a good responds to a change in price of that good
Term
 formula for price elasticity of supply
Definition
 % change in QS % change in P
Term
 Supply is elastic if...
Definition
 the QS responds substantially to a change in price
Term
 Supply is inelastic if...
Definition
 the quantity supplied responds only slightly to a change in price
Term
 in most market what is the key determinant for elasticity of supply
Definition
 TIME. supply is more elastic in the long run than in the short run because firms cannot easily change the size of their factories to make more or less of a good
Term
 For low levels of quantity supplied the elasticity rises indicating what?
Definition
 firms respond substantially to a change in price. they have the capacity for production that is not being used. in a smaller increase in price makes it profitable for firms to begin using idle capacity
Term
 in NYC thomas sowell states that ______ apartments existed with _______
Definition
 175,000 with 1 occupant
Term
 Thomas Sowell told us that in San Fran _____ % of city's rent controlled apartments _____________
Definition
 49% only one occupant
Term
 the causes of too few people living in large apartments created what problems in NYC and SF
Definition
 people were squeezing into small aprtments they were making long commutes
Term
 Explain the housing cycle thomas sowell describes in his article
Definition
 because people go throughdifferent stages of life the "stock" of housing is shared and circulated
Term
 Sowell talks about senior citizens and mentions how..
Definition
 with rent control they have little incentive to vacate  and so they keep their 4 bedroom apartment and cause havoc to the cycle. Reduces the rate of housing turnover
Term
 NYC has the _______ and most ______ than any other major american city
Definition
 longest lasting and most stringent 1: annual rate of turnover is less than 1/2 the nations average 2:proportion of people staying in their apartment longer than 20 years is 2x the national average
Term
 what are the effects of rent control on immigrant in NYC
Definition
 crowded into bunks in illegal boarding houses in the slums and are exposed to the drug trade and other illegal activity
Term
 when was minimum wage first established? How high??
Definition
 1938 as a provision of the Fair Labor Standards Act -25 cents and hour
Term
 Who gains and who loses from minimum wage?
Definition
 -upper middle class teenagers -low skilled bottom of the economic latter disadvantaged minority youths
Term
 In regards to supply of agriculture supply increasing and being inelastic what are the consequences?
Definition
 a decrease in price causes total revenue to fall where as the quantity of wheat sold rises on slightly
Term
 If a new form of technology actually decreases total revenue for agriculture firms why do they adopt it?
Definition
 because each farmer is only a small part of the market for wheat, he or she takes whatever price is given
Term
 What happened when a price ceiling was set on the price of gasoline?
Definition
 increased price of crude oil led to an increase in the cost of producing gas. reducing the supply, so in a regular market the price would tend to increase but the price ceiling prevented the equil price from increasing. Leads to a severe shortage
Term
 What are the short run effects of a price ceiling
Definition
 in the short run the supply remains the same so people buy more and there is a small shortage. the people who show up first benefit
Term
 In the long run what are the effects
Definition
 In the long run the suppliers supply less and less with every production period creating more and more of a shortage. The only people who benefit are those who have no sense of appreciation for time. People have to show up earlier and earlier to get the goods they desire
Term
 what are the unintended consequences of agricultural price floors?
Definition
 while farmers may be getting a decent price processors are refusing to buy crops because they cant sell it to consumers at an acceptable price SO -cut employees -leave the market
Term
 How is there an upside to "price gouging"
Definition
 If the supplier sold the good at a reasonable price right after the disaster then he would sell out and people whoneeded the good and were desperately  willing to pay for it would not be able to buy any because it would be sold out
Term
 in the price gouging example we see how forcing ________ down leads _________ out
Definition
 price suppliers
Term
 who is minimum wage most binding too
Definition
 teenagers
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