# Shared Flashcard Set

## Details

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

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 productUnintended 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 priceUnintended 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 priceEs=%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