Term
| origin of the word economy |
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Definition
| the Greek word oikonomos, which means "one who manages a household" |
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Term
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Definition
| the limited nature of society's resources; society has limited resources and therefore can't produce all the goods and services people wish to have |
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Term
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Definition
| the study of how society manages its scarce resources |
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Term
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Definition
| society getting the maximum benefits from its scarce resources; refers to the size of the economic pie |
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Term
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Definition
| economic prosperity being uniformly distributed among the members of society; refers to how the pie is divided into individual slices |
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Term
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Definition
| whatever must be given up to obtain an item |
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Term
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Definition
| people who systematically and purposefully do the best they can to achieve their objectives |
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Term
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Definition
| economists use this term to describe a small incremental adjustment to an existing plan of action |
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Term
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Definition
| something that induces a person to act, such as a punishment or reward |
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Term
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Definition
| economy that allocates resources thru the decentralized decisions of many firms and households as they interact in markets for goods and services |
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Term
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Definition
| the ability of an individual to own and exercise control over scarce resources |
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Term
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Definition
| situation where a market left on its own fails to allocate resources efficiently |
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Term
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Definition
| the impact of one person's actions on the well-being of a bystander |
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Term
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Definition
| the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices |
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Term
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Definition
| quantity of goods and services produced from each unit of labor input |
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Term
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Definition
| increase in the overall level of prices in the economy |
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Term
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Definition
| fluctuations in economic activity, such as employment and production |
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Term
| the 1st principle of economics |
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Definition
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Term
| the 2nd principle of economics |
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Definition
| the cost of something is what you give up to get it |
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Term
| the 3rd principle of economics |
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Definition
| rational people think at the margin |
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Term
| the 4th principle of economics |
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Definition
| people respond to incentives |
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Term
| the 5th principle of economics |
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Definition
| trade can make everyone better off |
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Term
| the 6th principle of economics |
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Definition
| markets are usually a good way to organize economic activity |
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Term
| the 7th principle of economics |
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Definition
| governments can sometimes improve market outcomes |
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Term
| the 8th principle of economics |
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Definition
| a country's standard of living depends on its ability to produce goods and services |
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Term
| the 9th principle of economics |
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Definition
| prices rise when the government prints too much money |
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Term
| the 10th principle of economics |
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Definition
| society faces a short-term trade-off between inflation and unemployment |
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Term
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Definition
| visual model of the economy that shows how dollars flow thru markets among households and firms |
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Term
| production possibilities frontier |
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Definition
| graph that shows the combos of output that the economy can possibly produce given the available factors of production and the available production technology |
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Term
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Definition
| when an economy is getting all it can from the resources available |
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Term
| when a production possibilities frontier shifts outward |
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Definition
| when there's a technological advance |
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Term
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Definition
| the study of how households and firms make decisions and how they interact in markets |
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Term
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Definition
| the study of economywide phenomena, including inflation, unemployment, and economic growth |
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Term
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Definition
| claims that attempt to describe the world as it is; how it is |
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Term
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Definition
| claims that attempt to prescribe how the world should be; how it ought to be |
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Term
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Definition
| traces out the effect of a good's price on the quantity of the good consumers want to buy |
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Term
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Definition
1: markets for goods and services
2: firms
3: households
4: markets for factors of production |
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Term
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Definition
1:
-firms sell
-households buy
2:
-produce and sell goods and services
-hire and use factors of production
3:
-buy and consume goods and services
-own and sell factors of production
4:
-households sell
-firms buy |
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Term
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Definition
1: spending
2: revenue
3: wages, rent, and profit
4: income |
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Term
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Definition
1: goods and services sold
2: goods and services bought
3: land, labor, and capital
4: factors of production |
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Term
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Definition
-how people decide what to buy, how much to work, save, and spend
-how firms decide how much to produce, how many workers to hire
-how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs |
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Term
| tradeoff of efficiency vs. equality |
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Definition
| To achieve greater equality, could redistribute income from wealthy to poor. But this reduces incentive to work and produce, shrinks the size of the economic “pie.” |
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Term
| Making decisions requires... |
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Definition
| comparing the costs and benefits of alternative choices. |
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Term
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Definition
-think at the margin
-systematically and purposefully do the best they can to achieve their objectives. |
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Term
| examples of thinking at the margin |
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Definition
-When a student considers whether to go to college for an additional year, he compares the fees & foregone wages to the extra income he could earn with the extra year of education.
-When a manager considers whether to increase output, she compares the cost of the needed labor and materials to the extra revenue. |
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Term
| examples of people responding to incentives |
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Definition
-When gas prices rise, consumers buy more hybrid cars and fewer gas guzzling SUVs.
-When cigarette taxes increase, teen smoking falls. |
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Term
| the term “economy” simply means... |
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Definition
| a group of people interacting with each other |
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Term
| This determines the prices of goods and the amounts produced and sold. |
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Definition
| the interaction of buyers and sellers |
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Term
| the interaction of buyers and sellers determines... |
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Definition
| the prices of goods and the amounts produced and sold |
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Term
| how countries can benefit from trade and specialization |
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Definition
-Get a better price abroad for goods they produce
-Buy other goods more cheaply from abroad than could be produced at home |
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Term
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Definition
| a group of buyers and sellers (need not be in a single location) |
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Term
| “Organize economic activity” means determining |
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Definition
| -what goods to produce
-how to produce them
-how much of each to produce
-who gets them |
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Term
| how the invisible hand works through the price system |
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Definition
-The interaction of buyers and sellers determines prices.
-Each price reflects the good’s value to buyers and the cost of producing the good.
-Prices guide self-interested households and firms to make decisions that, in many cases, maximize society’s economic well-being. |
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Term
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Definition
| enforce property rights (with police, courts) |
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Term
| Many fledgling market economies are struggling through the transition from central planning because... |
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Definition
| because they have not developed institutions that protect and enforce property rights. |
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Term
| Public policy may promote... |
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Definition
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Term
| Govt may alter market outcome to promote... |
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Definition
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Term
| example of the gov't promoting equity |
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Definition
| If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided. |
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Term
| The most important determinant of living standards |
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Definition
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Term
| Productivity depends on... |
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Definition
| the equipment, skills, and technology available to workers |
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Term
| The principles of decision making |
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Definition
-People face tradeoffs.
-The cost of any action is measured in terms of foregone opportunities.
-Rational people make decisions by comparing marginal costs and marginal benefits.
-People respond to incentives. |
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Term
| The principles of interactions among people |
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Definition
-Trade can be mutually beneficial.
-Markets are usually a good way of coordinating trade.
-Govt can potentially improve market outcomes if there is a market failure or if the market outcome is inequitable. |
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Term
| The principles of the economy as a whole |
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Definition
-Productivity is the ultimate source of living standards.
-Money growth is the ultimate source of inflation.
-Society faces a short-run tradeoff between inflation and unemployment. |
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Term
| the 2 roles played by economists |
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Definition
-scientists
-policy advisors |
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Term
|
Definition
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Term
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Definition
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Term
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Definition
| the dispassionate development and testing of theories about how the world works |
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Term
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Definition
-simplify the complex world, make it easier to understand
-Unrealistic, but simple to learn and gives useful insights about the real world |
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Term
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Definition
| a highly simplified representation of a more complicated reality. Economists use models to study economic issues |
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Term
| actors in the circular flow diagram |
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Definition
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Term
| markets in the circular flow diagram |
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Definition
-the market for goods and services
-the market for “factors of production” |
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Term
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Definition
the resources the economy uses to produce goods & services, including
-labor
-land
-capital (buildings and machines used in production) |
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Term
| the role of households in the circular flow diagram |
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Definition
-Own the factors of production, sell/rent them to firms for income
-Buy and consume goods & services |
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Term
| role of firms in the circular flow diagram |
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Definition
-Buy/hire factors of production, use them to produce goods and services
-Sell goods & services |
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Term
| The slope of the PPF tells you... |
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Definition
| the opportunity cost of one good in terms of the other |
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Term
| tradeoff faced by society |
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Definition
| Getting more of one good requires sacrificing some of the other |
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Term
| When is a PPF a straight line? |
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Definition
| when opportunity cost remains constant |
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Term
| When is the PPF bow-shaped? |
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Definition
| when the opportunity cost of a good rises as more of the good is produced |
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Term
| other reasons the PPF might be bow-shaped |
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Definition
-So, PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other.
-The PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (e.g., different types of land suited for different uses). |
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Term
| The PPF illustrates the concepts of... |
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Definition
| tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth |
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Term
| A bow-shaped PPF illustrates the concept of... |
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Definition
| increasing opportunity cost |
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Term
|
Definition
-Economists often give conflicting policy advice.
-They sometimes disagree about the validity of alternative positive theories about the world.
-They may have different values and, therefore, different normative views about what policy should try to accomplish.
-Yet, there are many propositions about which most economists agree. |
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Term
| the 2 roles played by economists |
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Definition
-scientists
-policy advisors |
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Term
|
Definition
|
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Term
|
Definition
|
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Term
|
Definition
| the dispassionate development and testing of theories about how the world works |
|
|
Term
|
Definition
-simplify the complex world, make it easier to understand
-Unrealistic, but simple to learn and gives useful insights about the real world |
|
|
Term
|
Definition
| a highly simplified representation of a more complicated reality. Economists use models to study economic issues |
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Term
| actors in the circular flow diagram |
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Definition
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Term
| markets in the circular flow diagram |
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Definition
-the market for goods and services
-the market for “factors of production” |
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Term
|
Definition
the resources the economy uses to produce goods & services, including
-labor
-land
-capital (buildings and machines used in production) |
|
|
Term
| the role of households in the circular flow diagram |
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Definition
-Own the factors of production, sell/rent them to firms for income
-Buy and consume goods & services |
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Term
| role of firms in the circular flow diagram |
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Definition
-Buy/hire factors of production, use them to produce goods and services
-Sell goods & services |
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Term
| The slope of the PPF tells you... |
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Definition
| the opportunity cost of one good in terms of the other |
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Term
| tradeoff faced by society |
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Definition
| Getting more of one good requires sacrificing some of the other |
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Term
| When is a PPF a straight line? |
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Definition
| when opportunity cost remains constant |
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Term
| When is the PPF bow-shaped? |
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Definition
| when the opportunity cost of a good rises as more of the good is produced |
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Term
| other reasons the PPF might be bow-shaped |
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Definition
-So, PPF is bow-shaped when different workers have different skills, different opportunity costs of producing one good in terms of the other.
-The PPF would also be bow-shaped when there is some other resource, or mix of resources with varying opportunity costs (e.g., different types of land suited for different uses). |
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|
Term
| The PPF illustrates the concepts of... |
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Definition
| tradeoff and opportunity cost, efficiency and inefficiency, unemployment, and economic growth |
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Term
| A bow-shaped PPF illustrates the concept of... |
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Definition
| increasing opportunity cost |
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|
Term
|
Definition
-Economists often give conflicting policy advice.
-They sometimes disagree about the validity of alternative positive theories about the world.
-They may have different values and, therefore, different normative views about what policy should try to accomplish.
-Yet, there are many propositions about which most economists agree. |
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Term
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Definition
| goods produced domestically and sold abroad |
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Term
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Definition
| goods produced abroad and sold domestically |
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Term
| one reason interdependence is good |
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Definition
| it makes a country able to consume more of something than it would be able to produce |
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Term
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Definition
| the ability to produce a good using fewer inputs than another producer |
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Term
| Two countries can gain from trade when... |
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Definition
| each specializes in the good it produces at lowest cost. |
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Term
| Absolute advantage measures... |
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Definition
| the cost of a good in terms of the inputs required to produce it. |
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Term
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Definition
| the ability to produce a good at a lower opportunity cost than another producer |
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Term
| Absolute advantage (is or is not) necessary for comparative advantage! |
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Definition
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Term
| Gains from trade arise from... |
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Definition
| comparative advantage (differences in opportunity costs). |
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Term
| When each country specializes in the good(s) in which it has a comparative advantage,... |
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Definition
| total production in all countries is higher, the world’s “economic pie” is bigger, and all countries can gain from trade. |
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Term
| Interdependence and trade allow everyone to... |
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Definition
| enjoy a greater quantity and variety of goods & services. |
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Term
| when the economic "pie" grows |
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Definition
| when people—or countries—specialize in the goods in which they have a comparative advantage |
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Term
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Definition
| a group of buyers and sellers of a particular product |
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Term
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Definition
| one with many buyers and sellers, each has a negligible effect on price |
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Term
| In a perfectly competitive market,... |
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Definition
-All goods exactly the same
-Buyers & sellers so numerous that no one can affect market price—each is a “price taker” |
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Term
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Definition
| the amount of the good that buyers are willing and able to purchase |
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Term
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Definition
| the claim that the quantity demanded of a good falls when the price of the good rises, other things equal |
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Term
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Definition
| a table that shows the relationship between the price of a good and the quantity demanded |
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Term
| The quantity demanded in the market |
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Definition
| the sum of the quantities demanded by all buyers at each price |
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Term
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Definition
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Term
| some Demand Curve Shifters |
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Definition
PYNTE
-# of Buyers
-income
-Prices of Related Goods
-Tastes
-Expectations |
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Term
| Income vs. Demand for a normal good |
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Definition
| Demand for a normal good is positively related to income. |
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Term
| Income vs. Demand for an inferior good |
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Definition
| Demand for an inferior good is negatively related to income. |
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Term
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Definition
| Two goods are substitutes if an increase in the price of one causes an increase in demand for the other. |
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Term
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Definition
| Two goods are complements if an increase in the price of one causes a fall in demand for the other. |
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Term
| how tastes affect demand curve |
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Definition
| Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right. |
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Term
| how Expectations affect demand curve |
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Definition
| Expectations affect consumers’ buying decisions. |
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Term
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Definition
-the amount that sellers are willing and able to sell
-this is the sum of the quantities supplied by all sellers at each price |
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Term
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Definition
| the claim that the quantity supplied of a good rises when the price of the good rises, other things equal |
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Term
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Definition
| A table that shows the relationship between the price of a good and the quantity supplied |
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Term
| What causes a shift in the supply curve? |
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Definition
| "other things" that are non-price determinants of supply |
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Term
| some supply curve shifters |
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Definition
TINE
-input prices
-technology
-# of sellers
-expectations |
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Term
| how input prices shift the supply curve |
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Definition
| A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right |
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Term
| how technology shifts the supply curve |
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Definition
| Technology determines how much inputs are required to produce a unit of output |
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Term
| how # of sellers shifts the supply curve |
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Definition
| An increase in the number of sellers increases the quantity supplied at each price |
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Term
| how expectations shift the supply curve |
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Definition
| In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable) |
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Term
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Definition
| the price that equates quantity supplied with quantity demanded |
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Term
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Definition
| the quantity supplied and demanded at the equilibrium price |
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Term
| Surplus (a.k.a. excess supply) |
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Definition
| when quantity supplied is greater than quantity demanded |
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Term
| Facing a surplus, sellers try to increase sales by... |
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Definition
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Term
| Shortage (a.k.a. excess demand) |
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Definition
| when quantity demanded is greater than quantity supplied |
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Term
| Facing a shortage, sellers ______ the price |
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Definition
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Term
| Three Steps to Analyzing Changes in E'librium |
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Definition
To determine the effects of any event,
1. Decide whether the event shifts S curve, D curve, or both.
2. Decide in which direction curve shifts.
3. Use supply—demand diagram to see how the shift changes eq’m P and Q. |
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Term
|
Definition
-a shift in the S curve
-occurs when a non-price determinant of supply changes (like technology or costs) |
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Term
| Change in the quantity supplied |
|
Definition
-a movement along a fixed S curve
-occurs when P changes |
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Term
|
Definition
-a shift in the D curve
-occurs when a non-price determinant of demand changes (like income or # of buyers) |
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Term
| Change in the quantity demanded |
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Definition
- a movement along a fixed D curve
-occurs when P changes |
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Term
|
Definition
| a numerical measure of the responsiveness of Qd or Qs to one of its determinants |
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Term
| Price elasticity of demand |
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Definition
| -measures how much Qd responds to a change in P
-Loosely speaking, it measures the price-sensitivity of buyers’ demand. |
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Term
| equation for price elasticity of demand |
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Definition
| equation for price elasticity of demand=(% change in Qd)/(% change in P)
always reported as non-negative number |
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|
Term
| midpoint method for calculating % change |
|
Definition
((end value–start value)/(midpoint))•100%
always use this to calculate elasticity |
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|
Term
| Price elasticity is higher when... |
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Definition
| close substitutes are available |
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|
Term
| Price elasticity is higher for ______ than for ______ ones. |
|
Definition
narrowly defined goods
broadly defined |
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|
Term
| Price elasticity is higher for ______ than for ______. |
|
Definition
|
|
Term
| Price elasticity is higher in the ______ run than the ______ run. |
|
Definition
|
|
Term
| The price elasticity of demand depends on... |
|
Definition
-the extent to which close substitutes are available
-whether the good is a necessity or a luxury
-how broadly or narrowly the good is defined
-the time horizon—elasticity is higher in the long run than the short run |
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|
Term
| Rule of thumb for elasticity |
|
Definition
-The flatter the curve, the bigger the elasticity.
-The steeper the curve, the smaller the elasticity. |
|
|
Term
| Five different classifications of D and S curves |
|
Definition
-perfectly inelastic
-inelastic
-unit elastic
-elastic
-perfectly elastic |
|
|
Term
| perfectly inelastic curve |
|
Definition
-vertical
-elasticity=0
-not sensitive |
|
|
Term
|
Definition
-relatively steep
-elasticity<1
-relatively insensitive |
|
|
Term
|
Definition
-intermediate slope
-elasticity=1
-intermediate sensitivity |
|
|
Term
|
Definition
-relatively flat
-elasticity>1
-relatively sensitive |
|
|
Term
|
Definition
-perfectly flat
-elasticity=infinity
-extremely sensitive |
|
|
Term
|
Definition
|
|
Term
| When D is elastic, a price increase causes revenue to... |
|
Definition
|
|
Term
| When D is inelastic, a price increase causes revenue to... |
|
Definition
|
|
Term
| Price elasticity of supply |
|
Definition
| -measures how much Qs responds to a change in P
-Loosely speaking, it measures sellers’ price-sensitivity |
|
|
Term
| equation for price elasticity of supply |
|
Definition
| equation for price elasticity of supply=(% change in Qs)/(% change in P)
Again, use the midpoint method to compute the percentage changes. |
|
|
Term
| Income elasticity of demand |
|
Definition
| measures the response of Qd to a change in consumer income |
|
|
Term
| equation for Income elasticity of demand |
|
Definition
| Income elasticity of demand=(% change in Qd)/(% change in income) |
|
|
Term
| An increase in income causes an increase in demand for a ______ good. |
|
Definition
|
|
Term
| Cross-price elasticity of demand |
|
Definition
| measures the response of demand for one good to changes in the price of another good |
|
|
Term
| equation for Cross-price elasticity of demand |
|
Definition
| Cross-price elasticity of demand=(% change in Qd for good 1)/(% change in Qd for good 2) |
|
|
Term
| cross-price elasticity for substitutes |
|
Definition
|
|
Term
| cross-price elasticity for complements |
|
Definition
|
|
Term
| When demand is ______, total revenue rises when price rises. When demand is ______, total revenue falls when price rises. |
|
Definition
|
|
Term
| midpoint method for calculating % change |
|
Definition
((end value–start value)/(midpoint))•100%
always use this to calculate elasticity |
|
|
Term
| Price elasticity is higher when... |
|
Definition
| close substitutes are available |
|
|
Term
| Price elasticity is higher for ______ than for ______ ones. |
|
Definition
narrowly defined goods
broadly defined |
|
|
Term
| Price elasticity is higher for ______ than for ______. |
|
Definition
|
|
Term
| Price elasticity is higher in the ______ run than the ______ run. |
|
Definition
|
|
Term
| The price elasticity of demand depends on... |
|
Definition
-the extent to which close substitutes are available
-whether the good is a necessity or a luxury
-how broadly or narrowly the good is defined
-the time horizon—elasticity is higher in the long run than the short run |
|
|
Term
| Rule of thumb for elasticity |
|
Definition
-The flatter the curve, the bigger the elasticity.
-The steeper the curve, the smaller the elasticity. |
|
|
Term
| Five different classifications of D and S curves |
|
Definition
-perfectly inelastic
-inelastic
-unit elastic
-elastic
-perfectly elastic |
|
|
Term
| perfectly inelastic curve |
|
Definition
-vertical
-elasticity=0
-not sensitive |
|
|
Term
|
Definition
-relatively steep
-elasticity<1
-relatively insensitive |
|
|
Term
|
Definition
-intermediate slope
-elasticity=1
-intermediate sensitivity |
|
|
Term
|
Definition
-relatively flat
-elasticity>1
-relatively sensitive |
|
|
Term
|
Definition
-perfectly flat
-elasticity=infinity
-extremely sensitive |
|
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Term
|
Definition
|
|
Term
| When D is elastic, a price increase causes revenue to... |
|
Definition
|
|
Term
| When D is inelastic, a price increase causes revenue to... |
|
Definition
|
|
Term
| Price elasticity of supply |
|
Definition
| -measures how much Qs responds to a change in P
-Loosely speaking, it measures sellers’ price-sensitivity |
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|
Term
| equation for price elasticity of supply |
|
Definition
| equation for price elasticity of supply=(% change in Qs)/(% change in P)
Again, use the midpoint method to compute the percentage changes. |
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Term
| Income elasticity of demand |
|
Definition
| measures the response of Qd to a change in consumer income |
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|
Term
| equation for Income elasticity of demand |
|
Definition
| Income elasticity of demand=(% change in Qd)/(% change in income) |
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|
Term
| An increase in income causes an increase in demand for a ______ good. |
|
Definition
|
|
Term
| Cross-price elasticity of demand |
|
Definition
| measures the response of demand for one good to changes in the price of another good |
|
|
Term
| equation for Cross-price elasticity of demand |
|
Definition
| Cross-price elasticity of demand=(% change in Qd for good 1)/(% change in Qd for good 2) |
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|
Term
| cross-price elasticity for substitutes |
|
Definition
|
|
Term
| cross-price elasticity for complements |
|
Definition
|
|
Term
| When demand is ______, total revenue rises when price rises. When demand is ______, total revenue falls when price rises. |
|
Definition
|
|
Term
|
Definition
a legal maximum on the price of a good or service
Example: rent control |
|
|
Term
|
Definition
a legal minimum on the price of a good or service
Example: minimum wage |
|
|
Term
| non-binding price ceiling |
|
Definition
| above market e'librium; no effect on market outcome |
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Term
|
Definition
below market e'librium; causes shortage
the ceiling is a binding constraint |
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|
Term
| When a shortage is caused by a price ceiling, why is the shortage larger in the long run? |
|
Definition
| because in the long run, supply and demand are more price-elastic |
|
|
Term
| Some rationing mechanisms and why they're often unfair and inefficient |
|
Definition
(1) Long lines
(2) Discrimination according to sellers’ biases
often unfair and inefficient because the goods do not necessarily go to the buyers who value them most highly |
|
|
Term
| when prices are not controlled, the rationing mechanism is... |
|
Definition
| efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair) |
|
|
Term
|
Definition
| below e'librium; no effect on market outcome |
|
|
Term
|
Definition
| above e'librium; creates surplus; it's a binding constraint |
|
|
Term
| the role of prices in markets |
|
Definition
| Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices. |
|
|
Term
| why the govt levies taxes on many goods & services |
|
Definition
| to raise revenue to pay for national defense, public schools, etc. |
|
|
Term
| When a tax is levied on buyers, what happens to the demand curve? |
|
Definition
| goes down by the amount of the tax |
|
|
Term
|
Definition
how the burden of a tax is shared among market participants, i.e., buyers and sellers
depends on price elasticities of supply and demand |
|
|
Term
| When a tax is levied on sellers, what happens to the supply curve? |
|
Definition
| goes up by the amount of tax |
|
|
Term
| what tax does to buyers and sellers |
|
Definition
drives a wedge between the price buyers pay and the price sellers receive (increases the amount buyers pay and decreases the amount sellers receive)
e'librium quantity falls |
|
|
Term
| When supply is more elastic than demand,... |
|
Definition
| buyers bear most of the burden of the tax. |
|
|
Term
| When demand is more elastic than supply,... |
|
Definition
| sellers bear most of the burden of the tax. |
|
|
Term
|
Definition
a legal maximum on the price of a good or service
Example: rent control |
|
|
Term
|
Definition
a legal minimum on the price of a good or service
Example: minimum wage |
|
|
Term
| non-binding price ceiling |
|
Definition
| above market e'librium; no effect on market outcome |
|
|
Term
|
Definition
below market e'librium; causes shortage
the ceiling is a binding constraint |
|
|
Term
| When a shortage is caused by a price ceiling, why is the shortage larger in the long run? |
|
Definition
| because in the long run, supply and demand are more price-elastic |
|
|
Term
| Some rationing mechanisms and why they're often unfair and inefficient |
|
Definition
(1) Long lines
(2) Discrimination according to sellers’ biases
often unfair and inefficient because the goods do not necessarily go to the buyers who value them most highly |
|
|
Term
| when prices are not controlled, the rationing mechanism is... |
|
Definition
| efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair) |
|
|
Term
|
Definition
| below e'librium; no effect on market outcome |
|
|
Term
|
Definition
| above e'librium; creates surplus; it's a binding constraint |
|
|
Term
| the role of prices in markets |
|
Definition
| Prices are the signals that guide the allocation of society’s resources. This allocation is altered when policymakers restrict prices. |
|
|
Term
| why the govt levies taxes on many goods & services |
|
Definition
| to raise revenue to pay for national defense, public schools, etc. |
|
|
Term
| When a tax is levied on buyers, what happens to the demand curve? |
|
Definition
| goes down by the amount of the tax |
|
|
Term
|
Definition
how the burden of a tax is shared among market participants, i.e., buyers and sellers
depends on price elasticities of supply and demand |
|
|
Term
| When a tax is levied on sellers, what happens to the supply curve? |
|
Definition
| goes up by the amount of tax |
|
|
Term
| what tax does to buyers and sellers |
|
Definition
drives a wedge between the price buyers pay and the price sellers receive (increases the amount buyers pay and decreases the amount sellers receive)
e'librium quantity falls |
|
|
Term
| When supply is more elastic than demand,... |
|
Definition
| buyers bear most of the burden of the tax. |
|
|
Term
| When demand is more elastic than supply,... |
|
Definition
| sellers bear most of the burden of the tax. |
|
|
Term
| the allocation of resources refers to |
|
Definition
-how much of each good is produced
-which producers produce it
-which consumers consume it |
|
|
Term
|
Definition
| studies how the allocation of resources affects economic well-being. |
|
|
Term
|
Definition
A buyer’s willingness to pay for a good is the maximum amount the buyer will pay for that good.
measures how much the buyer values the good |
|
|
Term
| the height of the D curve |
|
Definition
| At any Q, the height of the D curve is the WTP of the marginal buyer |
|
|
Term
|
Definition
| the buyer who would leave the market if P were any higher. |
|
|
Term
|
Definition
| the amount a buyer is willing to pay minus the amount the buyer actually pays |
|
|
Term
| equation for consumer surplus |
|
Definition
|
|
Term
|
Definition
the area under the demand curve above the price, from 0 to Q
expressed in $ |
|
|
Term
| 2 ways the CS decreases after a rise in price |
|
Definition
1: Fall in CS due to buyers leaving market
2: Fall in CS due to remaining buyers paying higher P |
|
|
Term
|
Definition
the value of everything a seller must give up to produce a good (i.e., opportunity cost).
measure of willingness to sell |
|
|
Term
| At each Q, the height of the S curve is... |
|
Definition
| the cost of the marginal seller |
|
|
Term
|
Definition
| the seller who would leave the market if the price were any lower |
|
|
Term
|
Definition
| the amount a seller is paid for a good minus the seller’s cost |
|
|
Term
| equation for producer surplus |
|
Definition
|
|
Term
|
Definition
the area above the supply curve under the price, from 0 to Q
expressed in $ |
|
|
Term
|
Definition
CS=(value to buyers)–(amount paid by buyers)
=buyers’ gains from participating in the market |
|
|
Term
|
Definition
PS=(amount received by sellers)–(cost to sellers)
=sellers’ gains from participating in the market |
|
|
Term
|
Definition
Total surplus=CS+PS
=total gains from trade in a market
=(value to buyers)–(cost to sellers) |
|
|
Term
| In a market economy, the allocation of resources determined by... |
|
Definition
| the interactions of many self-interested buyers and sellers |
|
|
Term
| An allocation of resources is efficient if... |
|
Definition
| it maximizes total surplus |
|
|
Term
|
Definition
| that total surplus is maximized, that the goods are produced by sellers with lowest cost, and that they are consumed by buyers who most value them |
|
|
Term
| the market condition that maximizes rotal surplus |
|
Definition
|
|
Term
| Can govt raise total surplus by changing the market’s allocation of resources? |
|
Definition
|
|
Term
|
Definition
| (French for “allow them to do”): the notion that govt should not interfere with the market |
|
|
Term
| why centrally-planned economies are never very efficient |
|
Definition
| because to allocate resources efficiently and maximize total surplus, the planner would need to know every seller’s cost and every buyer’s WTP for every good in the entire economy |
|
|
Term
|
Definition
| the ability to affect the market price |
|
|
Term
|
Definition
| transactions have side effects, called externalities, that affect bystanders. (example: pollution) |
|
|
Term
| The height of the D curve reflects... |
|
Definition
| the value of the good to buyers—their willingness to pay for it |
|
|
Term
| The height of the S curve is... |
|
Definition
| sellers’ cost of producing the good |
|
|
Term
| To measure society’s well-being, we use... |
|
Definition
|
|
Term
| how to calculate revenue from tax |
|
Definition
| $TxQT
$T=(tax buyers pay)+(tax sellers pay)
QT=quantity bought with tax |
|
|
Term
| deadweight loss (DWL) of the tax |
|
Definition
the fall in total surplus that results from a market distortion, such as a tax
that is, the decline in demand plus the decline in supply (this is the triangle at the intersection of the supply curve and the demand curve) |
|
|
Term
| Which goods or services should govt tax to raise the revenue it needs? |
|
Definition
| those with the lowest DWL |
|
|
Term
| Size of DWL depends on... |
|
Definition
| the price elasticities of supply and demand |
|
|
Term
| the biggest source of gov't revenue |
|
Definition
|
|
Term
|
Definition
the tax on the last dollar of earnings
for the typical worker, this is about 40% |
|
|
Term
|
Definition
| When a tax increases, DWL rises even more. |
|
|
Term
|
Definition
| shows the relationship between the size of the tax and tax revenue (revenue increases with tax size to a point, and then starts to decrease with tax size) |
|
|
Term
|
Definition
| because it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus |
|
|
Term
| how to calculate revenue from tax |
|
Definition
| $TxQT
$T=(tax buyers pay)+(tax sellers pay)
QT=quantity bought with tax |
|
|
Term
| deadweight loss (DWL) of the tax |
|
Definition
the fall in total surplus that results from a market distortion, such as a tax
that is, the decline in demand plus the decline in supply (this is the triangle at the intersection of the supply curve and the demand curve) |
|
|
Term
| Which goods or services should govt tax to raise the revenue it needs? |
|
Definition
| those with the lowest DWL |
|
|
Term
| Size of DWL depends on... |
|
Definition
| the price elasticities of supply and demand |
|
|
Term
| the biggest source of gov't revenue |
|
Definition
|
|
Term
|
Definition
the tax on the last dollar of earnings
for the typical worker, this is about 40% |
|
|
Term
|
Definition
| When a tax increases, DWL rises even more. |
|
|
Term
|
Definition
| shows the relationship between the size of the tax and tax revenue (revenue increases with tax size to a point, and then starts to decrease with tax size) |
|
|
Term
|
Definition
| because it causes consumers to buy less and producers to sell less, thus shrinking the market below the level that maximizes total surplus |
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|
