Term
| price elasticity of demand |
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Definition
| a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buyers' plans remain the same |
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Term
| calculation of price elasticity of demand |
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Definition
| (percent change in quantity demanded)/(percentage change in price) |
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Term
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Definition
| when the price of a good RISES, the quantity demanded DECREASES along the demand curve. therefore, elasticity decreases |
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Term
| perfectly inelastic demand |
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Definition
if the quantity demanded remains constant when the price changes then the price elasticity is zero and is said to be perfectly inelastic.
*it is a vertical line
*ex: insulin |
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Term
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Definition
if the percentage change in the quantity demanded equals the percentage change in price, then the price elasticity equals one.
*the good is unit elastic demand
*usually some type of parabola |
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Term
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Definition
*the percentage change in the quantity demanded is less than the percentage change in price
*said to be inelastic demand and between zero and one
*ex: food and housing |
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Term
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Definition
*if the quantity demanded changes by an infinitely large percentage in response to a tiny price change, then the price elasticity of demand is infinity and the good is said to have perfectly elastic demand.
*ex:soft drinks |
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Term
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Definition
when the percentage change in quantity demanded exceeds the percentage change in price.
*this means the elasticity is greater than one
*ex: automobiles, furniture |
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Term
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Definition
| the total revenue from the sale of a good equals the price of the good multiplied by the quantity sold |
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Term
| change in revenue depends on: |
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Definition
*if demand is elastic, a 1% price cut increases the quantity sold by more than 1% and total revenue increases
*if demand is elastic, a 1% price cut increases the quantity sold by less than 1% and total revenue decreases
*if demand is unit elastic, a 1% price cut increases the quantity sold by 1% and so total revenue doesn't change |
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Term
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Definition
| a method of estimating the price elasticity of demand by observing the change in total revenue that results from a change in the price, when all other influences on the quantity sold remain the same |
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Term
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Definition
*if a price cut increases total revenue, demand is elastic
*if a price cut decreases total revenue, demand is inelastic
*if a price cut leaves total revenue unchanged, demand is unit elastic |
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Term
| factors that influence elasticity of demand |
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Definition
*closeness of substitutes
*proportion of income spend on the good
*the time elapsed since a price change |
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Term
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Definition
| *closer the sub the more elastic |
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Term
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Definition
a good that has poor subs and that is crucial for our well-being. so generally, a necessity has inelastic demand
*Ex: food and housing |
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Term
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Definition
a good that usually has many subs
*elastic demand |
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Term
| Proportion of Income spend on the good |
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Definition
| *greater the proportion of income spent on a good, the more elastic is the demand for it |
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Term
| time elapsed since price change |
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Definition
| *longer the time that has elapsed since a price change, the more elastic is demand |
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Term
| cross elasticity of demand |
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Definition
| a measure of the responsiveness of the demand for a good to a change in the price of a sub or complement, other things remaining the same. |
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Term
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Definition
| (percentage change in quantity demanded)/(percentage change in price of a substitute or complement) |
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Term
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Definition
| cause the demand of its complement to go down which caused negative elasticity |
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Term
| income elasticity of demand |
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Definition
a measure of the responsiveness of the demand for a good or service to a change in income, other things remaining the same
*can be positive or negative |
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Term
| calc of income elasticity of demand |
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Definition
| (percentage change in quantity demanded)/(percentage change in income) |
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Term
| positive/negative income elasticity |
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Definition
*Greater than 1 (normal good, income elastic)
*Positive and less than 1 (normal good, income inelastic)
*negative (inferior good) |
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Term
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Definition
*if the income elasticity of demand in positive but less than 1, demand is income inelastic.
*when the demand for a good is income inelastic, as income increases, the percentag of income spent on the good decreases |
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Term
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Definition
| *when the demand for a good is income elastic, as income increases, the percentage of income spent on that good increases |
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Term
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Definition
| *the quantity demanded of an inferior good and the amount spent on it decreases when income increases |
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Term
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Definition
| the different outcomes arise from differing degrees of responsiveness of the quantity supplied to a change in price |
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Term
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Definition
| (percentage change in quantity supplied)/(percentage change in price) |
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Term
| factors that influence elasticity supply |
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Definition
*resource sub possibilities
*time frame for the supply decision |
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Term
| resource sub possibilities |
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Definition
| *if a good or service can be produced only by using unique productive resource it has a low elasticity of supply |
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Term
| three time frames of supply: |
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Definition
*Momentary supply
*long-run supply
*short-run supply |
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Term
| resources might be allocated by: |
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Definition
*Market price
*command
*majority rule
*contest
*first-come, first-served
*lottery
*personal characteristics
*force |
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Term
| demand, willingness to pay, and value |
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Definition
*the value of one more unit of a good or service is it marginal benefit
*a demand curse is a marginal benefit curve |
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Term
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Definition
the relationship between the price of a good and the quantity demanded by one person
*sum of horizontals |
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Term
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Definition
| the value of a good minus the price paid for it, summed over the quantity bought |
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Term
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Definition
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Term
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Definition
| the price received for a good minus its minimum supply-price (or marginal cost), summer over the quantity sold |
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Term
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Definition
marginal social benefit
*the only ppl who benefit from the good are the people who buy it |
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Term
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Definition
marginal social cost
*the only ppl who bear the cost of the good are the ppl who produce it |
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Term
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Definition
| the decrease in total surplus that results from an inefficient level of production |
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Term
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Definition
*price and quantity regulations
*taxes and subsidies
*externalities
*public goods and common resources
*monopoly
*high transaction costs |
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Term
| price elasticities of demand |
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Definition
*perfectly elastic-infinity
*elastic-less than infinity but >1
*unit elastic-1
*inelastic->0 but <1
*perfectly inelastic- zero |
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Term
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Definition
*close subs- large
*subs- positive
*unrelated goods- zero
*complements- negative |
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Term
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Definition
*perfectly elastic- infinite
*elastic- less than infinite but >1
*inelastic- >0 but <1
*perfectly inelastic- zero |
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Term
| price and quantity regulations |
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Definition
| leads to underproduction through minimum wages and overproduction through how farmers can only grow a certain amount of crops |
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Term
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Definition
| taxes lead to underproduction,sunsidies lead to overproduction |
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Term
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Definition
a cost of benefit that affects someone other than the seller or the buyer of a good
*dont take into consideration of negative causes-overproduction
*dont take into consideration marginal benefits of others-underproduction |
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Term
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Definition
a good or service that is consumed simultaneously by everyone even if they dont pay for it.
*public good is underproduced because of free riders |
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Term
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Definition
owned by no one but used by everyone
*leads to overproduction |
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Term
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Definition
a firm that is the sole provider of a good or service
*no competition so it produces to little and charges too high a price, leads to underproduction |
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Term
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Definition
the opportunity costs of making trades in a market
*when transaction costs are high, the market might underproduce |
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Term
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Definition
*its not fair if the result isn't fair
*its not fair if the rules aren't fair |
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Term
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Definition
states that we should strive to achieve "the greatest happiness for the greatest number."
*created by Bentham and Stuart Mill |
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Term
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Definition
| tradeoff between efficiency and fairness |
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Term
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Definition
| the requirement that people in similar situations be treated similarily. |
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Term
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Definition
*Nozick arugues to points:
-the state much enforce laws that est and protect private property
-private property may be transfered from one person to another only by voluntary exchange |
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Term
| resource allocation methods |
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Definition
| *bc resources are scarce, some mechanism must allocate them |
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Term
| demand and marginal benefit |
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Definition
*marginal benefit determines demand, and a demand curve is a marginal benefit curve
*value is what people are willing to pay; price is what people must pay
*consumer surplus equals value minus price, summed over the quantity bought |
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Term
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Definition
*the minimum supply-price determines supply, and the supply curve is the marginal cost curve
*opportunity cost is what producers pay; price is what producers receive
*producer surplus equals price minus opportunity cost, summed over the quantity sold |
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Term
| is the competitive market efficient? |
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Definition
*marginal social benefit equals marginal social cost and resource allocation is efficient
*buyers and sellers acting in their self-interest end up promoting the social interest
*the sum of consumer surplus and producer surplus is maximized |
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Term
| is the competitive market fair? |
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Definition
*fair-results ideas require income transfers from the rich to the poor
*fair-rules ideas require property rights and voluntary exchange |
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Term
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Definition
| a regulation that makes it illegal to charge a price higher than a specified lever |
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Term
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Definition
| when price ceilings are applied to housing markets |
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Term
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Definition
| the time spent looking for someone with whom to do business with |
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Term
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Definition
| an illegal market in which the price exceeds the legally imposed price ceiling |
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Term
| mechanisms used to allocate scarce housing |
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Definition
*a lottery
*a queue
*discrimination |
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Term
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Definition
| makes it illegal to trade at a price lower than a specified level |
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Term
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Definition
| defined as an hourly wage rate that enables a person who works a 40 hour week to rent adequate housing for not more than 30% of the amount earned |
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Term
| Housing markets and rent ceilings |
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Definition
*a decrease in the supply of housing raises rents
*higher rents stimulate building, and in the long run, the quantity of housing increases and rents fall
*a rent ceiling that is set below the equilibrium rent creates a housing shortage, wasteful search, and a black market |
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Term
| the labor market and minimum wage |
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Definition
*a decrease in the demand for low-skilled labor lowers the wage rate and reduces employment
*lower wage rate encourages ppl w low skills to acquire more skills, in long run raises wages for low-skilled labor
*a min wage set above the equilibrium wage rate creates unemployment
*minimum wage hits low-skilled young ppl hardest |
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