# Shared Flashcard Set

## Details

Microeconomics
Chapters 4,5,6
71
Economics
11/03/2008

Term
 price elasticity of demand
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
Term
 calculation of price elasticity of demand
Definition
 (percent change in quantity demanded)/(percentage change in price)
Term
 decreasing elasticity
Definition
 when the price of a good RISES, the quantity demanded DECREASES along the demand curve. therefore, elasticity decreases
Term
 perfectly inelastic demand
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
Term
 unit elastic demand
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
Term
 inelastic demand
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
Term
 perfectly elastic demand
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
Term
 elastic demand
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
Term
 total revenue
Definition
 the total revenue from the sale of a good equals the price of the good multiplied by the quantity sold
Term
 change in revenue depends on:
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
Term
 total revenue test
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
Term
 factors of revenue test
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
Term
 factors that influence elasticity of demand
Definition
 *closeness of substitutes*proportion of income spend on the good*the time elapsed since a price change
Term
 closeness of substitutes
Definition
 *closer the sub the more elastic
Term
 necessities
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
Term
 luxuries
Definition
 a good that usually has many subs*elastic demand
Term
 Proportion of Income spend on the good
Definition
 *greater the proportion of income spent on a good, the more elastic is the demand for it
Term
 time elapsed since price change
Definition
 *longer the time that has elapsed since a price change, the more elastic is demand
Term
 cross elasticity of demand
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.
Term
 calc of cross elasticity
Definition
 (percentage change in quantity demanded)/(percentage change in price of a substitute or complement)
Term
 complements
Definition
 cause the demand of its complement to go down which caused negative elasticity
Term
 income elasticity of demand
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
Term
 calc of income elasticity of demand
Definition
 (percentage change in quantity demanded)/(percentage change in income)
Term
 positive/negative income elasticity
Definition
 *Greater than 1 (normal good, income elastic)*Positive and less than 1 (normal good, income inelastic)*negative (inferior good)
Term
 income inelastic demand
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
Term
 income elastic demand
Definition
 *when the demand for a good is income elastic, as income increases, the percentage of income spent on that good increases
Term
 inferior goods
Definition
 *the quantity demanded of an inferior good and the amount spent on it decreases when income increases
Term
 elasticity of supply
Definition
 the different outcomes arise from differing degrees of responsiveness of the quantity supplied to a change in price
Term
 elasticity of supply
Definition
 (percentage change in quantity supplied)/(percentage change in price)
Term
 factors that influence elasticity supply
Definition
 *resource sub possibilities*time frame for the supply decision
Term
 resource sub possibilities
Definition
 *if a good or service can be produced only by using unique productive resource it has a low elasticity of supply
Term
 three time frames of supply:
Definition
 *Momentary supply*long-run supply*short-run supply
Term
 resources might be allocated by:
Definition
 *Market price*command*majority rule*contest*first-come, first-served*lottery*personal characteristics*force
Term
 demand, willingness to pay, and value
Definition
 *the value of one more unit of a good or service is it marginal benefit*a demand curse is a marginal benefit curve
Term
 individual demand
Definition
 the relationship between the price of a good and the quantity demanded by one person*sum of horizontals
Term
 consumer surplus
Definition
 the value of a good minus the price paid for it, summed over the quantity bought
Term
 individual supply
Definition
 sum of the horizontals
Term
 producer surplus
Definition
 the price received for a good minus its minimum supply-price (or marginal cost), summer over the quantity sold
Term
 MSB
Definition
 marginal social benefit*the only ppl who benefit from the good are the people who buy it
Term
 MSC
Definition
 marginal social cost*the only ppl who bear the cost of the good are the ppl who produce it
Term
Definition
 the decrease in total surplus that results from an inefficient level of production
Term
 obstacles to efficiency
Definition
 *price and quantity regulations*taxes and subsidies*externalities*public goods and common resources*monopoly*high transaction costs
Term
 price elasticities of demand
Definition
 *perfectly elastic-infinity*elastic-less than infinity but >1*unit elastic-1*inelastic->0 but <1*perfectly inelastic- zero
Term
 cross elasticities
Definition
 *close subs- large*subs- positive*unrelated goods- zero*complements- negative
Term
 elasticities of supply
Definition
 *perfectly elastic- infinite*elastic- less than infinite but >1*inelastic- >0 but <1*perfectly inelastic- zero
Term
 price and quantity regulations
Definition
 leads to underproduction through minimum wages and overproduction through how farmers can only grow a certain amount of crops
Term
 taxes and subsidies
Definition
Term
 externality
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
Term
 public good
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
Term
 common resource
Definition
 owned by no one but used by everyone*leads to overproduction
Term
 monopoly
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
Term
 transaction costs
Definition
 the opportunity costs of making trades in a market*when transaction costs are high, the market might underproduce
Term
Definition
 *its not fair if the result isn't fair*its not fair if the rules aren't fair
Term
 Utilitarianism
Definition
 states that we should strive to achieve "the greatest happiness for the greatest number."*created by Bentham and Stuart Mill
Term
Definition
Term
 symmetry principle
Definition
 the requirement that people in similar situations be treated similarily.
Term
 equality of opportunity
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
Term
 resource allocation methods
Definition
 *bc resources are scarce, some mechanism must allocate them
Term
 demand and marginal benefit
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
Term
 supply and marginal cost
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
Term
 is the competitive market efficient?
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
Term
 is the competitive market fair?
Definition
 *fair-results ideas require income transfers from the rich to the poor*fair-rules ideas require property rights and voluntary exchange
Term
 price ceiling
Definition
 a regulation that makes it illegal to charge a price higher than a specified lever
Term
 rent ceiling
Definition
 when price ceilings are applied to housing markets
Term
 search activity
Definition
 the time spent looking for someone with whom to do business with
Term
 black market
Definition
 an illegal market in which the price exceeds the legally imposed price ceiling
Term
 mechanisms used to allocate scarce housing
Definition
 *a lottery*a queue*discrimination
Term
 price floor
Definition
 makes it illegal to trade at a price lower than a specified level
Term
 living wage
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
Term
 Housing markets and rent ceilings
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
Term
 the labor market and minimum wage
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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