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61 Cards in this Set
- Front
- Back
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elasticity
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measurement of how changing one variable affects others
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how to find price elasticity of demand
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% change in Qd / % change in price (start value + end value / 2)
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narrowly defined goods
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goods for which there are close substitutes, higher price elasticity
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broadly defined goods
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goods for which there are no close substitutes, low elasticity
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how time effects elasticity
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higher in the long run (gas prices)
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perfectly elastic demand
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price drops but Qd always stays the same, elasticity = infinity
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perfectly inelastic demand
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price rises but Qd stays the same, elasticity = 0
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inelastic demand
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elasticity i less than 1
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unit elastic demand
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elasticity = 1
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elastic demand
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elasticity < 1
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total revenue
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amount paid by buyers and received by sellers, price of good x quantity of good sold
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effect on total revenue if demand is inelastic and price increases
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increase in total revenue
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effect on total revenue if demand is elastic and price increases
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decrease in total revenue
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effect on total revenue if demand is unit elastic and price changes
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total revenue remains constant
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income elasticity of demand equation
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% change in Qd/ percent change in income
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increase in income causes a(n) _______ in demand for a normal good
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increase
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increase in income causes a(n) ______ in demand for inferior goods
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decrease
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cross-price elasticity of demand
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measures the response of demand for one good to changes in the price of another good
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cross-price elasticity of demand equation
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% change in Qd for good 1/ %change in price of good 2
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price elasticity of supply
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how much quantity supplied responds to change in price
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price elasticity of supply equation
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% change in Qs/ % change in price. ALWAYS POSITIVE
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OPEC
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failed to keep the price of oil high. they reduced the amount of oil they supplied, prices doubled, people got mad, prices dropped
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effect of interdiction and education of supply of drugs
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interdiction reduced supply, education reduced quantity and prices dropped
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price ceiling
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legal maximum on the price of a good or service
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effect if price ceiling is higher than equilibrium price
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price ceiling is not binding
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effect if price ceiling is lower than equilibrium price
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price ceiling is binding, causes shortage, sellers must ration goods among buyers
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price floor
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legal minimum on the price of a good or service
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effect if price floor is below equilibrium price
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price floor is not binding
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effect if price floor is above equilibrium price
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price floor is binding, causes surplus
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fair labor standards act of 1938
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established minimum wage
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effect if minimum wage is above equilibrium
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unemployment, higher income for workers who have jobs
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effect of a tax on buyers
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price has to fall to keep Qd the same
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effect of a tax on sellers
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increases sellers cost so price rises and Q drops
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tax incidence
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how burden of tax is shared
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effect on tax if supply is more elastic than demand
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it's easier for sellers than buyers to leave the market so buyers bear most of the burden of the tax
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effect on tax if demand is more elastic than supply
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it's easier for buyers than sellers to leave the market so sellers bear most of the burden of the tax
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payroll tax
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deducted from your paycheck by FICA. half paid by workers, half by business
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wellfare economics
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studies how allocation on resources affects economic well-being
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willingness to pay
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maximum amount the buyer will pay for that good
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consumer surplus
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amount a buyer is willing to pay for a good - what the buyer actually pays. total is the area below the demand curve and above the price
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cost
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value of everything a seller must give up to produce a good
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marginal seller
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seller who would leave the market if the price were any lower
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producer surplus
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amount a seller is paid for a good minus the sellers cost of providing it, area between supply curve and price
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total surplus
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total gains from trade in a market, value to buyers - cost to sellers, used as a measure of society's well-being
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efficiency
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resource allocation maximizing total surplus received by all members of society
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free market
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equilibrium is efficient. gov can't raise total surplus by changing market allocation of resources
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laissez faire
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french for "allow them to do," notion that gov shouldn't interfere in the market
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central planning
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central planner allocates resources, would have to know every seller's cost and every buyer's wtp for every good, not efficient
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revenue from tax
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size of tax x quantity sold
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deadweight loss
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amount tax reduces total surplus
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effect of inelastic supply on dwl
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harder for firms to leave the market when tax reduces producer surplus so tax only reduces q a little and dwl is small
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effect of elastic supply on dwl
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easier for firms to leave the market when tax reduces ps and greater the dwl
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effect of inelastic demand on dwl
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harder for consumers to leave the market when tax raises buyer price, so tax only reduces q a little and dwl is small
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effect of elastic demand on dwl
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easier for buyers to leave the market when the tax raises buyer price, greater dwl
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marginal tax rate
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tax on the last dollar of earnings, usually about 40%
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effect of inelastic labor supply on dwl
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dwl is small
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effects of changing the size of the tax
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when tax increases, dwl rises. higher tax reduces size of the market
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presidents in favor of reducing tax rates
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reagan and bush
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laffer curve
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shows relationship between size of tax and tax revenue
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supply-side economics
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economic growth by lowering barriers for people to produce goods and services
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fairtax
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revenue neutral, bring in the same amount of revenue as income tax system today. raise output per person by 17%. collect 100% of paycheck, receive monthly pre-bates, businesses return operations to US, close down IRS, underground economy pays taxes
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