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17 Cards in this Set

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  • Back
Assumptions re: PPC curve
1. Two Goods only
2. Fixed Resources
3. Given level of technology
Defn. of PPC curve
Shows max. output combinations using resources efficiently. Best possible use with given level of technology and resources.
Straight line VS Curved PPC
STRAIGHT: Shows resources that are equally suited to production of either good, opportunity cost is unchanged in producing more units

CURVED: reflects law of diminishing returns. More Opportunity Cost as you move from one end to the other. Shows that resources are more suited to production of one good than another, have to be transferred
Allocative Efficiency
Requires production efficiency as well as the combination of g/s that consumers desire
Market forces - what happens when there is a Shortage/Surplus
SHORTAGE: Market forces return it to the equilibrium as consumers bid the price up so the qty. suppled will rise and qty. demanded will fall

SURPLUS: Return to equilibrium, firms will accept lower prices so qty. supplied will fall, qty. demanded rise
Consumer surplus
Monetary value to a buyer of buying a commodity over and above the expenditure necessary to make the purchase ( difference between what consumers are willing to pay, and what they did pay)
Producer Surplus
Monetary value to a seller of supplying a commodity, over and about the necessary cost to produce the goods. (Difference between total earnings of supplies for a certain qty. sold, and total costs required to put that qty. on the market) -- below priceline, above S
Deadweight loss
A loss of welfare by an individual or group which is not offset by welfare gain to some other individual or group.
Price Elasticity of Demand
Responsiveness of QTY DEMANDED of a good or service to changeds in PRICE
Elasticity of Demand - Revenue method
P<> TR unchanged= Unitary

P> TR > = Inelastic

P> TR< = Elastic
Cross-Elasticity of Demand
Responsiveness of QTY. DEMANDED of one good to PRICE changes in another good.

Substitutes: positive change (P> D>)
Complements: negative change (P> P<)
Income Elasticity
Responsiveness of QTY. DEMANDED to changes in INCOME

INFERIOR GOODS: Negative number, qty demanded and income changes= opposite directions
NORMAL GOODS: Positive number, same directions
Elasticity of Supply
Responsiveness of QTY. SUPPLIED of a good to changes in PRICE
Incidence of Sales Tax
Consumer on top

INELASTIC= more incidence on consumer

ELASTIC= more incidence on producer
Incidence of Subsidy
Consumer on top

INELASTIC= more incidence on consumer

ELASTIC= more incidence on producer
Nominal VS Real Wage
NOMINAL: return to labour measured in current dollars

REAL: purchasing power of wages- nominal wages adjusted for changes in the price level (Nominal wages divided by CPI)
Reasons for Govt to inforce minimum wage
Feels unregulated market is below subsistence level, or that greater equality of wages is desirable. Because of min. wage, or unions resisting wage cuts, wages might not clear up to equilibrium