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120 Cards in this Set
- Front
- Back
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economic efficiency
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the marginal benefit of the last unit consumed is equal to the marginal cost
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price ceiling
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a legally determined maximum price that sellers may charge
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price floor
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a legally determined minimu price that sellers may receive
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consumer surplus
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the difference between the highest price a consumer is willing to pay for a good/service and the price that the consumer actually pays
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marginal benefit
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the additional benefit to a consumer from consuming one more unit of a good/service. As units consumed increases, the marginal benefit decreases
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what happens when a government imposes a price ceiling or price floor
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the amount of economic surplus in a market is reduced
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on a graph, consumer surplus is equal to
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the area below the demand curve and above the market price
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marginal cost
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the additional cost to a firm of producing one more unit of a good/service
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producer surplus
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the difference between the lowest price a firm would be willing to accept for a good/service and the price that it actually receives
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on a graph, how is producer surplus measured
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the area below the market price and above the supply curve
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economic efficiency
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a market outcome in which the marginal benefit to consumers is equal the the marginal cost of production
the sum of consumer surplus and producer surplus is at its maximum |
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where on a graph indicates economic efficiency
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where supply and demand curves meet in equilibrium
MC = MB |
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economic surplus
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the sum of consumer and producer surplus
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deadweight loss
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the reduction in economic surplus resulting from a market not being in competitive equilibrium
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at economic surplus does it mean it has the most benefit to inividuals?
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No, it has the best net benefit, but it may not be the best for some individuals
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price floors must be set
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above equilibrium price
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price ceilings must be set
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below the equilibrium price
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Revenue at equilibrium equals
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the price by how many was sold
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externality
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a benefit or cost that affects someone who is not directly involved in the production or consumption of a good/service
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allocative efficiency
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when the marginal benefit equals the marginal cost of the unit unit produced/consumed
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negative externality
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when production or consumption hurts an outside individual or entity
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positive externality
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when the production or consumption benefits an outside individual or entity
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three types of market intervention
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quantity restriction
price floor price ceiling |
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quantity restriction
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Q bar is less than Qeq
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price floor
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price floor > P*
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price ceiling
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price ceiling < P*
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public goods
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goods that may not be produced at all unless the government produces them
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private cost
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the coast borne by the producer of a good or service
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social cost
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the total cost of producing a good or service, including both private cost and any external cost
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private benefit
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the benefit received by the consumed of a good or service
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social benefit
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the total benefit from consuming a good or service, including both the private benefit and any external benefit
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MCp
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cost borne by the producer (direct cost)
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MCs
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social cost
MCP + external |
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MCs > MCp
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negative production externality
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MBp
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benefit to the consumer (private benefit)
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MBs
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social benefit
MBp + externalities |
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MBp > MBs
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negative consumption externality
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MCs < MCp
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positive production externatility
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MBp < MBs
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positive consumption externality
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When there is a negative externality cost to production, what happens at market equilibrium
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too much of a good or service will be produced
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When there is a positive externality in consuming a good/service, what happens at market equilibrium
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there will be to little of the good/service
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market failure
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a situation in which the market fails to produce the efficient level of output
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property rights
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the rights of individuals or business to have the exclusive use or their property incluind the right to buy or sell
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How do property rights play into market failure and externalities
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they are often caused by incomplete property rights or from the difficulty of enforcing property rights in certain situations
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is it economically efficient to completely reduce pollution?
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no because with each amount of pollution reduced, there is less benefit to society
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transaction costs
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costs in time and other resources that parties incur in the process of agreeing to and crrying out an exchange of goods/services
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Coase theorem
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if transactions costs are low, private bargainin will result in an efficient solution to the problem of externalities
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command and control approach
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government imposing quantitative limits on the amount of pollution a firm are allowed to emit or requiring certain devices to be installed
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Short version of cap and trade
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the government offers allowances of emissions and companies can sell and trade those allowances
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rivalry
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the situation that ocfurs when one person's consuming a unit of a good means no one else can consume it
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excludability
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the situation in which anyone who does not pay for a good cannot consume it
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private good
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a good that is both rival and excludable
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public good
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a good that is both nonrivalrous and nonexcludable
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free riding
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benefiting froma good without paying for a it
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common resource
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a good that is rival but not excludable
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quasi-public goods
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excludable but not rival
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elasticity
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a measure of how much one economic variable responds to changes in another economic variable
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price elasticity of deamdn
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the responsiveness of the quantity deamnded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the products price
percent chagen in qd ------------------------------- percent change in p |
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is the price elasticity of deamnd the same as the slope of the demand curve?
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no
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elastic demand
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when %change qd > % change P
abs(Ep) is greater than 1 |
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inelastic demand
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when %change Qd < % change P
abs(ep) is less than 1 |
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unit elastic
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when percent change qd equals percent change p
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midpoint formula for elasticity
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(q2 - q1) / (q1+q2/2) divided by
(p2 - p1)/ (p1+p2/2) |
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perfectly inelastic demand
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the case where qd is totally unresponsive fo p
line is straight |
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perfectly elastic demand
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where qd always responds in the same manner to p
line straight |
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5 key determinents in price elasticity
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availabity of close substitutes
passage of time luxuries vs necessities definitoin of the market share of the good in consumer's budget |
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Availablity of close substitutes and how it affects price elasticity
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if there are more substitutes available it will be more elastic in demand and vice versa
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passage of time and how it affects price elasticity
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the more time passes the more elastic the demand for a product
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luxuries vs necessities and how it affects price elasticity
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the demand curve for a luxury is more elastic than for a necessity
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definition of the market and how it affects price elasticity
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The more narrow a market is defined, the more elastid demand will be
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share of a good in a consumer's budget and how it affects price elasticity
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the demand for a good will be more elastic the larger the share of the good in the average consumer's budget
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total revenue
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the total amont of funds received by a seller of a good/services, calculated by multiplying price per unit by the number of units sold
P X Qd |
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Total revenue as it relates to price elasticity
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when demand is inelastic total revenue and price move in the same direction
when demand is elastic, total revenue and price move in the opposite direction |
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is unit elastic affect total revenue
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nope
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cross price elasticity
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change in qd of one good
divided by change in p of another good |
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if cross price elasticity is zero
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unrelated
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if cross price elasticity is positiv
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substitutes
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if cross price elasticity is negativw
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complements
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income elasticity of demand
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percent change in quantity demanded
divided by percent change in income |
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if income elasticity is less than 0
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inferior good
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if income elasticity is 0 -1
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normal necessity
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price elasticity of supply
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measure how responsive firms are to changes in price
percent change in quantity supplied divided by percent change in price |
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if price elasticity of supply is less than 1
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inelatstic
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if price elasticity of supply is greater than 1
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elastic
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determinants of price elasticity of supply
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the ability and willingness of the firms to change
usually changes over a long period of time because businesses can't react in the short term |
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when a demand curve is inelastic and demand changes, what absorbs most of the change?
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the price
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when a demand curve is elastic and there is a change in demand, what absorbs most of the change?
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the quantity
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when supply is elastic, a change in supply results in a major change in what?
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quantity
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when supply is inelastic, a change in supply results in a major change in what
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price
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three factors that economists consider when consumers make choices
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tastes/preferences
incomes prices of goods/services |
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law of demand
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whenever the price of a good falls, the quantity demand increases, and vice versa
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utility
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measure of happiness/satisfaction
the enjoyment or satisfaction people receive from consuming goods or services |
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utility is a function of
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goods and services, leisure activites, etc
ex: coffee, health, exercise, impact on others how you measure happines, or things that influence your happiness |
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marginal utility
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the change in the total utility a person receives from consuming one additional unit of a good/services
OR the additional utility a person receives from consuming one more unit of a good or service |
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equation from MU
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change in total utility
divided by change in consumption |
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Law of diminishing marginal utility
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the principle that consumers receive diminishing additional utility as they consume more and more of an input
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Budget constraint
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the limited amount of income available to consumers to spend on goods and services
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what is the goal of consumers
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to maximize utility subject to constraints (time, budget, etc)
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What does it mean to say that optimal decisions are made at the margin
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economic decision makers make choices about whether or not to do a little more of one thing or another as an alternative
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two rules of maximizing utility subject to a budget constraint
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MU of good 1 = MU of good 2 = MU good 2 = ...
Spending for each good must total to the income available to the individual or firm |
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income effect
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the change in Qd of a good that results from a change in consumer purchasing power
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substitution effect
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the change in Qd of a good that results from a change in the relative price of other alternative goods/services
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A price decrease affects income in what way
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it increases purchasing power
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an increase in purchasing power affects inferior and normal goods in what way
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normals goods: increase in Qd
inferior goods: decrease in Qd |
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An increase in price affects income in what way
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it decreases purchasing power
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a decrease in purchaisng power affects inferiro and normal goods in what way
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normals: decrease in Qd
inferior goods: increase in Qd |
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an increase in purchasing power (price decrease) affects the substitution effect how?
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it lowers the opportunity cost of purchasing a good, therefore causing Qd to rise whether it is inferior or a normal good
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a decrease in purchasing power (price increase) affects the substitution effect how?
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raises the opportunity cost which causes Qd to decrease for normal and inferior goods
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how to turn individual demand curves into market demand curves
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the sum of Qd from all individuals at a given price equals the Qd on the market curve
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giffen good
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a good with an upward sloping demand curve
must be an inferior good with the income effect larger than the substitution effect |
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utility and popularity of items
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people receive more utility from purchasing goods/services that are popular
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Network externality
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a situation in which the usefulness of a product increase with the number of consumers who use it
ex: phone |
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switching costs
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when a consumer finds it too costly to switch over to another product that contains better technology
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path dependent
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the path along which a good/service was developed in the past is important
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fairness and the market
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there is an inherent (well seems to be) interest in most individuals about being fair in allocating money or goods
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business implications to fairness
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some businesses do not raise their prices when there is a shortage because of the popularity factor
ex: a resturant wants to see people coming out the door to give the idea that it is popular |
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behavioral econmics
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the study of situations in which pepole make choices that do not appear to be economically rational
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3 common mistakes that consumers make economically
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-take into account monetary costs and ignore nonmonetary opportunity costs
-fail to ignore sunk costs -unrealistic about their future behavior |
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endowment effect
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the tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it
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sunk cost
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a cost that has already been paid and cannot be receovered
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