Econ midterm chapt 5-7

Card Set Information

Econ midterm chapt 5-7
2012-10-11 17:16:05
Econ midterm chapt

Econ midterm chapt 5-7
Show Answers:

  1. The 4 Determinants of Price Elasticity:
    • The price elasticity of demand depends on:
    •  the extent to which close substitutes areavailableh th th d i it l
    •  whether the good is a necessity or a luxury
    •  how broadly or narrowly the good is defined
    •  the time horizon – elasticity is higher in the long run than the short run
  2. What is Total Revenue
    TR = Price * Quantiy
  3. 4 Elasticity equations
    Price elasticity of demand=

    Price elasticity of supply =

    • Income elasticityof demand =
    • (for normal goods, income elasticity > 0.)
    • (For inferior goods, income elasticity < 0.)

    • Cross-price elast.of demand =
    • (For substitutes, cross-price elasticity > 0)
    • (For complements, cross-price elasticity < 0)
  4. When is the Price Ceiling a binding constraint on the price?
    • -When the Price Ceiling is below equilibrium
    • -this causes a shortage of goods
  5. When is the Price Floor a binding constraint on the Price,
    • -When the Price Floor is above equilibrium
    • -this causes a surplus
  6. What is the the Incidence of a Tax:
    • -how the burden of a tax is shared among market participants  (buyers and seller)
    • -after tax the resulting equlibrium and tax incidence are thesame whether the tax is imposed on buyers or sellers
  7. willingness to pay
    the maximum amount the buyer will pay for that good
  8. 3 references for allocation of resources
    • • how much of each good is produced
    • • which producers produce it
    • • which consumers consume it
  9. marginal buyer
    the buyer who would leave the market if the Price were any higher
  10. Consumer surplus(CS)
    • -is the amount a buyer is willing to pay minus the amount the buyer actually pays
    • -Total CS equals the area under the demand curve and above the price, from 0 to the Quantity.
  11. marginal seller
    the seller who would leave the market if the price were any lower.
  12. Producer surplus(PS)
    • -the amount a selleris paid for a goodminus the seller’s cost
    • -Total PS equals the area above the supply curve under the price,from 0 to Q.
  13. Total surplus
    • = CS + PS
    • = total gains from trade in a market
    • = (value to buyers) – (cost to sellers)
  14. when is an allocation of resources efficient
    when it maximizes total surplus
  15. what is Efficiency whith regards to surplus
    •  The goods are consumed by the buyers who value them most highly.
    •  The goods are produced by the producers with the lowest costs.
    •  Raising or lowering the quantity of a good would not increase total surplus.