ECON 131 Midterm #2
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. What would you like to do?
- the total loss in Consumer and Producer Surplus due to a change in policy
- Excess Burden
Top half of triangle
Bottom half of triangle
- A measure of the response of one variable to a change in another.
- highly responsive is elastic
- highly unresponsive is inelastic
Price Elasticity of Demand
- The ratio of the percentage change in the quantity of a good demanded to a given percentage change in its price, other things being equal.
- Demand is always on top of equation
- Situation in which quantity demanded changes by a larger percentage then price.
- Elasticity > 1
- A situation in which quantity demanded changes by a smaller percentage then price
- Elasticity < 1
Different types of Elasticities
- Cross Elasticity
- Income Elasticity of Demand
- Price Elasticity of Supply
Determinants of price elasticity of demand
- Availability of Substitutes
- Proportion of income
- Luxury vs. necessity
- Time Horizon
- Who Actually Pays?
More substitutes = more elastic
Luxuries tend to be very elastic
Necessities tend to be very inelastic
Goods tend to be INELASTIC in the short run and ELASTIC in the long run
If demander doesn't face the real opportunity cost then demand tends to be inelastic
Policies to make demand more elastic for textbooks
- Force professors to list the price of the textbook on their syllabus
- Deduct the cost of textbooks from professor's salaries
- Allow students to choose the textbook themselves
The elasticity of demand curve is not the same as the slope
Elasticity is different on different points on the demand curve
Elastic towards the top
Revenue = Price x Quantity
increase prices with inelastic demand and you will make money
increase prices with elastic demand and you will so money
Prices declined over time creating the farm problem because
- Low income elasticity of demand for farm goods
- high rate of technological progress and increased supply form other countries
Three policies that could be implemented for the farm problem
- Price Supports
- Supply restrictions
Demand has shifted a little and Supply has shifted a lot
the distribution of the economic burden of a tax
"Read my lips: No new taxes"
- George Bush
- Omnibus Budget Reconciliation Act of 1990
- tax on yachts
Raised Salt Tax
- Gabelle- Salt tax
- Jean Baptiste Colbert
- French Minister of Finance
Wrote Progress and Poverty
- Henry George
- proposed abolishing all taxes and placing a single tax on land
Firms supply in the prodcut market
What do firms have in common?
- How much to produce
- how many people to hire
- what type of captal equipment to use
Criticism of Ricardo Example
Trade may not benefit some people and may make people worse off.
it assumes that factors of production are mobile with in country but not between
ricardo assumes no negative effects associated production
what happens to consumers when imports occur?
What happens to consumers when exports occur?
when did Prohibition start
Initial effects of prohibition
- Overall Drinking reduced
- Incentives of buyers and sellers were changed
- consumption of hard alcohol sky-rocketed
3 main economic effects of prohibition
- Small reduction in quantity consumed
- large increase in price
- massive increase in spending on alcohol
Legalization and taxation
- Both D and S go up
- easeier to enforce age restrictions
- drugs safer
- Addcits might be more willing to accept treatment
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