EC 308

a movement along the supply curve that occurs as a result of a change in the good's price

change in quantity supplied

a shift of the entire supply curve caused by a change in a non-price factor that affects supply

change in supply

what factors influence the DEMAND for a good or service?

-price -number of consumers -consumer income or wealth -consumer tastes -prices of other related goods

what factors affect supply of a good or service?

1. price 2. production costs (includes the processes used to make, distribute, and sell a good) 3. number of sellers 4. sellers' outside options (price of a good in other markets and prices of other related goods)

1. completeness and rankability 2. for most goods, more is better 3. transitivity 4. the more a consumer has of a particular good, the less she is willing to give up of something else to get even more of that good

4 assumptions about consumer preferences

1. we focus on supply and demand in a single market 2. all goods sold are identical 3. all goods sold in the market sell for the same price and everyone has the same information about the price, the quality of the goods being sold and son on 4. there are many producers and consumers in the market

4 assumptions for s and d model

An individual indifference curves for hot dogs and hot dog buns are most likely: A.to be L-shaped. B.to have a constant MRS (marginal rate of substitution). C.to be differentiable. D.to have a constant slope.

A

Consider the market for burritos. Which of the following will result in an increase in the equilibrium price and a decrease in the equilibrium quantity of burritos? A.an increase in the price of beans (an input) B.new advancements in burrito-making technology C.news report on the negative health risks of burritos D.an increase in the price of tortilla chips (a complement)

A

products traded in markets in which consumers view different varieties of the good as essentially interchangeable (wedding dresses, water, time)

commodity

Ryan would be willing to pay $1 for a lollipop. Sarah would be willing to pay $0.50. The price of the lollipop is $0.75. What is Ryan and Sarah's combined consumer surplus? A.$0 B.$0.25 C.$0.50 $0.75

B

The utility George enjoys from consuming a bag of popcorn (P) and a candy bar (C) at a movie is given by the following utility function: U = P0.6C0.4 Which of the following statements is true for George? A.Candy adds more utility than popcorn. B.Popcorn adds more utility than candy. C.Popcorn and candy add the same utility. D.Popcorn adds less utility than candy.

B

At his current income level, Randall's income elasticity for frozen dinners is -0.75. If the price of frozen dinners decreases by 10%, the substitution effect will cause Randall to _________ his consumption of frozen dinners, and the income effect will cause Randall to ________ his consumption of frozen dinners. A.increase; increase B.increase; decrease C.decrease; increase D.decrease; decrease

B (negative tells us inferior so IE is decresing, positive tells us normal so IE increasing)

A good has an income elasticity of -1.50. If consumers' incomes increase by 10%, the demand for the good: A.increases by 10%. B.decreases by 10%. C.increases by 15%. D.decreases by 15%.

D E=%change inQx/%change in I %change inQx= -1.50*10

In Figure 3.11, area _______ represents the consumer surplus with the smaller tax, and area ________ represents the consumer surplus with the larger tax on Boston movie tickets. A. A + B + C + F; A B. A + B + C + F; A + B C. A + B + C; A D. A + B + C; A + C

C

EDXY is negative for ___ -consumption of good X decreases with and increase in the price of a related good Y

complements

Tom would be willing to sell his yo-yo for $1.75. Megan would be willing to sell her yo-yo for $1.50. If the equilibrium price is $2, what is the combined value of Tom and Megan's producer surplus? A.$0 B.$0.25 C.$0.50 D.$0.75

D

a good that is purchased and used in combination with another good (cereal and milk)

complements

more convex curves describe ___

complements

taxes create a ____ bc they raise prices for consumers and lower the received price to producers

DWL

the reduction in total surplus that occurs as a result of market efficiency

DWL

•The change in quantities demanded due to the changes in the consumer's purchasing power after the change in prices

IE

TE=

IE+SE

describes the rate at which one is willing to trade off or substitute exactly 1 unit of good X for more of good Y, and be equally well off

MRS

is the additional utility a consumer receives from an additional unit of a good or service (1 more)

marginal utility

1. they can drawn (completeness and rankability) 2. curves further from the orgin represent higher utility (more is better) 3. curves never cross (transitivity 4. convex to the origin (consumers like variety/ diminishing marginal utility)

characteristics of IC

a movement along the demand curve that occurs as a result of a change in the goods price

change in quantity demanded

nonbinding price ceiling: set ____the equilibrium price

above

price ceiling binding only when set ___ equilibirum

below

is a curve that describes the entire set of consumption bundles a consumer can purchase when spending all of their income. It is generally plotted alongside indifference curves.

budget constraint

Consider the market for hot dog buns. Which of the following will result in a decrease in the equilibrium price and a decrease in the equilibrium quantity of hot dog buns? A.an increase in consumers' preferences for hot dogs B.a decrease in the price of hot dogs C.an increase in the price of hot dogs D.an increase in the price of flour (an input to hot dog buns)

c

If the consumption of fresh cut flowers increases by 10% when consumers' incomes increase by 5%, fresh cut flowers are: A.inferior goods. B.necessity goods. C.luxury goods. D.ordinary goods.

c

The utility George enjoys from consuming a bag of popcorn (P) and a candy bar (C) at a movie is given by the following utility function: U = P0.6C0.4 Which of the following represents the marginal utility of popcorn (MUP) for George? A. 0.6P-0.4C-0.6 B. 0.4P-0.6C0.4 C. 0.6P-0.4C0.4 D. 0.4P0.6C-0.6

c

a shift of the entire demand curve caused by a change in a determinate of demand other than the goods own price

change in demand

the difference between the price consumers would be willing to pay for a good (as measured by the height of their demand curves) and the price they actually have to pay

consumer surplus

the ratio of the percentage change in one good's quantity demanded (good x) to the percentage change in the price of another good (good y) where x and y are different products that may be related

cross price elasticity of demand

what determines the size of the SE and IE?

curvature quantiity consumed before the price change

the combined amount of a goof that all consumers in a market are willing to buy

demand

the relationship between quantity of a good that consumers demand and the goods price, holding other factors constant (what happens to the amount consumers demand when the price changes)

demand curve

ED>1 (D changes more than P does) -soft drinks, cereal, clothing, cars

elastic

implies the quantity demanded/supplied is infinitely responsive to minuscule changes in price ex- commodity crops- assume everyone has perfect ability and information

elastic demand

the slopes of the supply and demand curves determine how markets respond to shifts in supply and demand

elasticity

unit-less measure that describes the sensitivity of quantity demanded or supplied to changes in price, income, or price of related goods -percentage change in one variable (quantity) / percentage change in another (price)

elasticity

why markets move toward equilibrium -if P<Pe, quantity demanded will exceed quantity supplied resulting in ___ -shortage -the shortage will induce buyers to bud up the price -- as prices rise, quantity demanded will fall and quantity supplied will rise until the market reaches equilibrium at a higher price Qd-Qs

excess demand

why markets move toward equilibrium -if P>Pe, quantity supplied will exceed quantity demanded ____ -surplus -to sell their products, producers must lower prices -- as prices fall, quantity demanded increases and quantity supplies decreases until the market reaches an equilibrium at a lower price Qs-Qd

excess supply

goods for which a fall in price leads the consumer to want less of the good •Inferior goods, but the income effect outweighs the substitution effect -all inferior goods are this, but not all inferior goods are this -when the price of this drops the SE is smaller than the IE- results in an upward sloping demand curve

giffen

how do taxes impact markets?

imposed to correct market failures, in general distort market outcomes

elasticities of supply and demand are the major determinants of ___

incidence

the change in a consumer's consumption choices that results from a change in the purchasing power of consumer's income, holding relative prices constant

income effect

the ratio of the percent change in QD to the corresponding percent change in consumer income

income elasticity of demand

plots out all of the consumption bundles that provide a consumer with the same level of utility or satisfaction

indifference curve

the special case in which a consumer derives the same level of utility from each of two or more consumption bundles

indifferent

0<ED<1 (doesnt change as much to shocks) -life saving medicine, gas, cigs

inelastic

EDI is negative for _____ -consumption decreases with increases in income

inferior goods

____ higher income is associated with falling consumption (mac n cheese and steak)

inferior goods

•Determine the bundle of goods that would have been chosen at the new price while maintaining utility experienced before the price change.

isolating SE

if demand and supply are relatively elastic, the DWL is ___ and the transfer from PS to CS is smaller -(elastic more sensitive to price changes)

larger

rule: the more elastic curve (supply or demand) bares the ___ burden (producer or consumer)

least

when demand is relatively more elastic, consumers will experience ____ burden, an vice versa

less

when supply is more elastic, producers will experience __ burden, and vice versa

less

as you move down a demand cure, demand becomes ___ ___

less elastic (i.e, more inelastic)

EDI>1 rolex

luxury goods

-IC describe tradeoffs -how much of one good you are willing to give up for one more unit of another good? -the slope of the IC curve captures this tradeoff we call this ___

marginal rate of substitution

defined by the specific product being bought and sold (bannas), a particular location (grocery store, a city, etc) and a point in time (aug 19)

market

- combining market supply and market demand completes the model -both relate the price of a good to the quantity demanded or supplied -point where supply and demand curves cross

market equilibrium

normal goods: ____ income elasticity is between 0 and 1 (water consumption, electricity, clothing) ____income elasticity is greater than 1 (vaction homes, jewlery)

necessity luxury

EDI is positive for ___ -consumption increases with increases in income

normal goods

for ___ higher income is associated with rising consumption (vaction homes) *always atleast one normal good

normal goods

are goods that the consumer must consume in a fixed proportion.

perfect complements

are goods that the consumer will trade at a fixed rate and receive the same level of utility (MRS is constant).

perfect substitutes

ED= infinity

perfectly elastic

ED=0 (gas)

perfectly inelastic

implies quantity demanded/supplied does not change in response to a change in price ex- life saving drugs, gas

perfectly inelastic

the highest price that can be paid legally for a good or service

price ceiling

Ed=% Δ Quantity Demanded/% Δ Price

price elasticity of demand

Es=% Δ Quantity Supplied/% Δ Price

price elasticity of quantity supplied

a regulation that sets the minimum price that can be legally paid for a good or service (price support) binding when set __ nonbinding when set ___

price floor above below

the difference between the price producers actually receive for their goods and the cost of producing them (measured by the height of the supply curve) -NOT the same as profit

producer surplus

a regulation that sets the quantity of a good or service provided -often used to limit imports of certain goods

quota

small changes in price and large changes in quantity all else equal

shallow curves

if demand and supply are relatively inelastic the DWL is a ___ and the transfer from PS to CS is larger

smaller

larger changes in price and small changes in quantity, all else equal

steep curves

_____•curves imply the consumer is willing to give up a lot of Y to get one unit of X, or could trade 1 unit of X for a lot of good Y. _____ curves imply the consumer would require a large increase in good X to give up one unit of the good Y, or could trade 1 unit of Y for a lot of good X.

steeper flatter

a key factor in determining the amount of potential consumer surplus in the market is the ______ of the demand curve

steepness (elasticity)

___ IC describe substitutes

straight

EDXY is positive for ____ -consumption of good X increases with an increase in the price of a related good Y

substitutes

a good that can be used in place of another good (coke and pepsi)

substitutes

refers to the change in a consumer's consumption choices that results from a change in the relative prices of two goods

substitution effect

the combined amount of a good that all producers in a market are willing to sell

supply

binding price floor causes a ____ binding price ceiling causes a ___

surplus shortage

term describing who actually bears the burden of a tax (who is going to end up actually paying it) in the s and d model, it does not matter who is required to pay the tax (sales tax v. production tax)

tax incidence

surplus that moves from producers to consumers or vice versa, as a result of a regulation

transfer

what are the effects of price ceilings on markets?

transfer and DWL

ED=1 (1:1 relationship at that point)

unit elastic

elasticities do not have ___ -allows for the comparison across different goods and services in different markets -also used to describe supply

units

a measure of how "satisfied" consumers are -happiness or well being -not a measure of consumer income

utility

describes the relationship between what consumers actually consume and their level of well-being - represent consumer preferences

utility function

when is demand/supply perfectly inelastic (E=0)?

when the slope of d/s is infinite

when is demand/supply perfectly elastic (E=infinity)?

when the slope of d/s is zero