ECON 101 Midterm
T/F: Though they may face higher price, consumers usually see an increase in product quality when price ceilings are imposed.
False
T/F: Price ceilings result in resources being allocated to activities with the highest possible value
False [b/c when a price is lowered by a price ceiling, the price signal is blurred and this can result in an inefficient allocation of resources]
Price Ceiling
Government making it illegal to charge a price above a certain threshold
Sharp increase in the price of wood causes increases in prices for dresses and desks. Does Quantity Demanded Increase/Decrease/Remain Unchanged?
Quantity Demanded Decreases
Groupon has a groupon for $6 off the price of laser tag. Does Quantity Demanded Increase/Decrease/Remain Unchanged?
Quantity Demanded Increases
Week long special at Safeway, where pork shoulder is on sale at $1.99 a pound, down from $3.99 a pound. Does Quantity Demanded Increase/Decrease/Remain Unchanged?
Quantity Demanded Increases
Is this a result of a price floor or a price ceiling? What used to be a 24 hour diner is now only open 20 hours a day
Result of Price Ceiling
Is this a result of a price floor or a price ceiling? A shortage in the market for tie die shirts
Result of a Price Ceiling
Is this a result of a price floor or a price ceiling? Lawrence waits an hour at the local butcher's shop to obtain a mutton cutlet due to absurdly long lines.
Result of a Price Ceiling
Is this a result of a price floor or a price ceiling? Your favorite restaurant choosing to downsize their portion sizes
Result of a Price Ceiling
Is this a result of a price floor or a price ceiling? Unnecessarily Lavish Airline Flights
Result of a Price Floor
Is this a result of a price floor or a price ceiling? A surplus of workers in the labor market
Result of a Price floor
Elasticity of Supply
measures how responsive the QS is to the change in price - the determinate is how quickly per-unit costs increase with an increase in production
Elasticity of Demand
measures how responsive the quantity demanded is to a change in price the more responsive, the more elastic
Internalize the externality
tax goods that have negative externalities; grant subsidies to positive externalities
The longer the time period considered
the MORE elastic
Social Cost
the cost to everyone; the private cost + the external cost
Price Floor
when the price of a good is forced above the equilibrium price
Coase Theorem
when two parties (private bargains) come to agreement (market equilibrium is efficient) as long as : 1. Well defined property rights (very clear what we're arguing over and someone owns that right) 2. Low transaction costs (few parties involved)
Can nobody have the comparative advantage?
yes.
Social Surplus is
consumer surplus + producer surplus + everyone else's surplus
social surplus
consumer surplus + producer surplus + everyone else's surplus
Production Possibilities Curve
- assumes that society is using all of its resources and technology - slope tells us what the opportunity cost is of producing the good that's on the x-axis - Linear curve (straight line) suggests that the opportunity cost is constant - a tradeoff can be illustrated as a movement along the frontier itself -shows the combination of outputs a country can produce given its resources and productivity
Absolute Advantage
- the ability to produce more of a good with the same amount of resources - the ability to produce more of a good using less resources
Deadweight Loss
-the cost of an inefficient outcome in a market. Excess cost when units produced for which MC > MB for all production to the right of the equilibrium quantity. is the difference between the equilibrium market value and the price ceiling market value - a measure of the reduction in social welfare associated with an inefficient outcome.
Main Factors that affect Price Elasticity of Supply
1. Availability of Resources 2. Time 3. # of producers 4. Cost of production 5. Technology 6. Stock
3 Main factors that Contribute to Price Ed
1. Availability of Substitutes 2. Income 3. Time
Things that change Demand Curve
1. Income 2. Substitute Products 3. Customer Preference 4. future Expectation 5. Population size 6. Price of complements
Characteristics of a Competitive Market:
1. Many buyers 2. Many Sellers in that Market 3. Product is homogeneous (pretty much similar) 4. Entry and exit to the industry is free (no significant barriers to entry, e.g. No zoning limits)
T/F: The Coase theorem suggests that the efficient equilibrium quantity of flu shots will maximize the sum of producer and consumer surplus
False
Price Ceilings' Effects:
1. Shortages [b/c maximum price suppliers can charge below market $, demand exceeds supply and a shortage results] 2. reductions in product quality [less incentive to provide quality g/s / whether through smaller sizes or reduction in service] 3. Wasteful lines and other search costs 4. A loss of gains from trade [DWL arises due to the reduction in consumer/producer surplus. There are unfulfilled mutually beneficial transactions as a result of the ceiling] 5. A misallocation of resources
Price Floors have 4 important consequences:
1. Surpluses [b/c the minimum price suppliers can charge above market price, supply exceeds demand] 2. Lost gains from trade [DWL occurs b/c there are missed opportunities] 3. Wasteful increases in Quality [suppliers cannot compete against one another in terms of price difference. instead, producers try to compete through quality by justifying higher prices through lavish increases in quality despite consumers being better off with a lower quality] 4. A misallocation of Resources [a lot of underutilized resources/restrictions on entry into these markets.]
3 Types of Govt solutions to externality problems:
1. Taxes and Subsidies 2. Command and Control 3. Tradable Allowances
Suppose a farmer produces both beans and corn on her farm. If she must give up 16 bushels of corn to be able to get 6 bushels of beans, then her opportunity cost of 1 bushel of beans is ______________
2.67 bushels of corn
If CP elasticity is <0
A & B are complements
Positive income elasticity of demand means
A normal Good
T/F: The process of specialization and trade has positive net benefits and is therefore beneficial to everyone.
False
Which term below best describes the situation that, relative to England, France can produce beef at a lower cost of production (i.e. can produce beef using fewer inputs)?
Absolute Advantage
Total Surplus
Consumer surplus + Producer Surplus
To entice students to keep up-to-date with economic current events, an instructor offers extra credit to students for participating in an online discussion forum, and this sparks a lively debate about environmental policy.
Example of Responding to Incentives
Values to sellers is synonymous to
Costs
T/F: A nation will not have a comparative advantage in a product if it does not also have an absolute advantage in the production of that good.
False
Specialization and Trade
Decrease the per-unit costs of production b/c of economies of scale associated with large scale production
Will the Supply Curve or the Demand Curve change or both? Michael, after working at Nortel for over 20 years, is fired from his job. Michael eats out less as a result. Restaurants
Demand Curve Changes
Will the Supply Curve or the Demand Curve change or both? Spam unveils a new flavor, barbecue, which has students intrigued and as such, transition from buying ham to spam. Spam -
Demand Curve Changes
Will the Supply Curve or the Demand Curve change or both? Hair gel and hair wax are substitutes both in consumption and production. The price of hair gel decreases. Hair wax -
Demand Curve and Supply curve Changes
Demand vs. Quantity Demanded
Demand: the amount of a good people are willing and able to purchase / a shift in the demand curve QD: The amount of a good that people are willing and able to purchase at a given price, holding all other factors constant / movement along the demand curve
Does this put an upward pressure on price or a downward pressure on price? an outbreak of mad cow disease causes Americans to abstain from eating beef
Downward pressure on price
An educational software company wants to expand the number of economics questions that it offers and is considering hiring another economist. It compares how much adding another worker will improve the product with the additional cost.
Example of Marginal Decisions
On Black Friday, there are huge sales for electronics at many retail stores. David must decide between buying a camera at one store or a flat screen TV at another store, and buying one means losing out on the ability to purchase the other.
Example of Opportunity Cost
Ava finds that there is not enough time after work to have dinner, exercise, and watch TV, and she must make choices about how to use her limited time.
Example of Resource Scarcity
T/F: A problem with price ceiling is that they lead to surpluses
False
T/F: Taxes in markets always cause deadweight losses.
False
A new report by the AMA reveals that chocolate does, in fact, have significant health benefits. What will happen?
Increase the demand --> shift in the demand curve to the right --> creates shortage, increase in price --> increase in supply Both equilibrium price and quantity will increase for the market of chocolate ice cream.
If elastic of demand = 1
It's Unit Elastic. And, Revenue stays the same when price chagnes.
If Elasticity of demand > 1
It's elastic. And, Revenue and Price move in opposite directions
If elasticity of demand < 1
It's inelastic. And, Revenue and Price move together.
Primary Factors Affecting Elasticity of Supply
Less: 1. difficult to increase production at constant unit cost 2. Large share of market for inputs 3. Global supply 4. Short Run More: 1. Easy to increase production 2. Small share of market for inputs 3. Local supply 4. Long Run
Negative income elasticity of demand means
Luxury Good
The Cross-Price Elasticity of Demand
Measures how responsive the QD of good A is to the price of good B. Formula: %change QD, A / %change Price, B
Will the Supply Curve or the Demand Curve change? Le Bureau et Chaise offers a one weekend clearance sale on its old model of desks, which causes students to rush to upgrade their dorm furniture.
Movement Along the Demand Curve
Will this cause a shift in the Demand Curve or Movement along the demand Curve? Nettoyer raises the price for its laundry detergent, which results in less sales and strange scents around college dorm floors.
Movement along the Demand Curve
Can you have a comparative advantage in BOTH things?
NO.
Producer Surplus
Price - Seller's Cost
Shortage
QD is greater than the QS
Surplus
QS is greater than QD
Due to increases in hay prices, an input for raising cattle, the price of a gallon of 2% milk, increases from $2.98 to $3.25. Does Quantity Demanded Increase/Decrease/Remain Unchanged?
Quantity Demanded Decreases
Will the Supply Curve or the Demand Curve change? In the country of Weskia, designed to sag shorts are no longer in vogue and sales drop off as a result.
Shift of the Demand Curve
Will the Supply Curve or the Demand Curve change? Last Hope, an energy drink company notices students are desperate during finals and change their buying behavior.
Shift of the Demand Curve
Will the Supply Curve or the Demand Curve change? Out-N-In, a burger joint with an absurd national following in the US, sells more burgers as the price of chicken increases.
Shift of the Demand Curve
Between Cable TV market, Soybean market, New Car market, and the T-shirt Market, which is a competitive market.
Soy Beans. b/c Cable TV isn't b/c there r not many sellers, New Car market differs in price and quality, and T-shirts are not homogeneous (differ colors, lengths, etc.)
Will the Supply Curve or the Demand Curve change or both? Researchers develop a higher yielding, insect repellant strain of rice. Rice -
Supply Curve Changes
Will the Supply Curve or the Demand Curve change or both? iDecide, a consulting firm, joins the market for accounting. Consulting firms -
Supply Curve Changes
Will the Supply Curve or the Demand Curve change? The price of goose feathers, an input for pillows, increases sharply. Pillows -
Supply Curve Changes.
New technology for mixing and freezing ice cream lowers manufacturer's cost of producing chocolate ice cream. What will happen?
Supply will increase, prices fall, quantity increases.
What are commodity taxes?
Taxes on goods The tax = $ paid by buyers - $ received by sellers
Drives a wedge between what the buyer pays and what the seller gets
Taxes/Subsidies
Comparative Advantage
The ability to produce a good or service at a lower opportunity cost than another.
Consumer Surplus
The differences between what a person is willing to pay for a good and what they actually pay BV - Price
What is meant by "decisions are made at the margin"?
The idea of the margin is related to making decisions while thinking about the benefits and costs of small changes in behavior.
Diminishing Marginal Utility
The more you use a given item in a given amount of time, the less value.
Things that Change Supply Curve
To the left: 1. Increase in production costs 2. government regulations 3. pessimistic market expectations 4. withdrawal of competitors To the right: 1. Decrease production costs 2. New Technology 3. Decrease government regulations 4. Optimistic market expectations 5. Entrance of new market competitors
T/F: Both taxes and tradeable allowances in a market that has external costs can lead to the efficient quantity.
True
T/F: If the good causes an external cost, taxes actually reduce deadweight loss.
True
T/F: Taxes on producers cause the supply curve for the product to shift to the left.
True
T/F: The market for flu shots could be efficient if the beneficiaries of the external benefits sufficiently compensated those receiving the shot.
True
T/F: When price ceilings are imposed, consumers pay lower explicit prices but often face higher costs in terms of waiting in line for g/s.
True
Does this put an upward pressure on price or a downward pressure on price? "The Lion King" at the Disney store has 9 million orders for the DVD when the store in fact, only has 1 million copies. They told the public there would be 9 million copies.
Upward pressure on price
Does this put an upward pressure on price or a downward pressure on price? An impending nuclear holocaust causes people to stock u pin townies, a popular snack cake provided by many companies.
Upward pressure on price
External Cost
a cost paid by people other than the consumer or the producer trading in the market
Private Cost
a cost paid by the consumer or the producer
Demand Curve
a function that shows the relationship between prices and their associated quantities demanded
If the supply of a product is inelastic, a large price increase will only bring about
a small increase in QS
Externalities
are external costs or external benefits that fall on bystanders. when they are great (significant), markets who work less well and govt action can increase social surplus.
Command and Control Solutions
are often high-cost b/c they are inflexible and of not take advantage of differences in the costs and benefits of eliminating and producing the externality - not always efficient - is useful when the best approach to a problem is well known and if success requires very strong compliance
Local supply is more elastic than global supply because
for local goods, goods can be brought in from other areas - not possible for global.
A negative income Elasticity of Demand
inferior good
Absolute Advantage can be determined by comparing different producers'...
input requirements per unit of output
Pigouvian tax
is a tax on a good with external cost / taxing goods that have external costs
A positive income Elasticity of Demand
normal good
Scarcity
society's desires exceed the want-satisfying capability of the resources available to satisfy those desires
trade-off
the idea that because of scarcity, producing more of one g/s means producing less of another service
The fewer substitutes available___
the more inelastic the demand for a good
Total Revenue
the total amount of funds received by a seller of a g/s, Price x Quantity
If CP elasticity is >0
then A & B are substitutes.