ECON Exam 1

price elasticity of demand equation

Price elasticity of demand= (Percentage change in quantity demanded)/(Percentage change of price)

Total revenue

Price x Quantity

three symptoms of a market disequilibrium

Queuing Bundling of extras A secondary market

Scarity

Resources are limited, therefore any resource you spend pursuing one activity leaves fewer resources to pursue others. Scarcity implies that you always face a trade-off.

If you are willing to pay up to $8 for your first cup of coffee, the -------- of your first cup of coffee is $8. marginal benefit opportunity cost marginal cost

marginal benefit You are willing to pay up to $8 for your first cup of coffee. Applying the cost-benefit principle you know that your marginal benefit must be $8 because otherwise you would not be willing to pay that much for the coffee. The actual price of the coffee is the marginal cost. You buy the coffee as long as your marginal benefit is equal to, or greater than the marginal cost. opportunity cost is the next best alternative

price elasticity of demand

measures how responsive buyers are to price changes. Specifically, it measures by what percent the quantity demanded will change in response to a 1% price change

price elasticity of supply

measures how responsive sellers are to price changes. Specifically, it measures by what percent the quantity supplied will increase following a 1% price change. The larger this percent change in quantity supplied, the more responsive sellers are to price changes.

cross-price elasticity of demand

measures how responsive the quantity demanded of one good is to price changes of another.

income elasticity of demand

measures how responsive your demand for a good is to changes in your income

tends with taxes

they tend to reduce both the quantity demanded and the quantity supplied of the taxed good as buyers pay more and sellers receive less. Because the government takes a cut in the form of a tax.

How do you quantify benefits?

through one's willingness to pay

elastic

whenever the absolute value of the percent change in quantity demanded is larger than the absolute value of the percent change in price. This also means that the absolute value of the price elasticity of demand is greater than 1.

income elasticity of demand equation

% change in quantity demanded / % change in income

cross-price elasticity of demand equation

% change in quantity of A demanded / % change in price of B

price elasticity of supply equation

% change in quantity supplied / % change in price

cutting the price of gas by 20% typically leads to an increase in the quantity demanded of about 10%. What is the price elasticity?

-0.5

5 determinants of demand elasticity

1. More competing products mean greater elasticity 2.Specific brands tend to have more elastic demand than categories of goods 3.Necessities have less elastic demand 4.Consumer search makes demand more elastic 5.Demand gets more elastic over time

When Uber cut the price of a ride in New York City by 15%, it found that the quantity of rides demanded rose by 30%. What is the absolute value of the price elasticity of demand for Uber rides?

2

price floor

A legal minimum on the price at which a good can be sold

market

A setting bringing together potential buyers(demanders) and sellers(suppliers).

Describe the effects supply shifts and demand shifts have

A shift in supply causes price and quantity to move in opposite directions. A shift in demand causes price and quantity to move in the same direction.

price matching

A strategy in which a firm advertises a price and a promise to match any lower price offered by a competitor

example of the market in politics

As a voter, you're a supplier in the market for votes. These votes aren't literally bought and sold, but you're more likely to vote for the politician who promises the policies you want. And so the price in the market for votes is the work that the politician does to develop and campaign on their policies. The higher this price—that is, the politician who develops the best policies and runs the best campaign—then the more likely it is that you'll supply your vote to that politician.

planned economies

Centralized decisions are made about what is produced, how, by whom, and who gets what. an economic system directed by government agencies

example of scarity

Deciding to watch a movie? That's a decision not to spend two hours preparing for class.

market economies

Each individual makes their own production and consumption decisions, buying and selling in markets. economic systems in which individuals own and operate businesses

true or false. A change in price will shift the supply

False. a change in price will not shift the supply

True or false. A tax on seller shifts the demand curve

False. tax on sellers shifts the supply curve. Remember the supply curve is the marginal cost. Therefore, when marginal costs increase, the supply curve shifts.

Congestion effect is defined as:

Increasing numbers of users to lower the value of a product or service

examples of "or what" with opportunity cost

Should you hang out with your friends on Saturday afternoon? Or what? Or should you study for Tuesday's exam? Should you devote a lot of time to an extracurricular activity and aim for a top leadership position? Or what? Or should you study a lot more and aim for straight A's?

tends with subsidy

Subsidies increase the quantities demanded and supplied, and they tend to lower the price buyers pay and increase the price sellers receive

Equilibrium

The point at which there is no tendency for change. A market is in equilibrium when the quantity supplied equals the quantity demanded. In equilibrium, every seller who wants to sell an item at the current price can find a buyer, and every buyer who wants to buy at the current price can find a willing seller

Equilibrium price

The price at which the market is in equilibrium.

equilibrium quantity

The quantity demanded and supplied in equilibrium.

opportunity cost

The true cost of something is the next best alternative you have to give up to get it. (something you give up to get)

true or false. Demand shifts lead price and quantity to move in the same direction.

True, if demand increase the equilibrium price and quantity will increase. If the demand decreases the equilibrium price and quantity will decrease

framing effect

When a decision is affected by how a choice is described, or framed. You should avoid framing effects altering your own decisions.

unit elastic

When the absolute value of the price elasticity of demand is exactly equal to 1

perfectly elastic demand

When the demand curve is completely horizontal, it means that the price elasticity of demand is infinite—any change in price leads to an infinite change in quantity demanded.

perfectly inelastic demand

When the demand curve is completely vertical, it means that the price elasticity of demand is zero—no matter what the change in price, the total quantity demanded is unchanged.

example of economic surplus

You generate economic surplus every time you make a decision in accord with the cost-benefit principle. Consider again what happened when you bought a cup of coffee: As a buyer, you gained something worth $4 to you (remember, that's your willingness to pay for it), and in exchange, you transferred something worth only $3 (your money). This simple act of exchange generated an extra $1 worth of benefits for you! That's your economic surplus.

inferior good

a good that consumers demand less of when their incomes increase

normal good

a good that consumers demand more of when their incomes increase

market supply curve

a graph of the quantity supplied of a good by all suppliers at different prices

individual demand curve

a graph plotting the quantity of an item that someone plans to buy, at each price (a graph summarizing your buying plans and how they vary with the price)

quantity regulation

a maximum or minimum quantity that can be sold

price ceiling

a maximum price that can be legally charged for a good or service

slope

change in price/change in quantity demand

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

What are the four principles of econ?

cost-benefit principle opportunity cost principle Marginal principle Interdependence principle

when demand decreases

demand curve shifts left

When demand increases

demand curve shifts right

network effect

describes how products in a network increase in value to users as the number of users increases example social media apps

when customers are responsive to price change this is described as

elastic

true or false. Elastic demand curves are curver than inelastic demand curves

false. Elastic demand curves are flatter than inelastic. This is because when demand is elastic, the quantity demanded is relatively responsive. In contrast, when demand is inelastic, the quantity demanded is relatively unresponsive.

if the demand is ----, a higher price yields less revenue

if the demand is elastic

perfect competition

involves many buyers and many sellers of an identical good, and each of these buyers is small relative to the whole market

subsidy

is a payment made by the government to those who make a specific choice. example: Pell Grant

Example of Normal Good

lobster consumers demand more of when their incomes increase

an example of an inferior good

ramen noodles

quotas

set a maximum quantity of a good that can be bought or sold. Quotas can be on buyers—for instance, many states that have legalized marijuana limit the amount that people can buy per day.

Demand > Supply =

shortage shortage causes prices to rise

Supply > Demand =

surplus Surplus causes prices to fall

absolute value

the absolute value of the price elasticity of demand is the price elasticity of demand with the negative sign dropped

inelastic

whenever the absolute value of the percent change in quantity demanded is smaller than the absolute value of the percent change in price. This also means that the absolute value of the price elasticity of demand is smaller than 1.

According to the Cost-Benefit Principle, you should make a purchase only if

the benefit outweighs the cost

economic burden

the burden created by the change in after-tax prices faced by buyers and sellers

statutory burden

the burden of being assigned by the government to send a tax payment

a tax on buyers shift which curve the supply the demand

the demand curve. you learned that the demand curve is the marginal benefit curve. A tax of $0.30 reduces the marginal benefit of buying a soda by $0.30, because that soda now comes with a 30-cent tax obligation. As such, a tax on buyers causes a decrease in demand.

economic surplus

the difference between the benefits you enjoy and the costs you incur. Making good decisions is all about maximizing your economic surplus.

tax incidence

the division of the economic burden of a tax between buyers and sellers.

willingness to pay

the maximum amount that a buyer will pay for a good

If a market is NOT at equilibrium:

the price will change and, in response, market participants will move along the existing supply and demand curves until the market reaches equilibrium.

if the demand is inelastic, a higher price yield ----revenue

yield more revenue