econ exam 2
Five effects of price ceilings
1. Shortages 2. Reductions in product quality 3. Wasteful lines and other search costs 4. A loss of gains from trade (deadweight loss) 5. A misallocation of resources
Price Floors create
1. Surpluses 2. Lost gains from trade (deadweight loss) 3. Wasteful increases in quality 4. A misallocation of resources
the less elastic side of the market will pay
A greater share of the tax.
Joanne applies for a job as a part-time manager at a fast-food restaurant. Her MBA makes her overqualified for the job, yet the position goes to someone else who doesn't have a college degree.
Asymmetric information induced
Club Goods = Excludable and Non-rival
Cable TV, wi-fi, digital music
What determines whether a demand curve is more or less elastic?
The key determinant is the availability of substitutes. As we'll see in a minute, the more substitutes, the more elastic the curve.
A tax on Sellers Shifts the Supply Curve
Up by the tax
external benefit
a benefit received by people other than the consumers or producers trading in the market
external cost
a cost paid by bystanders, by people other than the consumer of the producer
price ceiling
a maximum price allowed by law
the more elastic side of the market will pay
a smaller share of the tax.
If the price in a market is above the equilibrium price, this creates ___________.
a surplus
producer surplus is shown graphically as the area
above the supply curve and below the market price
A demand curve is said to be elastic when
an INCREASE in price reduces the quantity demanded A LOT
Public Goods = Non-excludable and Non-rival
asteroid deflection, national defense, mosquito control
signals can help overcome
asymmetric information
How does a free market eliminate a shortage?
by letting the price rise
Public goods
challenge markets because non-excludability means its difficult to charge non-payers
Suppose the government forced all bread manufacturers to sell their products at a "fair price" that was half the current, free-market price. To keep it simple, assume that people must wait in line to get bread at the controlled price. Would consumer surplus rise, fall, or can't you tell with the information given?
consumer surplus decreases
social cost
cost to everyone (private cost + external cost)
When the price of a good increases the quantity demanded ____.
decreases
elastic demand means
demanders have good substitutes for the taxed good and so can escape the tax
The annoyance of your neighbor because she doesn't like your achingly conventional music
external costs
externalities
external costs or external benefits that fall on bystanders
A public good is defined as one produced by the public sector t/f?
false
income is a _______ variable
flow
A______is a person who______a public good that others______.
free rider;enjoys;pay for
prices as signals
guides allocation of society's resources
tax incidence
how the burden of a tax is shared among buyers/sellers
the poverty rate
indicates the percentage of people that cannot afford the basic necessities of life
Along a supply curve, if the price of oil falls, what will happen to the quantity of oil supplied?
it will decrease
Private Goods = Excludable and Rival
jeans, hamburgers, contact lenses
rationing mechanisms: 1) long lines 2) lottery 3) discrimination according to sellers bias
long lines- first come, first serve lottery- random chance discrimination according to seller bias- considered unfair inefficient- possibly no goods going to the consumer that values the product the most
which of the following is an example of a positive externality?
making improvements to your house
Profits are maximized when
marginal cost equals marginal revenue
how price floors affect market outcome
minimum wage surplus
Yosemite National Park
non-rival and excludable
Yosemite national park
non-rival, excludable
chinese language
non-rival, non-excludable
Adverse Selection
people with higher risks than average seek out the insurance to cover the risk, before they buy, they know
When demand increases, what happens to price and quantity in equilibrium?
price and quantity both increase
binding constraint
price ceiling- can be placed anywhere on a supply and demand graph, however, the only time it matters is when it is placed BELOW market equilibrium creating a BINDING CONSTRAINT that results in a SHORTAGE price floors- can be anywhere on a supply and demand graph, however, the only time it matters is when it is placed ABOVE market equilibrium creating a BINDING CONSTRAINT that results in SURPLUS
When supply increases, what happens to price and quantity in equilibrium?
price decreases and quantity increases
When a price ceiling is in place keeping the price below the market price, what's larger: quantity demanded or quantity supplied?
quantity demanded
to calculate the shortage of a price ceiling you
quantity demanded - quantity supplied
When supply falls, what happens to quantity demanded in equilibrium?
quantity demanded decreases
poverty
refers to a condition where someone cannot afford the basic necessities of life
inequality
refers to disparity between high-income and low-income earners
poverty trap
refers to situation where a region lacks the resources to have self-sustaining economic growth.
the poverty line
represents the income level needed for a basic standard of living
apples
rival, excludable
farm-raised salmon
rival, excludable
how price ceilings affect market outcomes
shortages rationing rationing mechanisms efficiency of rationing mechanism
Asymmetric Information
situation where either a buyer or seller has more information than the other, about what is being exchanged
wealth is a _____ variable
stock
On a demand curve when the quantity demanded isn't/or less responsive to the price,
that's an inelastic demand or a more inelastic demand, a less elastic demand.
private cost
the cost paid by the consumer and the producer
producer surplus is the difference between
the market price and the minimum price a seller is willing to accept
consumer surplus is equal to the difference between
the maximum price a buyer is willing to pay and the market price
On the elastic demand curve,
the quantity demanded is much more responsive to the price than it is on the inelastic demand curve.
elastic supply means
the resources used to produce the taxed good can easily be moved to other industries so they can escape tax
the price elasticity of demand measures
the responsiveness of quantity demanded to a change in price
A demand curve is said to be inelastic when
the same increase in price reduces quantity demanded just A LITTLE
social benefits
the sum of private benefits and external benefits
The Tragedy of the Commons
the tendency of any resource that is unowned and hence nonexcludable to be overused and undermaintained
If TWO linear demand or supply curves run through a common point,
then at any given quantity, the curve that is flatter, more horizontal, that's the more ELASTIC curve.
If increased production requires higher costs,
then the supply curve will be inelastic.
who will bear the burden of a tax?
this is dependent on how "responsive" the buyers and sellers are to a price change
Common Resources = Non-Excludable and Rival
tuna in the ocean, environment, public roads
consumer surplus is shown graphically as the area
under the demand curve and above the market price
A supply curve is said to be elastic
when an increase in price increases the quantity supplied by a lot.
deadweight loss
when mutually profitable gains from trade are not fully exploited we have lost consumer and producer surplus
Moral Hazard
when people behave recklessly because they know they will be saved if things go wrong
moral hazard
when people who are not responsible for the entire costs of their actions take riskier actions than they would otherwise take