Econ 102
Information problems
a market failure that stems from information problems that undermine trust Example: private information that one party has but the other does not.
Market power
a market failure that undermines competitive pressure
a price ceiling is:
a maximum price sellers can charge for a good or service
price elasticity of demand
a measure of how responsive buyers are to price changes. It measures the percent change in quantity demanded that follows from a 1% price change.
price elasticity of supply
a measure of how responsive sellers are to price changes
income elasticity of demand
a measure of how responsive the demand for a good is to changes in income.
cross-price elasticity of demand
a measure of how responsive the demand of one good is to price changes of another
midpoint formula
a method for calculating price elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages
quantity regulation
a minimum or maximum quantity that can be sold
Inferior good will have
a negative price elasticity.
mandate
a requirement to buy or sell a minimum amount of a good
welfare
a way to determine how a policy affects people's happiness, well-being, or prosperity.
a binding price floor must be set ____- the equilibrium price
above
Cornell can type reports faster and more accurately than Alice. Cornell has an ____ in typing reports.
absolute advantage
efficient allocation
allocating goods to create the largest economic surplus.
Price elasticity of demand formula
always demand over price
economic efficiency
an outcome is more economically efficient if it yields more economic surplus
total consumer + producer economic surplus
area of a triangle: 1/2 (base) x (height) base = quantity supplied height = consumer would've paid - supply
consumer surplus formula
area of a tringle : 1/2 (base) x (height) quantity = base what they would've paid - what they actually paid = height
which benefit could a company gain from using internal markets?
better allocation of its recourses and more accurate predicitions
When trade is based on comparative advantage...
both trading partners end up better off
In the immediate aftermath of hurricane Katrina, a surge in demand or drinking water caused the price of one bottle of water to rise above $5. Supporters of price ceilings on bottled water after a natural disaster are that:
bottle water is inelastically supplied.
The price elasticity of demand is a negative number,
but economics take the absolute value of this number to focus on magnitude
economists generally believe that a person should specialize in the production of a good or service is they
can produce the product while forgoing fewer alternative products than any other person
One should specialize in producing the good for which they have a
comparative advantage
If you want to increase revenues of your elastic good....
decrease the price
consumer surplus
describes the gain from buying something at a price below the highest price you were willing to pay
positive analysis
describes what is happening, explaining why, or predicting what will happen What is going to happen if we adopt this policy? Objective analysis that describes and forecasts the effect of the policy.
when the price of the last unit sold equals its marginal cost, a seller will
earn producer surplus on all units sold except the last one
when goods are allocated in a way that creates the largest economic surplus
efficient allocation has been achieved
not everyone will be happy with an
efficient outcome
why really burdens the tax matters on their
elasticity
You want to allocate tasks to the person who
gives up the least to do that task
more competing products means
greater elasticity (you'll find more substitutes)
Markets allocate goods to those with the
highest marginal benefit
Fixed supply amounts have a
horizontal supply curve (think of concert tickets), and have an elasticity of infinity
deadweight loss
how far economic surplus falls below the efficient outcome Abbreviated DWL
Chantelle produced tomatoes. As the price of tomatoes grows, she is encouraged to grow and sell more. This is an example of a price function as a(n)
incentive
Higher prices are usually an ____ for producers
incentive
if you want to increase revenues of your inelastic good...
increase the price
along a supply curve, a rise in the price of a good will:
increase the producer surplus
mandates tend to
increase the quantities bought or sold
Necessity goods are
inelastic, and thus have an elasticity close to zero.
If income rises, and a demand for a good decreases, this good is
inferior
A completely horizontal demand curve means the price elasticity of demand is
infinite, and is perfectly elastic, where any change in price leads to an infinitely large change in quantity.
Price is functioning as a message when it:
is a line of communication between buyers and sellers in a market
Marginal cost
is the extra cost from one extra unit
When the quantity supplied is unchanged for any change in price
it has a vertical supply curve and an elasticity of 0.
a price ceiling will have no immediate effect if:
it is set above the equilibrium price.
in order for a mandate to be binding
the mandate needs to be placed at a quantity that is greater than the equilibrium quantity
the efficient quantity prevails in a market when:
the market yields the largest possible economic surplus
the more inelastic someone is (the steeper their curve)
the more burden they bear from a tax
in order for a quota to be binding
the quota needs to be set at a quantity that is less than the equilibrium quantity.
quotas tend to
decrease the quantity bought or sold
A measure of how responsive buyers are to price changes is the
Price elasticity of demand
positive income elasticity of demand
the good is a normal good.
Negative income elasticity of demand
the good is an inferior good
Negative cross-price elasticity of demand means
the goods are complements
Positive cross-price elasticity of demand means
the goods are substitues
marginal benefit
willingness to pay for an item
If quantity demanded responds substantially to a relatively small change in price, demand is:
price-elastic
rational rule for markets
produce more of a good if its marginal benefit is greater than (or equal to) the marginal cost.
efficient production
producing a given quantity of output at the lowest possible cost. Requires producing each unit and the lowest marginal cost. In a competitive market, production takes place at a quantity that sets price = marginal cost
Unlike price ceilings and floors, mandates and quotas have to do with
quantity regulations instead of price
which statement is normative
scientists should not make normative statements
binding price ceilings produce a
shortage
A relatively flat demand curve
shows an elastic demand
prices serve as
signals, incentives (when high), bundles of information.
if cross price elasticity is zero
the two goods are independent from each other (unrelated)
Market power happens when
there is not enough sellers in a market and they can exploit it by charging higher prices
opportunity cost of a task formula
time this task takes / time requires to produce the alternative
When price elasticity is greater than one
It is "elastic"
a binding price ceiling must be set _____the equilibrium price
below
Efficient quantity
The quantity that produced the largest possible economic surplus
A tax of buyers shifts the
demand curve to the left or down
Elasticity is ____ the same thing as slope
not
a tax on sellers shifts then
supply curve to the left or up
When allocating tasks, ask:
"Who gives up relatively less to get this job done?"
an increase in price will only case revenue to rise if.....
% change in price is larger than % change in quantity
A decrease in price will only cause revenues to rise if.....
% change in price is smaller than % change in quantity
Opportunity cost of a task=
(time this task takes)/(time required to do alternative task) always put the time/quantity of the task in question on top
% change (delta) formula
(x1 - x2) / (x1 + x2) / 2
If income rises by 10% and the quantity demanded of an item falls by 30%, the income elasticity of demand for the item is:
-3%
When the price of water usage falls by 1%, the quantity demanded rises by 0.44%. The absolute value of the price elasticity of demand for water usage is
0.44
producer surplus formula (bottom of triangle)
= 1/2 (base) x (Height) Base = quantity sold Height = what it was sold for - what they would've sold it for
deadweight loss formula
= economic surplus at efficient outcome - actual economic surplus
consumer surplus
= marginal benefit - price
When price elasticity is less than one
It is "inelastic"
underproduction produces
deadweight
someone saying "I got a great deal, I would've paid way more for these!"
consumer surplus
The cross-price elasticity of demand between Fanta and Dr. Pepper has been estimated at 0.61. If the price of Dr. Pepper falls by 10%, the quantity demanded of Fanta will:
decrease by 6.1%
When a country's production mix becomes more specialized due to increased international trade based on comparative advantage:
some industries in the country will shrink and possible disappear
which of these government regulations is LEAST likely to lead to market failure
subsidized for vaccinations
Suppose the cross-price elasticity of demand for apple sauce and avocados is 0.96, but the cross-price elasticity for soda and oranges is -0.80. This means that apple sauce and avocados are _, whereas soda and oranges are
substitutes; complements.
binding price floor creates
surplus
government regulations
a market failure that are caused when governments impeded on market forces.
irrationality
a market failure that leads to bad decisions. Stems from people who make decisions that are not in their best interest (buyers don't follow the rational rule for buyers, and sellers don't follow the rational rule for sellers)
producer surplus describes
the gain from selling something at a price above the marginal cost you incur from producing your good or service
Externatilies
A market failure that involves third person side effects; it is the EXTERNAL benefits or costs to someone other than the original decision maker
When a popular comedian announces a tour, tickets often sell out quickly. However, it is quite common for the tour coordinator to later announce additional shows in the form of matinees and late-evening performances. Why would the tour coordinator include unpublicized additional shows in the tour schedule?
Additional shows create extra capacity and increase the tour's price elasticity of supply.
the government is considering taxing e-cigarettes to discourage the use of e-cigs. To maximize revenues from the tax, the government should apply the tax to:
Buyers, sellers, or manufactures, it doesn't matter which.
Negative Cross Price Elasticity of Demand
Complements (As the Price of one good increases, the Demand for the second good decreases) The 2 goods are in Joint Demand.
The demand for disposable diapers is inelastic. What explains this?
Disposable diapers are a necessity for more parents of infants.
determinants of supply
I.I.C.E.T 1) a storable products means suppliers can be more elastic. (inventory) 2) Easily available inputs means sellers can attain these quickly, more elastic supply. 3) The capacity a seller has to hold more inventory has an effect on the elasticity of supply. 4) Market supply will be more elastic when it is easier for a business to enter or exist in a market. 5) Price elasticity of supply is typically larger (more elastic) over a longer time frame.
You pay a plumber to install a new dishwasher in your home. Which statement is FALSE?
Only the plumber experiences gains from trade because they receive money.
A completely vertical demand curve means the price elasticity of demand is zero - no matter what the change in price, the total quantity demand is unchanged. Making this
Perfectly inelastic, where quantity does not respond at all to price changes.
Which of the following policies would be considered economically efficient?
Raising taxes on the top 1% and using this revenue to invest in education and infrastructure hurts the top 1% and benefits the bottom 50%. Overall economic surplus increases.
A relatively steep demand curve
Shows an inelastic demand
Positive Cross Price Elasticity of Demand
Substitutes (As the Price of one good increases, the Demand for the second good increases) The 2 goods are in Competitive Demand.
They want to reduce an unusually high minimum wage to minimize the effects of it. Which of these will likely occur as a result?
The wage paid to low-skilled workers will fall.
producers have an incentive to lower the quality of a good when the government imposes:
a binding price ceiling
Market failure results in
a less than efficient quantity being produced
quota
a limit on the maximum quantity of a good that can be bought or sold (eg. many states have legalized marijuana limit the amount that people can buy per day)
during an economic downturn, a state government debates what type of economic stimulus - a tax cut or spending increase- would produce the most efficient outcome, that is, the outcome with the:
largest economic surplus
Demand is more elastic in the ____ than the _____
long run, short run (gas increases today, you'll still buy it. However, if it stays that high price for a while, you may start looking for alternative methods of transportation).
When consumers are willing to search for a ______ alternative, demand for that product is _______
low cost, more elastic
deadweight loss allows us to calculate
market failure, and how care economic surplus falls below the efficient outcome
To obtain a license to work as a barber, hairstylist, or cosmetologist, one must graduate from a state-approved barber or cosmetology program and pass a state exam, limiting the number of people who can practice these professions. In this scenario, market failure would arise from:
market power
Market failure reasons
market power externalities information problems irrationality government regulations
During the coronavirus pandemic, global supply chain issues caused the supply of new cars to shift left. Which role did price play in the new car market? Price was a(n):
message to potential buyers that the marginal cost of manufacturing new cars is rising.
Gasoline prices have been rising. as time passes, people will adjust to the higher price, and demand becomes:
more elastic
In the market for grocery and household items, some comsumers have more elastic responses than others, Grocery stores know this and often offer price reductions in the form of coupons. The price elasticity of demand for people who use coupons is ____ elastic han for other consumers because coupon users
more; are willing to search f a low-cost alternative
If the income elasticity of demand for a good is ___, the good is said to be ______
negative, inferior.
% change in quantity is always
on top
As long as people have different ____, everyone has a comparative advantage in something
opportunity costs.
Demand gets more elastic _____
over time
a prediction market is a market where
payoffs are linked to whether an uncertain event occurs
A horizontal supply curve that is perfectly horizontal is said to be
perfectly elastic (as the quantity demanded increases, the supply provided responds accordingly)
This figure shows a demand curve that is
perfectly inelastic (completely vertical)
The price elasticity of supply is always a
positive number (supply curve is upward sloping)
Much like toilet paper, toothpaste is a necessity. The income elasticity of demand for toothpaste is likely to be _____ and _____.
positive; close to 0.
normative analysis
prescribes what should happen which involves value judgments. Which is the better outcome, and what policy should the government adopt? Values based
Producer surplus =
price - marginal cost
the likely result of a binding price floor is a _____ of the good at a price _____ the equilibirum price.
surplus; above
When a manager uses comparative advantage to assign tasks in a workplace, then each
task is assigned to the worker with the lowest opportunity costs for performing the task.
Why does Apple design the Iphone in California but assemble the iphone in China?
the US has a comparative advantage in iPhone design
comparative advantage
the ability to do a task at a lower opportunity cost
absolute advantage
the ability to produce a good using fewer inputs than another producer
When the absolute value of the percent change in quantity is larger than the absolute value of the percent change in price;
the absolute value of the price elasticity is greater than 1, and this demand is ELASTIC (>1)
When the absolute value of the percent changes in quantity is smaller than the absolute value of the percent change in price;
the absolute value of the price elasticity is less than one, and this demand is INELASTIC (<1)
voluntary exchange
the act of buyers and sellers freely and willingly engaging in market transactions
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
The incidence of a tax is:
the division of the economic burden of a tax between buyers and sellers
producer surplus
the economic surplus you get from selling something
efficiency outcome
the efficiency outcome yields the largest possible economic surplus
which statement akes use of positive analysis?
the federal government spends $500 billion on education each year.
Harrison is willing to buy the last ticket to the Billy Elliot play for $15, while Stefania is willing to pay $25. Harrison is first in line and buys a ticket for $15. He then resells his ticket to Stefania for $20. By reselling the ticket instead of going to the play himself, Harrison caused:
the sum of the consumer and producer surplus to increase.
total revenue
the total amount you receive from buyers which is calculated as price x quantity
economic surplus
the total benefits minus total costs flowing from a decision It measures how much a decision has improved your well-being.
when economic efficiency increases, the _____, and the benefits _____ be spread accross all people
total gains exceed the costs, may or may not.
The efficiency problem that results from market power is that the market:
underproduces
A person says they will supply the same amount of goods, no matter their prices. If this assertion is correct, the demand curve for the goods at his store must be ____, and the price elasticity is ___.
vertical, zero.
market failure
when market forces of supply and demand lead to an inefficient outcome
Absolute advantage tells you who is BEST at a task but it does not tell you
who SHOULD DO the task (who has the lowest opportunity cost)
When something is perfectly inelastic, it's elasticity is
zero
Which of the following is an example of a market failure due to negative externalities?
Carbon emissions are continuing to increase due to people not sufficiently accounting for the environmental costs their consumption imposes on others
Which of the following best describes the gains from trade?
You should specialize in producing the good for which you have the lowest opportunity cost
Suppose the government imposes a $4 per pack tax on cigarettes, paid by producers. Assume that the demand for cigarettes is much more inelastic than supply. Given this information, we would expect the price consumers pay to increase by ____ than $2 and they will pay a ______ share of the tax.
more; larger