econ 102 exam 2

Goods with close substitutes have more

ELASTIC demand

Luxuries have

ELASTIC demand, if boats are expensive, buy a hummer.

Necessities tend to have

INELASTIC demand

Elastic demand If price goes ____ Total Revenue _____

If price goes UP, total revenue goes DOWN

Inelastic demand If price goes ___ TR goes ____

If price goes UP, total revenue goes UP (sending the price UP threw a tube)

How do we know if a good is normal or inferior? Substitutes vs. Complements?

Normal goods are + (Elasticity of demand) Inferior goods are - (Elasticity of demand) Cross price elasticity of demand: + for substitutes - for complements

The price elasticity of supply measures how responsive

SELLERS are to a change in price.

Elasticity of demand is closely related to the slope of the demand curve. The less responsive buyers are to a change in price, the...

STEEPER the demand curve will be.

price floor

the legal minimum on the price at which a good can be sold. - the price must be at least that much

Efficiency is attained when

total surplus is maximized

price ceiling

when price is not allowed to rise above a certain level

The price elasticity of demand measures how responsive

BUYERS are to a change in price.

If a a market has a supply curve that is highly elastic and a demand curve that is highly inelastic.. If a tax is imposed on the market then,

BUYERS will bear a GREATER burden on the tax than the sellers.

If input prices increase, what happens to consumer surplus in a market with those inputs? -- If the price of oak lumber increases, what happens to the consumer surplus in the market for oak cabinets?

Consumer surplus decreases.

Policymakers use taxes

both to raise revenue for public purposes and to influence market outcomes.

Elasticity of demand is closely related to the slope of the demand curve. The more responsive buyers are to a change in price,

the flatter the demand curve will be

The price paid by buyers in a market will decrease if the government

decreases a binding price floor in that market

Longer time that passes,

higher elasticity

More narrow markets have a

higher elasticity of demand

Price elasticity of demand measures

how much the quantity demanded responds to a change in price.

shorter time passes,

lower elasticity Ex: If gas prices rise, in the short run we still have to buy gas. In the long run, more changes can be made, buying hybrid cars, living closer to work, etc.

less narrow markets have a

lower elasticity of demand

Demand is said to be elastic if the quantity demanded ...

responds a lot to changes in price. Ex: Kirkland water, if price goes up, we can just buy another kind.

Demand is said to be INELASTIC if the quantity demanded ...

responds only a little to changes in price. Ex: All water, if price goes up, we are still going to buy water because we have to have it.