economics 201 test 2
amount a buyer is willing to pay for a good minus the amount the buyer actually pays
consumer surplus
measures the benefit buyers receive from participating in a market
consumer surplus
total surplus =
consumer surplus + producer surplus or value to buyers - cost to sellers
the demand for gasoline is rising. which of the following statements describes a possible cause
consumers expect prices to rise the near future
minimum wage laws
create a price floor below which workers cannot be legally paid
how much the quantity demanded of one good responds to a change in the price of another good
cross-price elasticity of demand
Expectations about the future (increase/decrease) current supply
decrease
demand curve shifts left
decrease in demand
any change that decreases the quantity supplied at every price
decrease in supply
supply is perfectly elastic when the price elasticity of supply = ? and the supply curve is ?
infinity horizontal
when demand curve is perfectly elastic, price elasticity of demand = ? and the demand curve is ?
infinity horizontal
variables that can shift the supply curve
input prices, technology, expectations about future, number of sellers
intstitutions that bring buyers and sellers together so the
interactive modes
amount of a good that buyers are willing and able to purchase
quantity demanded
the amount of a good that sellers are willing and able to sell
quantity supplied
Advocates of the minimum wage
raise the income of the working poor
advocates if the minimum wage
raise the income of the working poor
farm price supports
reduce food prices
constant slope
rise over run
these people determine the supply of the product
sellers
Shifts vs. movements along curves... change in demand
shift in the demand curve
Shifts vs. movements along curves... change in supply
shift in the supply curve
changes in tastes, expectations about the future, number of buyers increases all can...
shift the demand curve
a decrease in the poulation in the market will cause
shift to the left in demand
-when quantity demanded is greater than quantity supplied -excess in demand -upward pressure on price
shortage
goods that are typically used together, negative cross-price elasticity
complements
an increase in income leades to an increase in demand
normal good
-positive income elasticity -necessities -luxuries
normal goods
oponents of the minimum working wage
not the best way to combat poverty
-goods offered for sale are exactly the same -no single buyer or seller has any influence over the market price -at the market place buyers can buy all they want and sellers can sell all they want
perfectly competitive market
determine who produces each good and how much is produced
price
a legal maximum on the price at which a good can be sold (rent control laws)
price ceiling
policy makers believe that the market price of a good or service is unfair to buyers or sellers, they can generate inequities
price controls
how much the quantity demanded of a good responds to a change in the price of that good
price elasticity of demand
how much the quantity supplied of a good responds to a change in the price of that good
price elasticity of supply
a legal minimum on the price at which a good can be sold (minimum wage laws)
price floor
the amount a seller is paid for a good minus the seller's cost of providing it
producer surplus
equation for price elasticity of demand
% change in quantity demanded / % change in price
price elasticity of supply equation
% change in quantity supplied / % change in price
midpoint method
(Q2-Q1)/[(Q2+Q1)/2] / (P2-P1)/[(P2+P1)/2]
change in quantity demanded vs change in demand
-a change in quantity demanded results from a change in price and moves along the demand curve -factors other than price can cause a shift in the demand curve. factors like income, age, gender and personal characteristics
Law of Supply -when the price of a good rises, the quantity supplied... -when the price falls, the quantity supplied...
-also rises -also falls
impact of the minimum wage on teenage labor
-binding -willing to accept a lower wage in exchange for on the job training
one summer, a hurricane destroys part of the sugarcane crop. what is the effect on the market for ice cream
-change in the price of sugar--> supply curve shifts to the left -higher equilibrium price--> lower equilibrium quantity
effect on the market for ice cream: one summer, very hot weather
-demand curve shifts to the right -equilibrium pice and quantity become higher
one summer, hurricane and a heat wave. what is the effect on the market for ice cream?
-heat wave shift the demand curve--> demand curve shifts to the right -hurricane shifts--> supply curve shifts to the left -equilibrium price raises
Supply Schedule and Supply Curve -an increase in price... -an increase in quantity supplied...
-moves up along the y axis -moves to the right along the x axis
impact of the minimum wage on highly skilled and experienced workers
-not binding -no effect on them
opponents of minimum wage
-not the best way to combat poverty -poorly targeted policy
rent control effects in the long run
-supply and demand are more elastic -landlords -induces more people to live in the city -large shortage of housing
rent control effects in the short run
-supply and demand for housing are inelastic in the short run -small shortage -reduced rents
Can good news for farming be bad news for farmers?: new hybrid of wheat increases production per acre by 20%
-supply curve shifts to the right -higher quantity and lower price -demand is inelastic: total revenue falls
Law of Demand -when the price of a good rises... -when the price falls...
-the quantity demanded of the good falls -the quantity demanded rises
if minimum wage is above equilibrium
-unemployment -higher income for workers who have jobs -lower income for workers who cannot find jobs
supply is perfectly inelastic when the price of supply = ? and the supply curve is ?
0 vertical
when demand is perfectly inelastic, price elasticity = ? and the demand curve is ?
0 vertical
nonbinding price ceiling
A maximum legal price that is set above the existing equilibrium price. Because the market equilibrium price is lower than the price ceiling, the ceiling has no effect on the market and is said to be nonbinding.
binding price ceiling
A maximum legal price that is set below the existing equilibrium price. Because the market equilibrium price is greater than the price ceiling, the ceiling restricts trade and is said to be binding.
binding price floor
A minimum legal price that is set above the existing equilibrium price. Since the market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding.
nonbinding price floor
A minimum legal price that is set below the existing equilibrium price. Since the market equilibrium price is greater than the price floor, the floor has no effect on the market and is said to be nonbinding.
Lower prices generally...
A: motivate consumers to buy
a shift in the demand curve can be directly caused by...
a change in one of the determinants of demand
assume the demand schedule for mp3 players is downward sloping. if the price of mp3 players increases from $100 to $150
a decrease in quantity demanded will occur
-takes all the information about buyers and sellers into account -guides everyone in the market to the best outcome -economic activity is all guided by...
adam smiths invisible hand
all else equal, a decrease in the number of businesses selling pizza will cause
an increase in the equilibrium price of pizza (because supply shifts to the left)
when the price of a good changes in the market...
both the quantity demanded and quantity supplied change for the good
these people determine the demand for the product
buyers
which of the following will cause an increase in consumer surplus a. the imposition of a binding price ceiling in the market b. buyers expect the price of the good to be lower next month c. the price of a substitute increases d. income oncreases and buyers consider the good to be inferior
c
market in which there are many buyers and many sellers
competitive market
an increase in the price of one leads to an decrease in the demand for the other
complements
teenage labor market: a 10% increase in the minimum wage increases/decreases teenage emplyment by 1-3%
decreases
relationship between the price of a good and quantity demanded
demand
a graph of the relationship between the price of a good and the quantity demanded
demand curve
Variety of Demand Curves: price elasticity of demand is =1
demand has unit elasticity
Variety of Demand Curves: price elasticity of demand >1
demand is elastic
Variety of Demand Curves: price elasticity of demand <1
demand is inelastic
a table that shows the relationship between the price of a good and the quantity demanded
demand schedule
Demand Schedule and Demand Curve a decrease in price causes a shift...
down the y axis
maximizing the total surplus received by all members of society
efficiency
At points with a high price and low quantity, the demand curve is
elastic
luxuries have a (inelastic/elastic) demand
elastic
long-run: supply and demand are decrease in supply...
elastic small increase in price
demand in which changes in price have large effects on the amount demanded
elastic demand
quantity demanded responds substantially to changes in price
elastic demand
for supply curve, Points with low price and high quantity
elastic supply
quantity supplied responds substantially to changes in the price
elastic supply
measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
elasticity
the property of distributing economic prosperity uniformly among the members of society
equality
a situation where market price has reached the level where supply and demand curves intersect
equilibrium
price floors are the outcome of some haphazard process true or false
false
what is the best way to organize economic activity
free markets
the flatter the demand curve, the ______ the price elasticity of demand
greater
all else equal, the law of demand states that ____ quantity of a good will be demanded the ___ its price
higher lower
markets for many agircultural commodities vs markets for ice cream in a particular town
highly organized vs less organized
variables that can shift the demand curve
income, prices of related goods, tastes, expectations, number of buyers
demand curve shifts right
increase in demand
any change that increases the quantity supplied at every price
increase in supply
advances in technology, reduces firms costs and (increases/decreases) supply
increases
when new buyers enter the market, consumer surplus...
increases
At points with a low price and high quantity, the demand curve is...
inelastic
necessities have a (inelastic/elastic) demand
inelastic
short-run: supply and demand are... decrease in supply...
inelastic large increase in price
A situation in which an increase or a decrease in price will not significantly affect demand for the product
inelastic demand
quantity demanded responds only slightly to changes in price
inelastic demand
for supply curve, points with high price and high quantity
inelastic supply
quantity supplied responds only slightly yo changes in the price
inelastic supply
An item whose demand rises as people's incomes fall is known as a(n) ________ good.
inferior
an increase in income leads to a decrease in demand
inferior good
-negative income elasticities
inferior goods
the price of any good adjusts to bring the quantity supplied and the quantity demandd for that good into balance
law of supply and demand
tax burden falls more heavily on the side of the market that is more/less elastic
less
what is a complementary good for a kayak
life jacket
a group of buyers and sellers of a particular good or service
market
sum of all individual demands for a good or service
market demand
sum of all the supplies of all sellers for a good or service
market supply
the only seller in the market sets the price
monopoly
demand is more/less elastic over a longer time
more
narrowly defined markets have a more/less elastic demand
more
availability of close substitutes: goods with close substitutes are...
more elastic demand
in france the average income is 30% lower and minimum wage is
more than 30% higher
Shifts vs. movements along curves... change in the quantity demanded
movement along a fixed demand curve
Shifts vs. movements along curves... change in the quantity supplied
movement along a fixed supply curve
supply is (positively/negatively) related to prices of inputs Higher input prices (decreases/increases) supply
negatively decreases
an increase in the price of one leads to an increase in the demand for the other
substitutes
goods typically used in place of one another, positive cross-price elasticity
substitutes
The quantity demanded in a market is the ____ of the quantities demanded by all the _____ at each price. Thus, the market demand curve is found by adding _______ the individual demand curves.
sum buyers horizontally
The quantity supplied in a market is the _____ of the quantities supplied by all the _____ at each price. Thus, the market supply curve is found by adding_______ the individual supply curves.
sum sellers horizontally
relationship between the price of a good and the quantity supplied
supply
the behavior of people as they interact with one another in competitive markets
supply and demand
a graph of the relationship between the price of a good and the quantity supplied
supply curve
Variety of supply curves: price elasticity of supply >1
supply is elastic
Variety of supply curves: price elasticity of supply <1
supply is inelastic
Variety of supply curves: price elasticity of supply =1
supply is unit elastic
a table that shows the relationship between the price of a good and the quantity supplied
supply schedule
-when quantity supplied is greater than quantity demanded -excess in supply -downward pressure on price
surplus
a ______ occurs when price is above market equilibrium
surplus
manner in which the burden of a tax is shared among participants in the market
tax incidence
tool to raise revenue for public purposes and to influence market outcomes
taxes
as the price of orange juice rises
the demand for grape juice falls
in a free market the main signal to the market that brings price to equilibrium comes from
the excess or shortage of inventory for sale
when economists refere to "market demand" curve we know that it represents...
the horizontal submation of individual demand curves
1. Decide whether the event shifts the supply curve, the demand curve, or, in some cases, both curves 2. Decide whether the curve shifts to the right or to the left 3. Use the supply-and-demand diagram
three steps to analyze changes in equilibrium
why does government use taxes
to raise revenue for public projects
in 1990, congress adopted a new luxury tax. what was their goal?
to raise revenue from those who could most easily afford to pay
Demand Schedule and Demand Curve an increase in quantity demanded causes a shift...
to the right on the x axis
suppose that an artist prices his painting at 150 but it remains unsold. the price of 150 is
too high, it should be lowered
the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold (P xQ)
total revenue
for a price increase... if demand is elastic then
total revenue decreases
for a price increase... if demand is inelastic then
total revenue increases
buyers and sellers share the vurden of tax true or false
true
economists ususally oppose price ceiling and price floors true or false
true
people respond to incentives true or false
true
prices balance supply and demand true or false
true
taxes discourage market activity true or false
true
If the minimum wage exceeds the equilibrium wage, then
unemployment, higher income for workers who have jobs, lower income for workers who cannot find jobs
Price is on the ___ axis and quantity is on the ___ axis.
vertical and horizontal
the study of how the allocation of resources affects economic well being
welfare economics
maximum amount that a buyer will pay for a good
willingness to pay
