Econ 5-7
Donald produces nails at a cost of $200 per ton. If he sells the nails for $350 per ton, his producer surplus per ton is
$150 (350-200)
All else equal, what happens to consumer surplus if the price of a good increases?
Consumer surplus decreases.
Rent-control laws dictate
a maximum rent that landlords may charge tenants.
Minimum-wage laws dictate
a minimum wage that firms may pay workers.
Consumer surplus is the
amount a consumer is willing to pay minus the amount the consumer actually pays.
When demand is elastic, a decrease in price will cause
an increase in total revenue.
Which of the following is likely to have the most price inelastic demand?
athletic shoes
Suppose that the market price for pizzas increases. The increase in producer surplus comes from the benefit of the higher prices to
both existing sellers who now receive higher prices on the pizzas they were already selling and new sellers who enter the market because of the higher prices.
If demand is price inelastic, then
buyers do not respond much to a change in price.
Demand is said to be price elastic if
buyers respond substantially to changes in the price of the good.
Price controls
can generate inequities of their own.
Total surplus in a market is equal to
consumer surplus + producer surplus.
Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should
decrease the price charged to vacationers and increase the price charged to business travelers.
When small changes in price lead to infinite changes in quantity demanded, demand is perfectly
elastic, and the demand curve will be horizontal.
If the price of milk rises, when is the price elasticity of demand likely to be the lowest?
immediately after the price increase
An increase in price causes an increase in total revenue when demand is
inelastic.
When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we know that the demand for candy bars is
inelastic.
The supply of a good will be more elastic, the
longer the time period being considered.
Consumer surplus
measures the benefit buyers receive from participating in a market.
Goods with many close substitutes tend to have
more elastic demands.
Frequently, in the short run, the quantity supplied of a good is
not very responsive to price changes.
Which of the following is likely to have the most price inelastic demand?
prescription medicine
Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor, the
quantity demanded of toothpaste decreases, and the quantity of toothpaste that firms want to supply increases.
The price elasticity of demand measures how much
quantity demanded responds to a change in price.
For a good that is a luxury, demand
tends to be elastic.
For a good that is a necessity, demand
tends to be inelastic.
Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling,
the quantity of physicals demanded increases,there is shortage of physicals,the quantity of physicals supplied decreases (all above)
The demand for Godiva mint chocolates is likely quite elastic because
there are many close substitutes,there are many close substitutes,the market is narrowly defined (all above)
At the equilibrium price of a good, the good will be purchased by those buyers who
value the good more than price.
Price controls are usually enacted
when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
At the equilibrium price of a good, the good will be sold by those sellers
whose cost is less than price.
Suppose Raymond and Victoria attend a charity benefit and participate in a silent auction. Each has in mind a maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called
willingness to pay.
Consider the market for gasoline. Buyers
would lobby for a price ceiling, whereas sellers would lobby for a price floor.
