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