Econ Exam 2

Demand Curve:

is a graph of the relationship between the price of a good and the quantity demanded

Market

is a group of buyers and sellers of a particular good or service

Competitive Market:

is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

Price elasticity of demand

is a measure of how much the quantity demanded of a good responds to a change in the price of that good

A change in Quantity Supplied:

is a movement along the supply curve which is caused by a change in price of that good

Tragedy of the Commons

is a parable that illustrates why common resources get used more than is desirable from the standpoint of society as a whole.

A change in Supply:

is a shift in the supply curve which is caused by all other factors that could influence the amount of supplied at any price

Quantity demanded:

is the amount of a good that buyers are willing and able to purchase at any given price

Rivalry

is the property of a good whereby one person's use diminishes other people's use.

What is economics?

is the study of human behavior. It is the study of the choices people make given unlimited wants and limited means.

If a shortage exists in the hamburger market, then the current price must be ___ than the equilibrium price. For the market to reach equilibrium, you would expect___

lower, buyers to offer higher prices.

If elasticity of demand is greater than 1, it is a

luxury good

Sellers...

determine supply

Free Rider

(common in public goods) is a person who receives the benefit of a good but avoids paying for it.

Determinants of Elasticity

-availability of close substitutes -necessities versus luxuries -definition of the market -time horizon

variables that can shift the demand curve:

-consumer income (normal and inferior goods) -tastes -prices of related good (compliments and substitutes) -expectations -number of buyers

Variables that can shift the supply curve:

-input goods prices (intermediate goods) -technology -expectations -number of sellers

Perfect Competition:

-products are the same -numerous buyers and sellers so that each has no influence over price -buyers and sellers are price takers

T/F: The value of the price elasticity of demand is equal to the slope of the demand curve

False

Nonexcludable

It is not possible to prevent an individual from using the good

Demand for an "inferior" good is...

NEGATIVELY related to income. As income increases, the curve moves to the left.

Demand for a "normal" good is...

POSITIVELY related to income. As income increases, the quantity demanded increases and curve moves to the right

If the demand for notebooks is perfectly inelastic, an increase in the supply of notebooks only lowers the price of notebooks and does not affect the quantity produced or sold.

True

True/False: The market for public utilities, such as gas and electricity, does not exhibit the two primary characteristics that define perfectly competitive markets.

True

True/False: When both the demand and supply curves shift, the curve that shifts by the larger magnitude determines the effect on the undetermined equilibrium object.

True

Complements:

When a fall in the price of one good raises the demand for another good. Complements are often pairs of goods and services that are used together.

Substitutes:

When a fall in the price of one good reduces the demand for another good. Substitutes are often pairs of goods and services that are used in place of each other

price ceiling

a legal maximum on the price at which a good can be sold

price floor

a legal minimum on the price at which a good can be sold

Demand Schedule:

a table that shows the relationship between the price of a good and the quantity demanded.

supply schedule:

a table that shows the relationship between the price of a good and the quantity supplied

Corrective Tax:

a tax designed to induce private decision-makers to take account of the social costs that arise from a negative externality. discourages behavior that have negative externalities

Private Goods

are both excludable and rival

Public goods

are neither excludable nor rival

Common Resources

are rival but not excludable

Price Controls

artificial intervention in the market with the purpose of controlling prices

Buyers...

determine demand

Law of supply and demand

economic theory that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

A good with many close substitutes is likely to have relatively ___ demand, since consumers can easily choose to purchase one of the close substitutes if the price of the good rises.

elastic

Corrective Subsidy

encourages behavior that has positive external effects

Club Goods

excludable but not rival in consumption

Rationing by coupon

goods are allocated via ticketing/couponing structure. Goods are parceled to buyers with some limited quota. (max amount that can be purchased in store)

Rationing by discrimination

goods distributed via attributes/perks the seller may find desirable (family ties, trading of favors)

Rationing by random assignment

goods will be allocated via a lottery-type structure

In a perfectly competitive market, all producers sell ___ goods or services. Additionally, there are ___ buyers and sellers. Because of these two characteristics, both buyers and sellers in perfectly competitive markets are price ___.

identical, many, takers.

The Coase Theorem

if private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own.

In order for a price increase to cause an increase in total revenue, demand must be ____

inelastic

Elasticity:

measures how much one variable responds to changes in another variable. Elasticity is a measure of how much buyers and sellers respond to changes in market conditions.

Monopoly:

one seller, and seller controls price

if price ceiling is set below the equilibrium...

price is binding and will cause a shortage

If price ceiling is set above the equilibrium...

price is not binding

unregulated

prices of goods are free to adjust based on the forces of supply and demand.

Market-based policies

provide incentives so that private decision makers will choose to solve the problem on their own *more efficient*

Command-and-control policies

regulate behavior directly. Examples: limits on quantity of pollution emitted requirements that firms adopt a particular technology to reduce emissions

Tradable Permit System

remedies an externality by regulating general behavior—in this case, total emissions of carbon dioxide—but also by allowing market forces to determine individual outcomes—in this case, the amount that each individual factory pollutes.

What is the Law of Demand?

states that holding all else constant, the quantity demanded of a good falls when the price of the good rises.

Transaction Costs

the costs that parties incur in the process of agreeing to and following through on a bargain. Usually measured in terms of time or money.

tax incidence

the manner in which the burden of a tax is shared among participants in a market

Excludability

the property of a good whereby a person can be prevented from using it

Law of supply:

the quantity supplied of a good rises when the price of the good rises, holding all else constant

externality

the uncompensated impact of one person's actions on the well-being of a bystander

inelastic

when a price goes up, consumers' buying habits stay about the same, and when the price goes down, consumers' buying habits also remain unchanged.

Rationing by waiting

whoever is willing to wait in line the longest will acquire the good