Micro economics units 4,5,6

if both numbers are positive, it is:

a normal good

binding price control

a price below the equlibrium price. (ex: rent control)

loses from quotas:

- incentives on illegal activities. (cheating) - dead weight loss

if consumers always spend 15% of their income on food, then the income elasticity for demand of food is:

1.00, Income elasticity is unitary elastic in this case because share of income is fixed. ΔI % = ΔQ %

if the cross-price elasticity between two goods is negative, the two goods are likely to be:

Compliments

If consumers think that there are very few substitutes for a good, then:

Demand would tend to be price inelastic

cross price elasticity

Exy = % change in quantity (y) divided by % change in price (x)

E < 1

Inelastic - price should be raised -anything below the midpoint

EI < 0

Inferior good -negative

EI > 0

Normal good - positive - if it is + and less than 0, normal necessity - if it is + and is greater than 0, normal luxury

if a fisherman must sell all of his daily catch before it spoils for whatever price he is offered, once the fish are caught, the fishermans price elasticity of supply for fresh fish is:

One

If there is excess capacity in production facility, it is likely that the firms supply curve is:

Price elastic

Exy > 0

Substitutes -things that can be used in place of the other (coke and pepsi) -positive cross-price elasticity

Total surplus formula

TS = CS (consumer surplus) + PS (producer surplus)

which would have a more elastic supply? TVs or beach front properties?

TVs, bc they respond to change in price better

price floor

a min. price the seller is allowed to charge for the good/service. above equlibrium price (ex: minimum wage)

price ceiling

a max. price the seller is allowed to change for the good or service.

which would have a more elastic supply? painting by van gogh or a print copy of the same painting?

a print copy bc it is more obtainable.

price floors misallocate sales by:

allowing high-cost firms to seperate preventing low cost firms from entering the industry

If the income elasticity of demand for a good is negative, it must be

an inferior good

Exy < 0

compliments -things that go together (ketchup and hotdogs) -negative cross price elasticity

If demand is linear (straight line), then price elasticity is

constant along the demand curve

which would have a more elastic supply? crude oil over the next week or over the next year?

crude oil over the next year bc the bigger the time spand the bigger the elastic supply.

price floors cause predictable side effects such as:

deadweight loss from inefficently low quantity inefficent allocation of sales among sellers wasted rescources inefficently high quality temptation to break the law by selling below the legal price

A decrease in the supply will increase total revenue in that market if

demand is price inelastic

Quota rent

difference between demand price and supply price (demand price - supply price = quota rent)

price controls

either help the buyer or seller.

E > 1

elastic - price should be lowered -anything above the midpoint

if supply is price inelastic, the value of the price elasticity of supply must be

greater than 1

Quota

limit the quantity of some goods/services that can be bought/sold, also the same thing as quantity control.

Efficiency

maximizing total surplus

inefficent

overproducing or underproducing

E = infinity

perfectly elastic

E = 0

perfectly inelastic - keep raising price

if a small % increase in the price of a good greatly reduces the quantity demanded of that good, the demand for that good is

price elastic

in general. a flatter demand curve is more likely to be:

price elastic

in general. a steeper supply curve is more likely to be:

price inelastic

Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to

reduce total revenue to farmers as a whole because the demand for food is inelastic.

windfall

same as rent

the price elasticity of demand is defined as

the % change in the price of a good divided by the % change in the quantity demanded of that good

which of the following would cause the demand curve for a good to be price inelastic?

the good is a necessity

if the supply curve for a good is price elastic, then:

the quantity supplied is sensitive to changes in the price of that good. (has nothing to do with demand)

quota limit

the total amount of a good under a quota that can be legally transacted.

the demand for which of the following is likely to be the most price elastic?

transportation

E = 1

unit elastic graph -keep the same bc it does not effect revenue