[MICRO] 02 - Demand & Supply Applications and Elasticity Flashcards
Definition: Price Rationing
The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied (e.g. Painting or Lobsters). Price rationing can be induced by governments or private firms.
Definition: Price Ceiling
A maximum price that sellers may charge for a good, usually set by the government. It occurs when the government puts a legal limit on how high the price of a product can be. In order for it to be effective it must be set below market equilibrium.
Possible results of a Price Ceiling (5)
There are five ways to distribute the resulting low supply of the product without raising the price:
1) Lottery
2) Black Market
3) First come first serve
4) Historical Use
5) Coupons
Definition: Price Floor
The lowest legal price a commodity can be sold at (e.g. Used often in agriculture to protect farmers)
Definition: Minimum wage
A price floor set under the price of labour
Definition: Consumer Surplus
The difference between the maximum amount a person is willing to pay for a good and its current market price. On the demand curve it is the area between maximum price and price equilibrium (triangular)
Definition: Producer Surplus
The difference between the current market price and the full cost of production for the firm. On the supply curve it is the area between minimum price and price equilibrium. (Triangular)
Definition: Deadweight Loss
The net loss of producer and consumer surplus from underproduction or overproduction.
Definition: Elasticity
The ratio of the percentage change in one varaible to the percentage change in another variable.
Definition: Price Elasticity of Demand
%change in quantity demanded/%change in price. It measures the responsiveness of demand to changes in price.
Definition: Unitary Elasticity
The quantity demanded changes as much as the pruce does. Value = -1
Definition: Elastic Demand
The quantity demanded changes more than the price does. Value > 1
Definition: Inelastic Demand
the quantity demanded changes less than the price does. Value < 1
Definition: Perfectly Elastic Demand
Demand in which quantity drops to zero at the slightest increase in price. (mainly theoretical)
Definition: Perfectly Inelastic Demand
Demand in which quantity demanded does not respond at all to a change in price (e.g. Medicine). Value = 0
