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Flashcards in Exam 2 Deck (69):
1

Consumer Surplus

the difference between what you are willing to pay and what you actually pay.

2

Consumer Surplus Formula

CS = Buyer’s Maximum – Price

3

Producer’s Surplus

the difference between the price the seller received and how much they were willing to sell it for.

4

Producer’s Surplus formula

PS = Price – Seller’s Minimum

5

Total Surplus formula

TS = PS + CS

6

Price Ceiling

Maximum legal price a seller can charge for a product.

Goal: Make affordable by keeping price from reaching equlilbrium

BELOW ORIGINAL EQULIBRIUM

7

Price Floor

Minimum legal price a seller can sell a product.

Goal: Keep price high by keeping price from falling to equilibrium

ABOVE ORIGINAL EQUILIBRIUM

8

Subsidies

The government just gives producers money.

The goal is for them to make more of the goods that the government thinks are important.

9

Excise Tax

A per unit tax on PRODUCERS

10

What did the Laffer curve show

Since tax rates were so high, reducing them would actually increase tax revenue

11

Elasticity

Responsiveness of buyers and sellers to changes in market conditions.

12

Demand is elastic if...

Quantity demanded changes significantly as the result of the price change

Elastic = “sensitive” or “responsive”

13

Demand is inelastic if

Quantity demanded changes a small amount as the result of the price change

Inelastic = “insensitive” or “unresponsive”

14

The Determinants of the Price Elasticity of Demand

Existence of substitutes

Share of the budget spent on the good

Time and adjustment process

15

Existence of substitutes effect on Ed

Goods with lots of substitutes
---Canned vegetables, breakfast
cereals, many types of products with multiple brands
---More elastic

Goods with no good substitutes
---Broadway theatre, rare coins, autographs, drinking water, electricity, Super Bowl tickets, medication.
---More inelastic

16

Share of the budget spent on the good effect on Ed

Demand is more elastic for “big ticket” items that make up a large portion of income.

Demand is more inelastic for inexpensive items.

Which would you react to more?
---20% sale on a new vehicle you want
---20% sale on candy bar

17

Time and adjustment process effect on Ed

Generally, demand for goods tends to become more elastic over time.

Over time, consumers are
---More able to find substitutes
---More able to adjust for price changes in other ways

18

Ed in the immediate run

No time to adjust behavior.

Very inelastic demand or perfectly inelastic

19

Ed in the short run

A little bit of time to adjust behavior.

Demand is slightly more elastic than the immediate run.

20

Ed in the long run

Enough time to make a full adjustment to any changes in price.

Demand is even more elastic. Demand elasticity reflects the information of all substitutes.

21

Midpoint formula

(Q2-Q1)/((Q1+Q2)/2))
/
(P2-P1)/((P1+P2)/2))

22

If demand is relatively elastic, what is the effect on the slope of the line?

It is relatively flatter

23

If demand is relatively inelastic, what is the effect on the slope of the line?

It is relatively steeper

Steep demand curve looks like the letter “I,” so it is “I”nelastic.

Steep demand curve has an almost “I”nfinite slope, and is “I”nelastic

24

Ed = __ in perfectly inelastic things

Ed = 0

25

Ed = __ in relatively inelastic things

0 > Ed > -1

26

Ed = __ in unit elastic things

Ed = -1

27

Ed = __ in relatively elastic things

-1 > Ed > -infinity (undefined)

28

Ed = __ in perfectly elastic things

Ed = -infinity (undefined)

29

Inelastic Demand phase total revenue test

As price goes up, total revenue goes up

As price goes down, total revenue goes down

30

Elastic Demand phase total revenue test

As price goes up, total revenue goes down

As price goes down, total revenue goes up

31

Normal goods

Goods we purchase more of when income rises

32

Inferior goods

Goods we purchase less of when income rises

33

Two categories of normal goods

Luxuries and necessities

34

Luxury goods

Purchase a lot more when income rises (Income elasticity more than 1)

35

Necessity goods

Purchase a little more when income rises (Income elasticity less than 1)

36

Substitute goods cross-price elasticity

Ec > 0

37

Complementary goods cross-price elasticity

Ec < 0

38

Suppose that the price of candy bars increases by 100%. As a result of this, you decide to purchase 50% less candy bars. How would you describe your demand for candy bars?

Demand is inelastic.

39

Suppose that Doug receives a pay increase at work, and his income increases by 20%. As a result, Doug decides to buy 12% less ground beef. For Doug, ground beef is a(n) ________.

inferior good

40

Economists have studied that when the price of chicken increases, people purchase less rice. With these two goods, which of the following is true?(EC = Cross-price elasticity)

Ec < 0, chicken and rice are complements.

41

In terms of price elasticity of demand, which of the following goods do you think is the least elastic (most inelastic)?

electricity to power your home

42

Suppose a firm is selling a product at a price on the inelastic portion of the demand line. This firm could increase revenue by doing what?

increasing the price, selling less units

43

Internal costs

The costs of an activity paid by an individual engaging in the activity

44

External costs

The cost of an activity paid for by someone else not directly involved in the activity

45

Social costs

Sum of internal and external costs

46

Externalities

Occur when private cost (or benefit) diverges from social cost (or benefit)

47

Negative externalities

Costs experienced by third parties

“Too much” of the good is consumedand produced.
Pollution, secondhand smoke

48

Positive externalities

Benefits experienced by third parties

“Not enough” of the good is consumed and produced.

Education, vaccines

49

Positive externalities examples

Flu shots prevent the spread of disease.

Education citizens are more productive and make more informed decisions for the betterment of society.

Restored Historic buildings enable people to enjoy the beautiful architectural details.

50

Negative externalities examples

Oil refining creates air pollution.

Traffic congestion causes all motorists to spend more time on the road waiting.

Airports create noise pollution.

51

Private property incentives

Incentive to maintain

Incentive to protect

Incentive to conserve

Incentive to trade with others

52

Incentive to maintain

Keep the vehicle safe and reliable

53

Incentive to protect

Lock your doors

54

Incentive to conserve

Extend vehicle life, drive less

55

Incentive to trade with others

You can voluntarily trade for something better in the market.

56

Excludable goods

The good must be purchased before use.

57

Rival goods

The good cannot be enjoyed by more than one person at the same time.

58

Private goods

Are both excludable and rival in consumption

Most goods we purchase and consume are private goods

59

Club goods

Non-rival and excludable

Examples:
Satellite TV, gym membership

60

Common resource goods

Rival but non-excludable

Examples:
Fishing, hunting (specific animals fished and hunted), public campsites

61

Cost-benefit analysis

Process to determine whether the benefits of providing a public good outweigh the costs

62

Tragedy of the commons

Occurs when a rival (but non-excludable) good becomes depleted or ruined

63

Incentive to neglect

Good cannot be protected.No political borders or ownership.

64

Incentive to overuse

Each individual wants to fish as much as possible for higher profits. If one conserves, others will fish even more.

65

Incentive to ignore others

No one has the ability to define how many resources can be used. I may still break the rules set even if others follow them.

66

Which of the following activities would most likely create a negative externality?

smoking a cigarette

67

Which of the following activities is most likely to create a positive externality?

getting a college degree

68

Membership at your local fitness facility is what type of good?

club good

69

Suppose good X creates a negative externality. Which of the following would NOT be an appropriate way to correct the negative externality?

subsidize the production of good X