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Define: Economics
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the study of how societies allocate it's scarce resources
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What is the objective of this course as stated on the course syllabus?
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To develop an understanding of how resources are allocated by markets including when markets suffer from one of several common forms of market failure. Arguments for and against allowing governments to alter the market allocation of resources to compensate for market failures, or promote equity, will be considered.
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List the four types of changes presented in this class shift the supply curve for a good.
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1. Input Prices (what goes into making the product, ingredients)
2. Technology
3. Number of Sellers
4. Expectations (expectations of price in the future)
2. Technology
3. Number of Sellers
4. Expectations (expectations of price in the future)
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List the six types of changes presented in this class that shift the demand curve for a good.
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1. Income (normal vs. inferior goods)
2. Prices of related goods (substitutes vs. complements)
3. Tastes (buy more of what you like)
4. Expectations (less willing to buy something now if price is cheaper in the future)
5. Number of buyers
6. Price of the good itself
2. Prices of related goods (substitutes vs. complements)
3. Tastes (buy more of what you like)
4. Expectations (less willing to buy something now if price is cheaper in the future)
5. Number of buyers
6. Price of the good itself
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Identify something that, if its P increases, it will cause the equilibrium price of DVD players to rise and the equilibrium quantity of DVD players to fall.
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This means supply has to decrease too, for example: a rise in price of DVD player parts.
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If the widget market is NOT in equilibrium, then what would you expect to change that would cause buyers and sellers to behave differently and bring about equilibrium in the widget market?
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The price of widgets
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Identify a change to the ice cream market that would cause the quantity demanded to rise but the demand to remain unchanged.
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An increase in supply (that lowers the price)
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An increase in the price of X causes the equilibrium price and equilibrium quantity of Y to fall. What information does this tell you about X and/or Y?
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Cross elasticity is negative: X and Y are complements.
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Which has a larger income elasticity of demand: milk or orange juice? Why?
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Orange Juice because it is more of a luxury
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How will an increase in the supply of widgets affect the total amount spent on widgets (in the widget market)?
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It depends. If the demand for W is elastic, the total amount would increase. If inelastic, it would decrease.
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Which has a greater income elasticity: toothpaste or whipped cream (the good kind)?
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Whipped cream, it is less of a necessity
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Correctly complete the following statement: "JMU hired a consultant to help it reduce how much money it loses on its men's basketball team. The consultant did some studies and found that the elasticity of demand for basketball tickets is 0.795 and, therefore, advised JMU to......"
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raise prices
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Which would you predict (based on what we've discussed in this class) has a higher income elasticity: beer or champagne?
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Champagne, it's more of a luxury
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What characteristic of a good is revealed about a particular good by being told that it has a negative income elasticity?
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It is an inferior good
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What characteristic of a good is revealed about a particular good by being told that it has a negative cross elasticity of demand with hamburgers
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It is a complement of hamburgers
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When is a firm more inclined to raise the price of something it is selling: When the demand at the current price is elastic, or, when it is unit elastic, or, when it is in inelastic?
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inelastic
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Is it possible that a market with a very elastic demand can have a tax where the incidence of the tax falls more on the buyer than the seller?
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YES, when the elasticity of supply is even greater than the very elastic demand
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Identify one reason why an increase in the minimum wage might cause an employer's payroll (to all of those it employs) to rise?
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Demand for the unskilled labor is inelastic
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When (under what conditions) will an increase in the price floor for a good (e.g., widgets) cause the total amount of money paid in the market for the good (e.g., widgets) to rise
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When the price floor is binding and the elasticity of demand is inelastic.
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The minimum wage is an example of a particular type of policy discussed in this class. What is that policy?
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Price floor in the unskilled labor market
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Which is more likely to cause a non-binding price floor to become a binding price floor: an increase in the price of a complement or an increase in the price of a substitute
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A complement because with cause the demand to fall, trying to lower price below the price floor
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What is the one situation that your textbook has acknowledged when shortages persist?
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With a binding price ceiling
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When does the incidence of a tax levied on buyers in a market fall almost completely on those buyers?
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with a near-perfectly elastic supply and/or a near-perfectly inelastic demand
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Define: consumer surplus
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the amount that buyers are willing to pay for a good MINUS the amount they actually pay for it
- area below the demand curve and above the price
- area below the demand curve and above the price
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Define: efficient quantity
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when an allocation of resources maximizes total surplus
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What, according to the author of your textbook, is good about the "efficient quantity" of goods produced?
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it maximizes total surplus!
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Identify one specific change that would cause the price of potato chips to fall and the amount sold to rise.
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it would have to shift supply out through ex. an increase in technology
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Welfare Economics
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the study of how the allocation of resources affects economic well-being
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cost
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the value of everything a seller must give up to produce a good
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producer surplus
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amount a seller is paid for a good minus the seller's cost of providing it
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equality
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property of distributing economic prosperity uniformly among members of society
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Absolute advantage
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the ability to produce a good using fewer inputs than another producer
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Comparative advantage
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the ability to produce a good at a lower opportunity cost than another producer
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competitive market
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market where there are many buyers and sellers so that each has a negligible impact on the market price
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quantity demanded
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the amount of a good that buyers are willing and able to purchase
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Law of demand
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the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
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demand schedule
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a table that shows the relationship between the price of a good and quantity demanded
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Normal good
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a good where an increase in income leads to an increase in demand (ex: buying a house)
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inferior good
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a good where and increase in income leads to a decrease in demand (ex: higher income means more demand for a car, not a taxi)
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substitutes
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two goods when an increase in price of one leads to an increase in demand for the other
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complements
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two goods for which an increase in the price of one leads to a decrease in the demand for the other
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law of supply
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the quantity supplied of a good rises when the price of a good rises
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supply schedule
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table that shows the relationship between the price of a good and the quantity supplied
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equilibrium
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when the market price has reached the level at which quantity supplied equals q demanded
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law of supply and demand
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the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
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elasticity
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measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
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price elasticity of demand
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(% change in Qdemanded) / (% change in price)
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price ceiling
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legal maximum on the price at which a good can be sold
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price floor
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legal minimum on the price at which a good can be sold
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tax incidence
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the manner in which the burden of a tax is shared among participants in a market
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