Econ Midterm

  1. An increase in Tax causes what effect on DWL?
    Much higher DWL increase
  2. Marginal tax rate
    The tax on the last dollar of earnings
  3. the More elastic demand/supply gets, the _______ DWL gets
  4. the more Inelastic demand/supply, the _________f DWL gets
  5. Revenue from Tax
    $T X QT
  6. Total Surplus
    • TS = CS + PS
    • (Value to buyers) - (cost to sellers)
  7. Total PS
    Area between P and S curve from 0 to Q
  8. Producer Surplus
    PS - P - cost
  9. Marginal Seller
    Seller who will leave if price any lower
  10. Total CS
    CS = Area under demand curve above P from 0 to Q
  11. Consumer Surplus
    CS = WTP - P
  12. Marginal buyer
    One who is at his WTP and would leave if P gets higher
  13. WTP
    Willingness to pay. Highest price buyer will pay
  14. Laffer curve
    Shows relationship between size of tax and tax revenue
  15. Inelastic supply - state of DWL?
    DWL small
  16. Welfare Economics
    Studies HOW the allocation of resources affects economic welbeing
  17. When Tax large, what's the effect of raising tax
    Revenue falls
  18. When Tax small = what's the effect of raising tax
    Rise in revenue
  19. More Elastic Demand = What DWL effect?
    Bigger DWL
  20. Efficiency
    • -Total surplus maximized
    • -Goods produced by sellers with lowest cost
    • -Consumed by buyers who most value them
  21. Producer Surplus
    PS = P- cost
  22. Dead Weight Loss
    DWL. Fall in total surplus due to market distortion like tax
  23. Opportunity Cost
    • The highest benefit you give up to obtain an this item
    • Determined by slope on graph
  24. Equality
    Prosperity is distributed uniformly amogn society's members
  25. Scarcity
    • Limited nature of society's resources.
    • Limited + Good
  26. Demand curve shift: # of buyers
    • Increase in # of buyers increases quantity demanded at each price
    • shifts D curve to the right
  27. Demand curve shift: inferior goods
    An increase in income shifts D curve for inferior goods to the left
  28. Demand Curve Shift: Normal Good
    • Incrase in income causes increase in quantity demanded at each price
    • D curve shifts to the right
  29. Law of Demand
    the claim that the quantity demanded of a good falls when the price of the good rises, other things equal (P↑, Q↓)
  30. Comparative Advantage
    the ability to produce a good at a lower opportunity cost than another producer
  31. Absolute advantage
    the ability to produce a good using fewer inputs than another producer
  32. Normative
    Suggestion beyond facts (can be argued against)
  33. Positive
    Just the facts
  34. PPF
    • Production Possibilities Frontier
    • a graph that shows the combinations of two goods the economy can possibly produce given the available resources and the available technology
    • posssible points
    • efficient points
    • impossible points
  35. Circular Flow Diagram
    • Households provide Factors of Production - rent/sell to firms
    • Firms buy/hire factors of production - produce goods and services - sells goods/services
    • Households consume goods/services
  36. Factors of Production
    the resources the economy uses to produce goods & services, including –labor –land –capital (buildings & machines used in production)
  37. Government intervention might help if
    • Market failure:
    • monopoly - Market power
    • polution - Externality
  38. Law of Supply
    the claim that the quantity supplied of a good rises when the price of the good rises, other things equal (P↑, Q↑)
  39. Causes of D curve Shift v. Along curve
    • Changes in:
    • Income
    • Prices of related goods
    • Tastes
    • Expectation
    • # of buyers
    • Shift D curve

    • Changes in own price
    • caues movement along the D curve
  40. Compliments
    • • Two goods are complementsif an increase in the price of one (Px↑) causes a fall in demand for the other. (Qy↓)
    • • Logic: Px↑=> Qx↓ => Qy↓
    • • Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.
    • • Other examples: college tuition and textbooks, bagels and cream cheese, ice-cream and fudge.
  41. Substitutes
    • • Two goods are substitutesif an increase in the price of one (Px↑) causes an increase in demand for the other. (Qy↑)
    • • Logic: Px↑=> Qx↓ => Qy↑
    • • Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.
    • • Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads
  42. Perfectly elastic demand
    • elasticity = infinity
    • horizontal
  43. Elastic curve
    • elasticity > 1
    • relatively flat
  44. Unit elastic
    • elasticity = 1
    • intermediate slope
  45. Inelastic
    • Elasticity <1
    • relatively steep
  46. Perfectly inelastic
    • Elasticity = 0
    • vertical
  47. Flatter the curve the ___________ the elasticity.
    Steeper the curve, the ___________ the elasticity.
    • Bigger
    • Smaller
  48. Calculating Percentage Changes
    • Midpoint method:
    • (end value –start value) / midpoint x 100%
  49. Price elasticity of demand
    measures how much Qd responds to a change in P
  50. Determinants of Price Elasticity
    • The price elasticity of demand depends on:
    • –the extent to which close substitutes are available
    • –whether the good is a necessity or a luxury
    • –how broadly or narrowly the good is defined
    • –the time horizon –elasticity is higher in the long run than the short run
  51. Movement along D curve
    • Change in the quantity demanded: a movement along a fixed Dcurve occurs when Pchanges
  52. Shift of D curve
    • Change in demand: a shift in the Dcurve occurs when a non-price determinant of demand changes (like income or # of buyers)
  53. Movement along S curve
    • Change in the quantity supplied: a movement along a fixed Scurve occurs when Pchanges
  54. Shift of the S curve
    • Change in supply: a shift in the Scurve occurs when a non-price determinant of supply changes (like technology or costs)
  55. Variables that influence sellers
    • Variable A change in this variable…
    • Own Price …causes a movement ALONG the Scurve
    • Input Prices …shifts the Scurve
    • Technology …shifts the Scurve
    • Expectations …shifts the
    • Scurve # of sellers …shifts the Scurve
  56. Supply curve shifter: Expectations
    • Example: - Events in the Middle East lead to expectations of higher oil prices. - In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price. - S curve shifts left. • In general, sellers may adjust supply* when their expectations of future prices change. (*If good not perishable)
  57. Supply curve shifter: # of sellers
    • An increase in the number of sellers increases the quantity supplied at each price, shifts Scurve to the right.
  58. Supply Curve shifter: Technology
    • • Technology determines how much inputs are required to produce a unit of output.
    • • A cost-saving technological improvement has the same effect as a fall in input prices, shifts Scurve to the right.
  59. Supply Curve shifter: Input Prices
    • • Examples of input prices: wages, prices of raw materials.
    • • A fallin input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the Scurve shifts to the right.
  60. Profit
    (Revenue) - (total cost)
  61. Revenue
    P X Q
  62. When D is elastic P ______ Q _______ to Total Revenut (TR) up
    P down, Q up alot so TR rises
  63. When D is inelastic P ______ Q _______ to Total Revenut (TR) up
    P up, Q down a little so TR rises
  64. Price Elasticity of Supply
    % change in Qs / % change in P
  65. Price Elasticity of Demand
    % change in Qd / % change in P
  66. Income elasticity of demand
    measures the response of Qd to a change in consumer income

    = % change in Qd / % change in income
  67. Income elasticity for normal goods
    income elasticity > 0
  68. Income elasticity for inferior goods
    < 0
  69. Cross-price elasticity of demand
    measures the response of demand for one good to changes in teh price of another good

    = % change in Qd for good 1 / % change in price of good 2
  70. For substitutres, cross-price elasticity is....
    > 0

    (e.g., an increase in price of beef causes an increase in demand for chicken)
  71. For complements, cross-price elasticity is...
    • < 0
    • (e.g., an increase in price of computers causes decrease in demand for software)
  72. Incidence of a tax
    • the division of the burden of the tax between buyers and sellers
    • doesnt depend on whether the tax is imposed on buyers or sellers
  73. Elasticity and Tax Incidence
    Supply is more elastic than demand
    It's easier for sellers than buyers to leave the maket, so buyers bear most of the burden of the tax
  74. Elasticity and Tax Incidence
    Demand is more elastic than supply
    It's easier for buyers than sellers to leave the market. Sellers bear most of the burden of the tax
  75. allocation of resources
    • how much of each good is produced
    • which producers produce it
    • which consumers consume it
  76. Market failures
    –a buyer or seller has market power–the ability to affect the market price. –transactions have side effects, called externalities, that affect bystanders. (example: pollution)
  77. If Pd < Pw
    • –country has comparative advantage in the good
    • –under free trade, country exports the good
  78. If Pd > Pw
    • –country does not have comparative advantage
    • –under free trade, country imports the good
  79. Price taker
    A small economy is a price takerin world markets: Its actions have no effect on P.
  80. Tariff
    • tax on importts
    • In general, price facing domestic buyers and sellers = (Pw + T)
    • Revenue recieved by government
  81. Import quota
    a quantitative limit on imports of a good.

    • • Mostly has the same effects as a tariff: –Raises price, reduces quantity of imports. –Reduces buyers’ welfare. –Increases sellers’ welfare.
    • revenue recieved by sellers
Card Set
Econ Midterm
Economics terms for Micro-econ midterm