Market equilibrium, elasticity, consumer and producer surplus, price controls, taxes, and international trade effects.
40 cards · basic cards · AI-written, checked twice. Edit anything.
- Define producer surplus
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The difference between the price a seller receives and the minimum price they would accept; the area above the supply curve and below the market price- When only demand increases while supply stays constant, how do equilibrium price and quantity change?
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Both increase; the rightward demand shift creates a shortage at the original price, driving prices up until quantity supplied increases along the supply curve- What happens to equilibrium price when the supply curve shifts left while demand is unchanged?
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Equilibrium price increases as the leftward supply shift reduces quantity supplied at each price level- When both supply and demand increase, what can be determined about equilibrium price without knowing magnitudes?
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Nothing definite; equilibrium price could rise, fall, or stay the same depending on whether the demand shift or supply shift is larger- Explain why allocative efficiency occurs at competitive market equilibrium
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At equilibrium, price equals marginal cost, so resources flow to highest-valued uses and no mutually beneficial trades remain unexploited- Name four non-price factors that shift the demand curve
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Consumer income, preferences, prices of related goods (substitutes and complements), expectations, and number of buyers- Peanut butter and jelly: when the price of peanut butter falls, demand for jelly increases. What is their economic relationship?
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They are complements; a decrease in one good's price increases demand for the other because they are consumed together- How do consumer expectations of higher future income shift the current demand curve for normal goods?
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Expectations of higher future income increase current demand, shifting the demand curve rightward as consumers buy more now- A decrease in the number of buyers in a market shifts the demand curve in which direction?
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Leftward; fewer buyers means lower total demand at every price level- During the Great Recession, demand for airline travel fell significantly. Use income elasticity to explain why
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Airline travel is a normal good with relatively high income elasticity; when incomes fell, demand fell by a larger percentage than the income decline- Define price elasticity of supply
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The percentage change in quantity supplied divided by the percentage change in price; measures how responsive suppliers are to price changes- Name three factors that make demand for a good more or less elastic
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Availability of close substitutes, whether the good is a necessity or luxury, and the share of budget spent on it- Why is demand for insulin less elastic than demand for soft drinks?
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Insulin is a necessity with no close substitutes, while soft drinks are a luxury with many substitutes; demand for soft drinks is more price-responsive- Why does price elasticity of demand tend to be higher in the long run than the short run?
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Over time, consumers can find and switch to substitute goods and fully adjust their consumption patterns, making demand more responsive to price- Describe the total revenue test: what does a firm learn about demand elasticity when it raises price?
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If revenue increases, demand is inelastic; if revenue decreases, demand is elastic; if revenue stays the same, demand is unit elastic
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