LECTURE 4: ELASTICITY AND ITS APPLICATION Elasticity measures the Price elasticity of demand equals When it’s less than one, demand is “inelastic.” When greater than one, demand is “elastic.” When demand is inelastic, total revenue rises when price rises. When demand is elastic, total revenue falls when price rises. 12
LECTURE 4: ELASTICITY AND ITS APPLICATION Demand is ______________ in the short run, for necessities, for broadly defined goods, or for goods with few close substitutes. Price elasticity of supply equals When it’s less than one, supply is “inelastic.” When greater than one, supply is “elastic.” Price elasticity of supply is greater in the long run than in the short run. 13
LECTURE 4: ELASTICITY AND ITS APPLICATION The income elasticity of demand measures how much The cross-price elasticity of demand measures how much 14
LECTURE 5: SUPPLY, DEMAND, AND GOVERNMENT POLICIES A price ceiling is a legal maximum on the price of a good. An example is rent control. If the price ceiling is below the eq’m price, it is binding and causes _____________. A price floor is a legal minimum on the price of a good. An example is the minimum wage. If the price floor is above the eq’m price, it is binding and causes _________. The labor surplus caused by the minimum wage is 15
LECTURE 5: SUPPLY, DEMAND, AND GOVERNMENT POLICIES A tax on a good places a __________ between the price buyers pay and the price sellers receive, and causes the eq’m quantity ________. The impact of a tax on eq’m does not depend on 16
LECTURE 5: SUPPLY, DEMAND, AND GOVERNMENT POLICIES The incidence of a tax is the division of the ________ of the tax between buyers and sellers. Tax incidence does not depend on The incidence of the tax depends What if the tax is imposed on many markets? 17
LECTURE 6: CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS The height of the D curve reflects the value of the good to buyers—their Consumer surplus is the difference between On the graph, consumer surplus is the area between 18
LECTURE 6: CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS The height of the S curve is sellers’ ___________________. Sellers are willing to sell if the price they get is at least as high as their cost. Producer surplus is the difference between On the graph, producer surplus is the area 19
LECTURE 6: CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF MARKETS To measure of society’s well-being, we use Efficiency means that: Total surplus The goods are produced They are consumed by buyers Under perfect competition, the market outcome is_________. Altering it would reduce total surplus. 20
LECTURE 7: THE COSTS OF PRODUCTION Implicit costs do not involve a ___________, yet are just as important as explicit costs to firms’ decisions. Accounting profit is ________________. Economic profit is revenue minus The production function shows the relationship between 21
LECTURE 7: THE COSTS OF PRODUCTION The marginal product of labor is the increase Marginal product usually diminishes as the input increases.
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