Supply, Demand & Elasticity
What does price elasticity of demand measure?
How responsive quantity demanded is to a change in price.
Give an example of a negative externality.
Pollution from factories or secondhand smoke.
What is a characteristic of a perfectly competitive firm?
Take Any:
It is a price taker.
No barriers to entry.
Full information.
What is a Pigouvian Tax?
A tax that is equal to the cost of negative externality.
What does GDP measure?
The total market value of final goods and services produced in an economy.
If demand is perfectly inelastic, how does quantity demanded respond to price changes?
Quantity demanded does not change at all.
What does it mean for an allocation to be economically efficient?
Goods are allocated to maximize total surplus,no one can be made better off without making someone worse off.
Why is a monopolist a price maker?
Because it is the sole seller in the market and can produce at any quantity they like.
What determines the economic incidence of a tax?
Relative elasticities of supply and demand.
What is inflation?
A sustained increase in the overall price level.
Why does the marginal cost curve typically slope upward?
Because of diminishing marginal returns,each additional unit becomes more costly to produce.
Why are public goods often underprovided by private markets?
Because they are non-excludable and non-rival, leading to free riding.
In perfect competition, where does a firm produce in the short run?
Where price equals marginal cost (P = MC), if price covers AVC.
Why do taxes create deadweight loss?
They reduce mutually beneficial trades.
Name one benefit of international trade.
Gains from specialization and increased efficiency.
A firm’s average total cost is falling, what does this imply about marginal cost relative to ATC?
Marginal cost is below average total cost.
What is the free rider problem and why does it occur?
People benefit without paying because they cannot be excluded, reducing incentives to provide the good.
Why does monopoly lead to deadweight loss?
Because output is restricted below the efficient level, reducing total surplus.
How does elasticity affect the burden of a tax between buyers and sellers?
The less elastic side bears more of the burden.
How does a tariff affect domestic consumers and producers?
Consumers pay higher prices; producers benefit from protection.
Explain the difference between short-run and long-run production costs and why firms experience economies of scale.
Short run has fixed inputs; long run allows all inputs to vary. Economies of scale occur when larger production lowers average costs due to specialization and efficiency.
How can a Pigovian tax can improve welfare in the presence of a negative externality.
It internalizes the external cost, reducing overproduction and moving output closer to the socially optimal level.
Compare long-run outcomes under perfect competition and monopoly in terms of price, output, and efficiency.
Perfect competition: lower price, higher output, efficient allocation.
Monopoly: higher price, lower output, deadweight loss.
Why does increasing a tax rate does not always increase tax revenue.
Higher taxes can reduce economic activity, resulting in lesser quantity being sold in the market.
Explain the difference between nominal GDP and real GDP and why the distinction matters.
Nominal GDP uses current prices; real GDP adjusts for inflation, allowing comparison of true output over time.