econ quiz: specific market failures and elasticity


third party is affected by the market

postive externality

third party is helped; ex. good loud music, education, pollution, etc.

negative externality

third party is hurt; ex. loud music, guitar next door, drunk driving, pollution, etc.

why is pollution both a positive and negative externality?

pollution can be positive for fish bc the pollution can cause water to be warmer in which they like however pollution is also bad for the environment

problems with negative externalities

over provided goods, too much, quantity too high

problems with positive externalities

under provided, quantity too low

fixes to externalities

1) taxes 2) subsidize: we subsidize education (Mercer 40K vs. GCSU 7K, theres a 35K difference that is made up for by the government, HOPE takes care of majority of the tuition bringing it down to about $500 and then Zell takes it down to $0) 3) do nothin

income distribution

unequal distribution (problem)

fixes to income distribution

1) tax: progressive income tax (income increase, percent you pay increase) 2) transfer programs: government gives you cash through cash: social security (SSI, unemployment) or inkind: food stamps, HOPE, medicaid/medicare, housing (projects)

price elasticity of demand

measures consumers response to a price change

ED =


ED < or > 0

ED < 0

slope is constant, elasticity is ___

not constant

ED = 1

demand is unit elastic; %?Qd = %?P

ED < 1

demand is inelastic; %?Qd < %?P

ED > 1

demand is elastic; %?Qd > %?P

ED = -1/3


ED = -3

elastic (consumer response is three times as big)

elastic equation

ED = Q1 - Q0 / Q1 + Q0 / P1 - P0 / P1 + P0

if elasticity is 3 and if price decrease by 10%...

quantity demand will go up by 30% and total revenue will go up

total revenue

Price x Quantity goes up

if elasticity is 3 and if price increase by 10%...

quantity demand will go down by 30% and total revenue will go down


big response; a change in price quickly results in a change in the quantity demanded

if elasticity is 1/3 and price increase by 10%

quantity demand will go down by 3.33% and total revenue goes up

if elasticity is 1/3 and price decrease by 10%

quantity demand will go up by 3.33% and total revenue will go down

drugs are inelastic or elastic


determinants of elasticity demand

number of substitutes, time, necessity, budget share

number of substitutes

number of subs goes up, elasticity goes up; ex. electricity has no subs - inelastic ham has tofu, turkey, etc. to sub - elastic - if price goes up you will buy others


the more specific you are the higher the Ed

specificity example

autos has 10 subs, sedans have 10 + 6 more subs, camry has 50 + 16 more subs

more specific

more elastic


the more time you have the higher the Ed

less time

options run out; less elastic

time example

$6 meat on top of gum: if announced that meat was $6 you would've had more time to pick a different meat


more necessary a good is, less elastic demand

necessity example

food, water, shelter - will pay a lot for

budget share

budget share increase, Ed increase

budget share example

salt: 0.0001% of your budget (you wont notice a price change)
gas: 25% of your budget (we react when has price changes but will still get making the demand more elastic, not many subs)


postive and >0

Es > 1

supply is elastic; %?Qd > %?P

Es < 1

supply is inelastic; %?Qd < %?P

Es = 1

supply is unit elastic; %?Qd = %?P

determinants of elasticity supply

number of substitutes in production, time, income elasticity of demand

number of substitutes in production (Es)

things you can produce; flu season - other virus - other vaccine; subs goes go up Es goes up

time (Es)

more time more options

income elasticity of demand (Ed)

%?Qd > or < %?P



0 < Yd < 1

ncome rises, demand (Qd) for "X" rises by a small amount; "X" is a necessity-NORMAL good

Yd > 1

income increase, demand (Qd) for "x" increase by A LOT (buy more); "x" is a luxury normal good

Yd < 0

income increase, demand (Qd) for "x" decrease; "x" is an inferior good

types of normal good

luxury: Yd > 1 (yacht, mink coats, jets)
necessity: 0< Yd < 1 if equal zero you buy anyways (toilet paper)


Yd: 0.21; normal necessity


Yd: 2.6; normal luxury

mac n cheese

Yd: -0.6; inferior

mink coat

Yd: 3.5; normal luxury

elasticity of demand (Ed)

how much quantity demand falls; small decrease or large drop

law of demand

when P increases, the quantity demand falls

elasticity of supply (Es)

how much quantity supplied rises; small increase or large increase

law of supply

when P increases, the quantity supplied increases

Income Elasticity (Yd)

what happens to my demand for good "x" when my income rises or falls?


small response; there is little change in the quantity demanded if the price of the good changes

inferior good

a good whose demand decreases when consumer income rises

Normal goods `

demand rises as consumer income rises