2.3.2 Price Controls

Question 1

Price Elasticity of Demand

Answer 1

a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
Ex: Water would likely have a PED between 0 and -1 and be inelastic because it is a necessity

Question 2

Elastic Demand

Answer 2

a change in the price of a good or service will cause a proportionately larger change in quantity demanded and inelastic demand means that a change in price of a good or service will cause a proportionately smaller change in quantity demanded.
Ex: D1 is more elastic than D2 because a change in price would cause a significant change in Qd whereas it would have little effect on D2 insert demand curve diagram

Question 3

Cross Elasticity of Demand

Answer 3

a measure of the responsiveness of the demand for a good or service to a change in the price of a related good.
ex: the change in demand of laptop covers after an increase in the price of laptops

Question 4

Substitute Goods

Answer 4

goods that can be used instead of each other. They have a positive XED.
Ex: Coke for Pepsi or vice versa

Question 5

Complement Goods

Answer 5

A good that are goods that are used together. They have a negative XED.
Ex: Laptops and laptop covers

Question 6

Income Elasticity of Demand

Answer 6

a measure of the responsiveness of demand for a good to a change in income.
Ex: If someone’s income changed their quantity demanded for vacations abroad would have a proportionally greater change than their quantity demanded for food

Question 7

Normal Good

Answer 7

has a positive income elasticity of demand. As income rises, demand increases.
Ex: Trips abroad

Question 8

Inferior Goods

Answer 8

have a negative income elasticity of demand. As income rises, demand decreases.
Ex: Ikea furniture vs nice furniture

Question 9

Price Elasticity of Supply

Answer 9

a measure of the responsiveness of the quantity supplied of a good or service to a change in its price.
Ex: Craft supplies would have a more elastic PES than fighter planes because it takes less time to change the production rates of craft supplies than fighter planes

Question 10

An Indirect Tax

Answer 10

an expenditure tax on a good or service. An indirect tax is shown on a supply and demand diagram as an upward shift in the supply curve, where the vertical distance between the two supply curves represents the amount of the tax. A specific tax is shown as a parallel shift. An ad valorem tax is shown as a divergent shift.
Ex: Value tax or excise duties

Question 11

The Incidence (or Burden) of Tax

Answer 11

Refers to the amount of tax paid by the producer or the consumer. if the demand for a good is inelastic, the greater incidence of the tax falls on the consumer. if the demand for a good is elastic, the greater incidence of the tax falls on the producer.
Ex: Tobacco consumers pay a slightly higher price as a result of the tax, but tobacco producers have to keep their price somewhat lower