Chapter 3 (Week 2) Flashcards
Elasticity
Percentage change in one variable, in response to a 1% change in another variable
PED
Percentage change in quantity demanded in response to a given percentage change in price
Percentage change in quantity demanded / Percentage change in price
Elastic : x > 1
Inelastic : x < 1
Elasticity along the demand curve
- On strictly downward sloping linear demand curves, the PED is constant along the line
The higher the price, the more negative the PED - Horizontal demand curve: (the shallower, the more elastic)
This shows that people are willing to buy as much as firms sell at any price less than or equal to p.
It is perfectly elastic everywhere
PED: - infinity - Vertical demand curve: (the more vertical, the more inelastic)
It is perfectly inelastic everywhere
PED: 0
YED
Percentage change in quantity demanded in response to a given percentage change in income
Percentage change in quantity demanded / Percentage change in income
Normal good: xi > 0
Inferior good: xi < 0
Necessity good: 0 < xi < 1
Luxury good: xi > 1
XED
Percentage change in quantity demanded in response to a given percentage change in the price of another good
Percentage change in quantity demanded of good A / Percentage change in price of good B
Negative: goods are complements
Positive: goods are substitutes
PES
Percentage change in quantity supplied in response to a given percentage change in price
Percentage change in quantity supplied / Percentage change in price
Ad valorem tax
Tax based on the value of an item
- usually a percentage of its cost
Rotates the curve
Specific tax
Fixed amount charged per unit of a good, regardless of its price
Shifts the curve
Incidence of tax
Distribution of tax burden between consumers and producers
Subsidy
Grant given by the government to firms to reduce their costs of production and thus increase supply
