Chapter 5 Flashcards
What is the sign of price elasticity of demand?
Always negative
How is price elasticity of demand calculated?
Percentage change in quantity / percentage change in price
How is price elasticity of supply calculated?
Percentage change in quantity over percentage change in price.
What indicates relatively elastic demand?
Large percentage change in quantity
What is the most important reason for studying elasticities?
Pricing
What should a band do if demand is elastic?
Cut the price
What causes supply to shift right?
Cost-saving gains
How is the tax burden of cigarette taxes primarily passed?
Higher prices
What is the new market price after tax?
Pc
What does quantity demanded (Qd) depend on?
Income, preferences, related goods, price
What is the elasticity of labor supply for teenage workers?
Fairly elastic
How many streaming subscribers did Netflix have in June 2013?
36 million
What indicates elastic demand?
Elasticity greater than one
How do supply and demand react to price changes in the short run?
Slow response
What does a price elasticity of demand of 0.45 indicate?
Inelastic demand
What happens to the elasticity measure at the bottom of the demand curve?
Much lower, inelastic
What should a band do if demand is inelastic?
Raise the ticket price
What happens if demand is inelastic?
Substantially lower prices
What can the government do in a market with inelastic demand?
Pass tax burden to consumers
What do sellers receive per unit sold after tax?
Pp
What does quantity supplied (Qs) depend on?
Cost of production, price
Wage elasticity of labor supply for adults in their thirties and forties
Fairly inelastic
What is inelastic demand?
Elasticity less than one
How do supply and demand react to price changes in the long run?
Substantial response
What does the law of demand state?
Higher price = lower quantity demanded
How are elasticities typically represented?
As positive numbers
What are the two extreme cases of elasticity?
Zero and infinite
What happens to price and quantity when elasticity equals 1?
Equal percentage change
What occurs with unitary elasticity?
Revenue remains the same
What happens if demand is elastic?
Slightly lower prices
What characterizes demand for addictive substances?
Inelastic demand
What does an excise tax create between consumer price and producer price?
A wedge
How is consumer tax incidence calculated?
Pc - Pe
What is income elasticity of demand?
Percentage change in quantity demanded / Percentage change in income
Elasticity of savings
Percentage change in savings / Percentage change in interest rates
What is the formula for calculating elasticity?
Percentage change in quantity/percentage change in price
What is the elasticity of demand and supply in the short run?
Relatively inelastic
What does the law of supply state?
Higher price = higher quantity supplied
What is infinite elasticity?
Extreme response to price change
What happens to total revenue if demand is elastic?
Revenue falls
Effect of elastic demand and supply on tax revenue?
Lower tax revenue
How is seller tax incidence calculated?
Pe - Pp
Why are prices more volatile in the short run?
Inelastic supply and demand
What happens to quantity demanded when income rises for normal goods?
Increases
What does unitary elasticity mean?
Equal percentage change in quantity
What is the elasticity of demand and supply in the long run?
Relatively elastic
What does elasticity measure?
Responsiveness of variables
What does zero elasticity indicate?
No change in quantity
What happens to total revenue if demand is unitary?
Revenue unchanged
What happens to farmers’ total revenue when there is a surge in production?
Decreases
How can we reduce cigarette demand?
Shift inelastic demand left
Result of introducing a tax?
Creates a price wedge
Who bears the tax incidence when supply is more elastic than demand?
Consumers bear more
What do we call a good with negative income elasticity of demand?
Inferior good
What does elasticity refer to?
Responsiveness
What happens to total revenue if demand is inelastic?
Revenue rises
What effect can poor weather have on farm product prices?
Raises prices
Effect of higher taxes on elastic demand for cigarettes?
Reduce quantity smoked substantially
What happens with elastic demand when tax is imposed?
Consumers reduce quantity
What happens to the demand curve for a normal good when income increases?
Shifts to the right
What happens if cigarette tax discourages consumption considerably?
Reduced revenue for government
What happens in (a) when demand is inelastic?
Costs passed to consumers
What happens with elastic supply when tax is imposed?
Sellers reduce quantity sold
