Chapter 6 (5)

Question 1

HOW BIG IS THE EFFECT OF A TAX / SUBSIDY

Answer 1

► it’s important to know exactly how much it will change the equilibrium quantity & price

Question 2

Can the effect of a tax or subsidy on the equilibrium quantity be predicted ahead of time?

Answer 2

► Yes, if the price elasticity of supply and demand are known.

►The more elastic the supply or demand is, the greater the change in quantity.

Question 3

LONG-RUN VS SHORT-RUN IMPACT

Answer 3

note that in the short run –> the quantity of x might not change very much

►In the short run, both demand and supply are not very elastic (typically fixed) –> and the price floor results in only a small excess quantity supplied

Question 4

recall that for both supply & demand –> one of the determinants of price elasticity = the period over which it is measured

Answer 4

On both sides of the market –> elasticity = often greater over a long time period than over a short one

Question 5

Demand side:

Answer 5

consumers might make small lifestyle changes over the medium term (e.g., buying a bus pass / shopping closer to home

►Over the long run –> they might make even bigger changes

►When they need to buy a new car, for example, they will be inclined to buy a model that offers high gas mileage

► If they move to a new job or home, they may place more weight than in the past on commuting distance.

Question 6

Supply side:

Answer 6

producers will also be able to increase production (be more elastic over the long run

►Because a higher price gives suppliers an incentive to produce more, they may invest in oil exploration, dig new wells, or take steps to increase the pumping capacity of existing wells