Chapter 6.2: Supply, Demand and Govt policies

Question 1

How does tax on buyers affect the market?

Answer 1

-supply curve isn’t affected
-the demand curve shifts to the left/ downward (buyers demand less of a product)
-the demand curve shifts down by the amount of tax levied on the buyers
-the price sellers receive fall, the price buyers pay (with tax) rises
-sellers sell less, buyers buy less (as the price falls the equilibrium quantity falls)
-buyers and sellers share tax burden

Question 2

How does tax on sellers affect the market?

Answer 2

-the demand curve stays the same
-the supply shifts to the left/upward (sellers make less profit and quantity reduces)
-the supply curve shifts down by the amount of tax
- buyers pay more, the price sellers receive falls (as price increases the equilibrium quantity falls)
-buys and sellers share tax burden

Question 3

when we ask ourselves how is tax burden divided we refer to?

Answer 3

Elasticity

Question 4

how do we calculate price elasticity?

Answer 4

%change in quantity demanded/%change in price

Question 5

a payroll tax places a wedge between

Answer 5

wage that workers receive and the wage a firm pays

Question 6

If supply is Elastic and demand is Inelastic how are sellers and buyers affected?

Answer 6

-supply curve is flat (sellers are responsive to changes in price)
-demand curve is steep (buyers are not responsive to price changes)
-sellers bear only small burden, buyers bear most burden

Question 7

is supply in Inelastic and demand is Elastic how are sellers and buyers affected?

Answer 7

-supply curve is steep (sellers aren’t responsive)
-demand curve is flat (buyers are responsive)
-buyers bear only small burden, sellers bear most burden

Question 8

does tax burden fall more heavily on the more/less elastic side?

Answer 8

less elastic side

Question 9

Elasticity measures

Answer 9

the willingness of buyers or sellers to leave the market when conditions become unfavorable

Question 10

a small elasticity of DEMAND means

Answer 10

buyers don’t have good alternatives to a good

Question 11

a small elasticity of SUPPLY means

Answer 11

sellers don’t have good alternatives to producing a good

Question 12

necessities have a

Answer 12

INELASTIC demand

Question 13

luxuries have an

Answer 13

ELASTIC demand

Question 14

Total revenue of price elasticity is calculated by:

Answer 14

price x quantity

Question 15

if good is elastic, a decrease in price _______ revenue and an increase in price would _______ revenue

Answer 15

raise; reduce

Question 16

if TR and P move in the same direction

Answer 16

Inelastic

Question 17

is TR and P move in opposite directions

Answer 17

Elastic

Question 18

if a good is inelastic, a decrease in price would _________ revenue and an increase in price would _________ revenue

Answer 18

reduce;raises

Question 19

normal goods= ___________ income elasticity

Answer 19

positive

Question 20

inferior goods = ____________ income elasticity

Answer 20

negative

Question 21

how can we calculate elasticity of a supply curve

Answer 21

% change in quantity supplied/ % change in price
-product is greater than/ equal to 1=elastic
-less than 1=inelastic

Question 22

apples and oranges are substitutes, if a portion of apples were destroyed the price or apples and oranges will

Answer 22

increase