econ final elzenga section 12 Flashcards
Factors that affect the number of substitutes a good has:
o Time period being considered-there are more substitutes in the long run than short run; more elastic in long run
o Degree to which a good is a luxury-luxury goods have more substitutes
o The market definition-the more defined a good is the more elastic it is
o The importance of the good in one’s budget-the larger portion of a budget the good represents, the more elastic it is
Elasticity of Demand > 1
Price and Revenue move in opposite directions; don’t change price
Elasticity of Demand < 1
Price and Revenue move in same direction
Elasticity of Demand = 1
Revenue doesn’t change
Price Discrimination:
when firms separate out people with less elastic demand and charge them a higher price
Income elasticity of demand:
the percentage change in demand divided by the percentage change in income; tells the responsiveness of demand changes to changes in income
Inferior goods:
goods whose consumption decreases when income increases; negative income elasticity
Luxuries:
goods that have an income elasticity greater than 1
Necessity:
a good that has an income elasticity between 0 and 1
Cross price elasticity of demand:
the percentage change in demand divided by the percentage change in the price of a related good
Substitutes:
goods that can be used in place of one another; positive cross price elasticity of demand
Complements:
goods that are used in conjunction with other goods; cross price elasticity will be negative
Elastic Demand
when to not raise prices
Deadweight loss:
the loss of consumer and producer surplus from a tax
Welfare loss triangle:
a geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from supply and demand equilibrium
Shared by Consumers and Producers (uneven to whichever is more inelastic)
When demand is elastic and supply is elastic, this group bears the burden of taxation
Difference between taxes and price controls:
o Price ceilings create shortages, taxes don’t
o Price controls often create black markets, taxes can but don’t often
Rent-seeking activities:
activities designed to transfer surplus from one group to another
General rule of political economy:
small groups that are significantly affected by a government policy will lobby more effectively than large groups that are equally affected by the same policy
Choose to consume an additional unit of good x
If (MUx/Px) > (MUy/Py)
General Utility-maximizing rule:
(MUx/Px) = (MUy/Py) = (MUz/Pz)
Income effect:
reduction in quantity demanded because we are poorer
Substitution Effect:
the reduction in quantity demanded because relative price has risen
Opportunity Cost:
the benefit forgone of the next-best alternative
