Elasticity, Microeconomic Policy, and Consumer Theory

Question 1

elasticity

Answer 1

the measure of the sensitivity of a thing (such as demand or supply) to change in an external factor

Question 2

price elasticity of demand

Answer 2

the sensitivity of consumer demand for a given good when the price of that good changes

Question 3

price elasticity of demand formula

Answer 3

E~d = (%change in Q~d) / (%change in price)

Question 4

price elastic demand

Answer 4

when E~d > 1, aka when % change in Q~d is greater than % change in P

Question 5

price inelastic demand

Answer 5

when E~d < 1, aka when % change in Q~d is less than % change in P

Question 6

unit elastic demand

Answer 6

when E~d = 1, aka when the % change in Q~d is equal to % change in P

Question 7

perfectly inelastic

Answer 7

when E~d = 0; in this case, the demand curve is vertical and there is absolutely no change in the quantity demand, regardless of the price

Question 8

perfectly elastic

Answer 8

when E~d = infinity; in this case, the demand curve is horizontal and there is an infinitely large change in the amount of demand as price increases

Question 9

slope and elasticity

Answer 9

in general, the more vertical a good’s demand curve, the more inelastic the demand for that good; the more horizontal a good’s demand curve, the more elastic the demand for that good; despite this generalization, elasticity and slope are still not equivalent measures

Question 10

determinants of elasticity

Answer 10

if a good has more readily available substitutes (luxuries vs. necessities), it is likely that consumers are more price elastic for that good; if a high proportion of a consumer’s income is devoted to a particular good, consumers are generally more price elastic for that good; over larger periods of time, consumer response is oftentimes more elastic

Question 11

total revenue

Answer 11

TR = P * Q~d

Question 12

total revenue test

Answer 12

total revenue generally rises with a price increase if demand is price inelastic and falls with a price increase if demand is price elastic

Question 13

elasticity and demand curves

Answer 13

at the midpoint of a linear demand curve, E~d =1; above the midpoint demand is elastic and below the midpoint demand is inelastic

Question 14

income elasticity

Answer 14

a measure of how sensitive consumption of a given good is to a change in the consumer’s income

Question 15

income elasticity formula

Answer 15

E~i = (%change in Q~d) / (% change in income)

Question 16

luxury

Answer 16

a good for which income elasticity is greater than 1

Question 17

necessity

Answer 17

a good for which the income elasticity is above zero, but less than one

Question 18

values of income elasticity of demand

Answer 18

if E~i > 1, the good is normal and a luxury; if 1 > E~i > 0, the good is normal and income inelastic; if E~i < 0, the good is inferior

Question 19

cross-price elasticity of demand

Answer 19

a measure of how sensitive consumption of a given good is in response to a change in the price of another good

Question 20

cross-price elasticity formula

Answer 20

E~xy = (% change in Q~D good X) / (% change in price of good Y)

Question 21

values of cross-price elasticity of demand

Answer 21

if E~xy > 0, goods X and Y are substitutes; if E~xy < 0, goods X and Y are complementary

Question 22

price elasticity of supply

Answer 22

the measure of the sensitivity of a quantity supplied of a given good when the price of that good changes

Question 23

price elasticity of supply formula

Answer 23

E~s = (% change in Q~S) / (% change in P)

Question 24

excise tax

Answer 24

a per unit tax on production that results in a vertical shift in the supply curve by the amount of the tax

Question 25

incidence of tax

Answer 25

the proportion of the tax paid by consumers in the form of a higher price for the taxed good is greater if demand for the good is inelastic and supply is elastic

Question 26

dead weight loss

Answer 26

the lost net benefit to society caused by a movement away from the competitive market equilibrium as a result of outside intervention; policies like excise taxes create lost welfare to society

Question 27

subsidy

Answer 27

how the opposite effect of an excise tax, as it lowers the marginal cost of production, resulting in a downward vertical shift in the supply curve a given good

Question 28

price floor

Answer 28

a legal minimum price below which the product cannot be sold; if a floor is installed at some level above the equilibrium price, it creates a permanent surplus

Question 29

price ceiling

Answer 29

a legal maximum price above which the product cannot be sold; if a ceiling is installed at some level below the equilibrium price, is creates a permanent shortage (not necessarily manifested in decreased number of units, could be manifested in decreased value of units)

Question 30

utility

Answer 30

happiness, benefit, satisfaction, or enjoyment gained from consumption

Question 31

total utility

Answer 31

total happiness received from the consumption of a number of units of a good

Question 32

marginal utility

Answer 32

the incremental happiness received from consumption of a number of units of a good

Question 33

utils

Answer 33

a unit of measurement often used to quantity utility; it has no set value

Question 34

Law of Diminishing Marginal Utility

Answer 34

in a given time period, the marginal (additional) utility from consumption of more and more of that item falls

Question 35

constrained utility maximization

Answer 35

constrained by price and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal benefit received

Question 36

utility maximizing rule

Answer 36

the consumer maximizes utility when they choose amounts of goods with their limited income so that the marginal utility per dollar spent is equal for all goods; for example, for goods X and Y:

MU~X / P~X = MU~Y / P~Y
or
MU~X / MU~Y = P~X / P~Y

Question 37

horizontal summation

Answer 37

the process of adding, at each price, the individual quantities demanded to find the market demand curve for a good