elasticity, surplus and tax/subsidies Flashcards
define price elasticity
the responsiveness of demand to a change in price.
it is not the slope of the demand function - that is the actual change. we are looking at the ration of relative changes between the quantity and price. the slope is constant where as elasticity falls from 0 to - infinity
the negative is just normally ignored
how do you calculate price elasticity ?
change Q/ change P . P/Q
differential DQ/DP
what are the characteristics of price elasticity ?
a. 3p < -1
b. 3p = -1
c. 0 > 3p > -1
a. elastic
b. unitary
c. inelastic
what are the components of the demand function
Qd = a - bp
a. + constants
b. price
c. slope
d. choke price
a. a and b
b. p
c. b
d. a/b
- choke price is the p where Q = 0 ( x axis intercept )
how does elasticity effect total revenue ?
elastic - fall in Q > rise in price - TR falls
inelastic - fall in Q < rise in price - TR rises
what are the determinants of Ped
- availability of substitutes
- necessity vs luxury goods
- proportion of income
- time
what does a linear demand curve look like compared to a constant elasticity of demand curve ?
a linear demand curve is a negatively sloped straight line.
at the top curve the 3 = - infinity
in the middle 3 = -1
at the bottom of the curve 3 = 0
a constant demand curve is a convex curve with the bottom of the curve tilted towards the origin
the elasticity is obviously the same at every point on the curve = -b
how do demand and supply change in the LR ?
in the LR the suppliers and consumers can fully adjust based on their decisions after changes in prices. in the SR they are unable to fully adjust.
define a durable good, and how the durability of a good effects its price elasticity ?
a good that provides a service/usefullness over many years.
consumers can delay the purchase of a durable good in the SR and therefore it is more elastic.
how do you calculate :
a. Price elasticity of Supply
b. income elasticity
c. cross price elasticity
a. change in Qs / change in P . P/Qs
b. change Qd / change Y . Y/Qd
c. change Qd1 / change P2 . P2/Qd1
when you know the price, Qd, 3 and the demand function,but a is unknown, how do you calculate a ?
you find the price elasticity in terms of b and then solve to find the value of b.
then you substitute b into the demand function and solve to find a
define consumer surplus ?
the difference between what the consumer is willing to pay and what they actually pay. the net economic benefit to the consumer due tot a purchase they have made.
on a diagram it is the space under the demand curveand above the price.
define producer surplus ?
the difference between the price that producers would be willing to sell at and the price they actually sell at ( the market price ).
on a diagram it is the space above the supply curve and below the price.
define and give examples of TAXES
it is a cost levied by the government on : profit, goods\services or transactions in order to discourage the production and consumption of a creation good/service.
if the tax is levied onto a good/service, the seller may chose to absorb the cost or pass it onto the consumer via a raise in prices. this is dependent on how the producer believes the raise in price will effect their profits and objectives.
define and give examples of SUBSIDIES
a grant given by the government to consumers of producers in order to encourage the production or consumption of a good/service.
when the subsidies is given, normally both parties benefit no matter who is granted it.
