exam 2 Flashcards
elasticity equation
EvD= (%Delta QD)/(%DeltaP)
traditional method calculating elasticity
%delta QD= (Q1-Q0)/Q0
%deltaP= P1-P0/P0
mid-point method
%change QD = (Q1-Q0)/ (Q1+Q0)/2
%change price = (P1-P0)/(P1+P0)/2
what is the relationship between price, quantity, and total revenue?
When price increases, it will raise total revenue, however quantity will consequently decrease which will decrease total revenue.
what is the area of a graph associated with TR?
the area beneath the equilibrium lines
what relationship do price and quantity have ?
They have an inverse relationship
if demand is elastic, what happens when price changes to the total revenue?
when price increases, total revenue falls
when price decreases, total revenue rises
(Inverse relationship)
if demand is inelastic, what happens to total revenue when price changes?
when price increases, total revenue rises
when price decreases, total revenue falls
(positive relationship)
what is price elasticity in supply?
measures the responsiveness of producers (sellers) to changes in price
has the same categories as demand
- elastic, inelastic and unit
how do we tell if a supply is inelastic?
0<Es<1 inelastic supply
-supply is unresponsive to changes in price
how do we tell is a supply is unit elastic?
Es=1 unit supply
how do we know that a supply is elastic?
Es>1 elastic supply
-supply is responsive to changes in price
what are some determinants of supply elasticity?
flexibility of sellers…fixed amount of production leads to inelastic supply
time horizon: short run (inelastic supply) vs long run (elastic supply)
*see graph on lecture 26, slide 15
what is a price floor?
a minimum on the price at which a god can be sold
minimum wage
price ceiling
a maximum on the price at which a good can be sold
rent coltron/stabilized
what do taxes do?
They discourage economic activities
tax on sellers on a graph
look up lol
how does tax affect market outcomes?
graph
what is a tax burden?
how does tax affect market outcomes
what is WTO
a buyers willingness to pay for a good
-maximum amount the buyer will pay for that good
-how much the buyer values the good
what is consumer surplus and how do we find it?
wilingness to pay-price
amount a buyer is wiling to pay minus the amount the buyer actually pays
wilingness to sell WTS
the value of everything a seller must give up to produce a good
producer surplus
price-wilingness to sell
price of the good/service minus the amount a seller is wiling to sell for it
market efficiency: total surplus
CS+PS= total surplus
CS= value to buyers -amount paid by buyers
-buyers gains from participating in the market
PS= amount received by sellers-cost to sellers
-sellers’ gains form participating in the market
when is the market efficient?
when we reach the maximum total producer surplus
what are examples of market inefficiency?
what determines the deadweight loss?
what is the best tax rate?
