Q4-Price Controls and Elasticity Flashcards
define elasticity
Elasticity measures the reaction of consumers to price changes; more specifically elasticity measures the responsiveness of quantity demanded to a change in price
What makes a product inelastic?
even if price increases, demand barely changes
What makes a product elastic?
demand changes greatly with a price change
What are the factors that determine Elasticity?
- availability of substitutes
- importance/percentage of budget
- durability
- time frame
- necessitie vs. luxuries
What is the formula to find elasticity?
[percentage change in quantity demanded] / [percentage change in price]
When is a product inelastic, in terms of elasticity (number)?
Less than one
When is a product elastic, in terms of elasticity(number)?
More than 1
When the elasticity value is 1 the product is _______
unitary elastic
When the elasticity value is 0 the product is _________
perfectly inelastic
when the elasticity value is infinite the product is ________
perfectly elastic
What is a perfectly competitive market?
a market with no dominant firms
the market system is also known as the ____________
Price System
The Market system performs what two important functions?
- price rationing
- resource allocation
Define price rationing
process by which the maret system allocates goods and services to consumers when quantity demanded exceed quantity supplied
Why are price controls implemented?
Correct what is seen as an undesirable market
Who introduces price controls?
government
Define price ceilings and give an example
Price ceiling is a maximum price that sellers may charge for a goof usually set by government
- ex. rent control, national emergencies
Price ceilings cause _______
shortages
What are some examples of non-price rationing systems?
queuing, producers preference, rationing coupons
What’s the problem with non-price rationing systems?
excess demand is controlled but not eliminated
Define price floors and give an example
minimum prie that sellers may charge for a good, usually set by governemnt
-ex. agriculture, minimum wage
Price floors cause ________
surpluses
How do you get rid of a surplus?
- store it
- convert it
- sell it abroad at reduced price (can be termed dumping and can be illegal)
- donate it
- destroy it
