Section 9 Flashcards
Substitution Effect
the change in the price of a good is the change in the quantity of that good demanded as the consumer substitutes the good that has become relatively more expensive
Income Effect
The change in price of a good is the change in the quantity of the good demanded that results from a change in the consumer’s purchasing power when the price of the good changes.
Giffen Goods
Good that has a demand slope upward not downward
Inferior good
a good for which demand increases when income falls
Price Elasticity of Demand
the ratio of the percent change in quantity to the percent change in the price dropping the minus sign
Midpoint method
%change in QD over %change in Price
***When doing the % change its New-Old over Average of both
Demand is Perfectly Inelastic
the Quantity demanded does not respond at all to the changes in the price
Vertical line, Slope is undefined
Demand is Perfectly Elastic
Any price increase will cause the quantity demanded to drop to zero. Horizontal line Slope is 0
Elasticity of demand- Relatively Elastic
if the Price elasticity of demand is greater than one
Elasticity of demand- Relatively Inelastic
If the Price Elasticity is less than one
Elasticity of demand- Unit-elastic
If the Price Elasticity id exactly one
Total Revenue
Total Value of the sales of a good or service. It is equal to the price multiplied by the quantity sold.
What factor determine the price
Close substitutes
Necessity or a Luxury
Share of Income
Time
Cross-price elasticity of demand
the effect of change in one good’s price on the quantity of the other good. It is equal to the percent change in QD of one good decided by the percent change in the other good’s price.
Income Elasticity of Demand
is the percent change in the quantity of a good demanded when a consumer’s income changes divided by the percent change in the consumer’s income.
Income- Elastic
If the income elasticity of demand for that good is greater than one.
Income - Inelastic
If the income elasticity for a good is greater than 0 but less than one
The price elasticity of supply
the measure of the responsiveness of the quantity of a good supplied to the price of that good. It is the ratio of the percent change in the quantity supplied to the percent change in price as we move along the supply curve
Perfectly inelastic supply
when the price elasticity of supply is zero so that changes in the price of a good have no effect on the quantity supplied
Vertical line
Perfectly Elastic Supply
If the quantity supplied is zero below some price and infinite above that price
Horizontal line
Factors that determine the Price elasticity of Supply
Availability of inputs
Time
Individual consumer surplus
net gain to an individual buyer from the purchase of a good it is equal the difference between the buyers willingness to pay and the price paid
Individual Producer surplus
is the net gain to an individual seller from selling a good. it is equal to the difference between the price received and the seller’s cost.
Total Surplus
Is the total net gain to consumers and producers from trading in a market it is the sum of producer and consumer surplus
Progressive tax
rises more than in proportion to income
Regressive tax
rises less than in proportion to income
Proportional tax
rises in proportion to the income
excise tax
tax on sales if a particular good or service
Tax incidence
distribution of the tax burden
Administrative cost
the resources used by the government to collect the tax used by government to collect the tax and by taxpayers to pay it over and above the amount collected.
Lump-some Tax
tax of a fixed amount paid by all taxpayers.
Utility
the measure of satisfaction
Marginal Utility
the change in total utility generated by consuming one additional unit of that good or service
Optimal Consumption Bundle
maximises total utility
Optimal Consumption Rule
in order to maximize utility a consumer must equate the marginal utility per dollar spent on each good and service in the consumption bundle
MUx/Px= MUy/Py
