Topic 3 - Applications of the Demand and Supply: Positive Considerations Flashcards
What is “Elasticity”?
Elasticity is a measure of how much buyers and sellers will respond to changes in market conditions.
Elasticity is usually considered in respect to a specific condition.
Define “Price Elasticity of Demand”?
Price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good.
How is “Price Elasticity of Demand” calculated?
Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price.
This almost always returns a negative value. So take the magnitude.
What does it mean for something to be “Inelastic”?
This means the elasticity is less than 1.
What does it mean for something to be “Elastic”?
This means the elasticity is greater than 1.
What does it mean for something to be “Perfectly Inelastic”?
This means the elasticity equals 0.
What does it mean for something to be “Perfectly Elastic”?
This means the elasticity tends towards infinity.
What does it mean for something to be “Unit Elastic”?
This means the elasticity is exactly 1.
What is the definition of “Total Revenue”?
Total revenue is the amount paid by buyers and received by sellers of a good, calculated as the price of the good times the quantity sold: TR = P x Q
Define “Income Elasticity of Demand”?
The income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
How is “Income Elasticity of Demand” calculated?
It is calculated by dividing the percentage change in the quantity demanded by the percentage change in income.
What does it mean if the “Income Elasticity of Demand” is greater than 0?
This means that the good is considered a normal good.
What does it mean if the “Income Elasticity of Demand” is less than 0?
This means that the good is considered an inferior good. As a person’s income reduces they are likely to buy more of an inferior good rather than a normal good, leading to an increased demand.
Define “Cross-Price Elasticity of Demand”?
The cross-price elasticity of demand measures how much the quantity demanded of a good changes as the price of another good changes.
How is “Cross-Price Elasticity of Demand” calculated?
Cross-price elasticity of demand is calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in the price of a different good.
What is “Cross-Price Elasticity of Demand” used for?
Cross-price elasticity of demand is used to find the relationship between different goods in a market be they substitutes, complements, or unrelated.
What does it mean if the “Cross-Price Elasticity of Demand” is greater than 0?
This means that the two goods being evaluated are complements to each other. When more of one is bought, it correlates with more of the other being bought.
What does it mean if the “Cross-Price Elasticity of Demand” is less than 0?
This means that the two goods are substitutes for each other. When one good’s price increases people are more likely to find a substitute good to buy instead and vice-versa.
What does it mean if the “Cross-Price Elasticity of Demand” is exactly 0?
The two goods being observed are unrelated.
Define “Price Elasticity of Supply”?
Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good.
How is “Price Elasticity of Supply” calculated?
Price elasticity of supply is calculated by dividing the percentage change in the quantity supplied by the percentage change in price.
What is a “Price Ceiling”?
A price ceiling is a legal limit on the maximum price at which a good can be sold.
What is a “Price Floor”?
A price floor is a legal limit on the minimum price at which a good can be sold.
Rent Control is…
The best way to destroy a city other than bombing.
Define “Tax Incidence”
Tax incidence is the study of who bears the burden of a tax.
How does a tax levied on buyers shift the demand curve?
It shifts the demand curve down by the value of the tax.
How does a tax levied on sellers shift the supply curve?
It shifts the supply curve up by the value of the tax.
How does the quantity traded of an item change after a tax is introduced?
The quantity traded will reduce, as buyers have to pay more per item (reducing demand) and/or sellers receive less per item (reducing supply).
How does the tax incidence relate to who is paying the tax?
It doesn’t, they are independent, as whoever is being taxed changes their behaviour, both sides end up paying the same amount of the tax regardless.
Who does the burden of tax fall more heavily on? Sellers or Buyers?
Whoever has the more inelastic curve. As they have less ability to change behaviour.
