Topic 3.3 Flashcards
Define reservation price for a) a buyer and b) a seller?
a) the maximum price they will pay for a good
b) the minimum price they will accept for a good
See top of page 2 about discreet goods and learn it
What is the area under the DC equal to?
now
gross benefit
Define gross benefit?
Utility from consuming goods
Why do we use a demand curve for continuous goods?
Difficult to estimate the reservation-price curve for a continuous good
What is is meant by consumer’s surplus measure of net utility gain?
It means approximating the net utility gain area under the RP curve by the corresponding area under the normal demand curve
What is the difference between the RP curve and the DC due to? When is there no difference between them?
Due to income effects
BUT if consumer’s utility function is quasilinear in income then there’s no difference (see slide 95)
Market demand curve = ?
Horizontal sum of individual consumers demand curves (see and draw diagrams in notes)
Why is there sometimes a kink in the market demand curve?
Since there are no negative quantities of goods, therefore at some levels of quantity consumers will demand none rather than -ve -> kink
What does elasticity measure?
The ‘sensitivity’ of one variable wrt another
Advantage of using elasticity measure?
It is a ratio of percentages tf has no units
Draw diagram showing the change in absolute value of PED at different points?
See notes
What happens to revenue if you increase price when PED is:
a) between 0 and -1
b) equal to -1
c) less than -1
a) inelastic tf increase p -> increase rev
b) unit elasticity tf no change in rev
c) elastic tf decrease in rev
Define PED?
A measure of responsiveness of demand after a change in products own price
What happens to marginal revenue when PED is:
a) between 0 and -1
b) equal to -1
c) less than -1
a) MR<0
b) MR=0
c) MR>0
See market equilibrium bit in notes
now
How are P and Q determined when:
a) normal D and S curves
b) S is fixed and independent of p
c) S is very sensitive to change in p?
a) when Q(d)=Q(s)
b) DC determines price, supply determines quantity
c) equilibrium price determined by supply curve
See
Slides 119-120 and check i know definitions for PS, CS and TS
Define quantity tax? What is it called if its levied on sellers? and on buyers?
A rate t of tax is paid on each unit traded
Sellers - Excise tax
Buyers - Sales tax
What determines the incidence of a tax?
The own-price elasticity of the supply and demand curves
Tf doesn’t make a difference if an excise or sales tax is levied if they are levied at the same rate t
How do excise taxes and sales taxes affect the D and S diagram? Draw both diagrams
Excise shifts market supply left
Sales shifts market demand down
See notes for diagrams
See and learn algebraic quantity taxes and market eq, also see slides 129-134
Now
Define tax incidence?
The division of tax between buyers and sellers
Note
The fraction of a Q tax t paid by buyers rises as supply becomes more own-price elastic or as demand becomes more own-price elastic (and vice versa)
What does a quantity imposed on a competitive market do?
It reduces the quantity traded and tf reduces the gains-to-trade
Define gains-to-trade?
The increase in total surplus arising from lower taxes or otherwise liberalizing trade
Gains to trade = ?
The sum of CS, PS and tax collected by government
When elasticity of demand=0, what will be the DWL when a quantity tax is imposed?
0 (show in a diagram)
When elasticity of supply=0, what will be the DWL when a quantity tax is imposed?
0 (show in a diagram)
as PED/PES becomes more elastic, the DWL from a quantity tax will increase
Draw diagrams and explain how a price ceiling/rationing may affect a market and welfare?
Now (see notes)
price of a ration coupon=pe(1)-pc
What does a ration coupon do?
Allows each consumer to purchase a certain amount of a product
