Unit 3: Price Elasticity

Question 1

Price elasticity

Answer 1

The measure of the responsiveness to the percent chance in quantity demanded or supplied to changes in price
Or how much more or less someone is going to buy/sell something when price changes

Question 2

Price elasticity of demand

Answer 2

Measurement of how much the quantity demanded responds to a change in price

Question 3

Necessity good

Answer 3

A good for which consumption tends to show a little to no response to change in price (ex. Epi pen)

Question 4

Luxury good

Answer 4

A good for which consumption tends to show a significant response to a change in price (ex. Pizza)

Question 5

When a good is elastic, what happens to price, QD and total revenue?

Answer 5

Decrease in price increases QD, Increases in total revenue

Increase in price decreases QD, Decreases total revenue

Question 6

When a good is inelastic, what happens to price, QD and total revenue?

Answer 6

Decrease in price increases QD, Increases in total revenue

Increase in price decreases QD, Decreases total revenue

Question 7

Ratio of change-elastic or inelastic?
Greater than 1
Less than 1
=1
0
Undefined/infinity

Answer 7

Elastic
Inelastic
Unit elastic
Perfectly inelastic (vertical line)
Perfectly elastic (horizontal line)

Question 8

Ratio of change-substitutes or complements?

+,-

Answer 8

+: substitute

-: complement

Question 9

Ratio of change-normal good or inferior good?

+,-

Answer 9

+: normal

-: inferior

Question 10

How to calculate price elasticity of demand
QD<1
QD>1

Answer 10

change in % QD/ % change in price
QD<1: INELASTIC
QD>1: ELASTIC

Question 11

How to calculate cross price elasticity of demand
QD<1
QD>1

Answer 11

change % QD of good A/ Change % price of good B
QD<1: INELASTIC, substitutes
QD>1: ELASTIC, complements

Question 12

How to calcuate income elasticity of demand
QD<1
QD>1

Answer 12

change % QD/change % Income
QD<1: INELASTIC, inferior
QD>1: ELASTIC, normal

Question 13

A good is unit elastic if

Answer 13

decrease in price-increase in Qd-no change in TR

increase in price-decrease in !d-no change in TR

Question 14

A good is elastic if

Answer 14

increase in price-decrease in Qd-decrease in TR

decrease in price-increase in Qd-increase in TR

Question 15

A good is inelastic if

Answer 15

increase in price-decrease in Qd-increase in TR

decrease in price-increase in Qd-decrease in TR

Question 16

TR=

Answer 16

P x Q

Question 17

Price celiling

Answer 17

a legal maximum on the price at which a good can be sold

Question 18

Price floor

Answer 18

a legal minimum price for which a good can be sold

Question 19

If the price ceiling is ABOVE or BELOW equilibrium, is it binding or not binding?
Does a binding ceiling create a shortage or surplus?

Answer 19

Has to be BELOW in order to be binding

Creates a shortage

Question 20

If the price floor is ABOVE or BELOW equilibrium, is it binding or not binding?
Does a binding ceiling create a shortage or surplus?

Answer 20

Has to be ABOVE in order to be binding

Creates a surplus

Question 21

Consumer surplus

Answer 21

Difference between the resource costs and price that consumer pays

Question 22

Producer surplus

Answer 22

(amount seller is paid for a good) - (what the seller is willing to sell at)

Question 23

Total surplus

Answer 23

(consumer surplus) + (producer surplus)

Question 24

Efficient market

Answer 24

market that is opperating at the price and quantity with the most total surplus
aka allocatively efficient

Question 25

Changes in price affecting CS and PS

Answer 25

Price increases-CS decreases-PS increases | Price decreases-CS increases-PS decreases

Question 26

Taxes in a perfectly competitive market

Answer 26

- taxes are almost always split between producer and consumers (except if S or D is perfectly elastic/inelastic) - burden on tax falls more heavily on the part of the market that is more inelastic

Question 27

efficiency vs. equity | How do price controls affect both?

Answer 27

efficientcy: maximizing total surplus received by all members of society equity: fairness of distribution of well-being among society Price contrls DECREASE efficiency but INCREASE equity

Question 28

Lump-sum tax

Answer 28

a tax that is an equal quantity for every person | ex. everyone pays $50, tax with cars, city tax/overnigh tax (tourism)

Question 29

Progressive tax

Answer 29

a tax that increases in % as income rises | ex. high income pays 40%, low income pays 30%

Question 30

Regressive tax

Answer 30

a tax that decreases in percentage as income rises | ex. high income pays 20%, low income pays 30%

Question 31

Proportional tax (flat tax)

Answer 31

a tax for which each taxpayer pays an equal proportion of their income ex. everyone pays 10% of their income in taxes

Question 32

The Laffer curve

Answer 32

the idea that at a certain point, decreasing the tax % actually increases tax revenue

Question 33

Price elasticity of supply

Answer 33

change % in QS/change % in price

Question 34

Why is a price floor ineffective under the equilibrium price?

Answer 34

Forces of S and D will keep price at equilibrium above the floor, so a minimum is not needed

Question 35

Why is a price ceiling ineffective above the equilibrium price?

Answer 35

Forces of S and D will keep price at equilibrium below ceoiling so maximum is not needed

Question 36

Are price controls inefficient even if they are not binding

Answer 36

No, they're still efficient because they do not cause deadweight loss if they are not binding

Question 37

Deadweight loss

Answer 37

Fall in total surplus due to market distortion

Question 38

Why is an effective price control inefficient?

Answer 38

Because it causes deadweight loss

Question 39

What happens to consumer surplus when price increases?

Answer 39

It decreases because consumers are no longer saving as much money with their purchases as price has increased

Question 40

What happens to producer surplus when price increases?

Answer 40

Increases because price has increased and costs have stayed the same, so profits decrease