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Econ > Unit 3: Price Elasticity > Flashcards

Unit 3: Price Elasticity Flashcards

1
Q

Price elasticity

A

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

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2
Q

Price elasticity of demand

A

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

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3
Q

Necessity good

A

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

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4
Q

Luxury good

A

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

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5
Q

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

A

Decrease in price increases QD, Increases in total revenue

Increase in price decreases QD, Decreases total revenue

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6
Q

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

A

Decrease in price increases QD, Increases in total revenue

Increase in price decreases QD, Decreases total revenue

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7
Q 
Ratio of change-elastic or inelastic?
Greater than 1
Less than 1
=1
0
Undefined/infinity
A 
Elastic
Inelastic
Unit elastic
Perfectly inelastic (vertical line)
Perfectly elastic (horizontal line)
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8
Q

Ratio of change-substitutes or complements?

+,-

A

+: substitute

-: complement

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9
Q

Ratio of change-normal good or inferior good?

+,-

A

+: normal

-: inferior

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10
Q

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

A

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

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11
Q

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

A

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

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12
Q

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

A

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

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13
Q

A good is unit elastic if

A

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

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

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14
Q

A good is elastic if

A

increase in price-decrease in Qd-decrease in TR

decrease in price-increase in Qd-increase in TR

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15
Q

A good is inelastic if

A

increase in price-decrease in Qd-increase in TR

decrease in price-increase in Qd-decrease in TR

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16
Q

TR=

A

P x Q

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17
Q

Price celiling

A

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

18
Q

Price floor

A

a legal minimum price for which a good can be sold

19
Q

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

A

Has to be BELOW in order to be binding

Creates a shortage

20
Q

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

A

Has to be ABOVE in order to be binding

Creates a surplus

21
Q

Consumer surplus

A

Difference between the resource costs and price that consumer pays

22
Q

Producer surplus

A

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

23
Q

Total surplus

A

(consumer surplus) + (producer surplus)

24
Q

Efficient market

A

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

25
Q

Changes in price affecting CS and PS

A

Price increases-CS decreases-PS increases

Price decreases-CS increases-PS decreases

26
Q

Taxes in a perfectly competitive market

A
  • 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
27
Q

efficiency vs. equity

How do price controls affect both?

A

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

28
Q

Lump-sum tax

A

a tax that is an equal quantity for every person

ex. everyone pays $50, tax with cars, city tax/overnigh tax (tourism)

29
Q

Progressive tax

A

a tax that increases in % as income rises

ex. high income pays 40%, low income pays 30%

30
Q

Regressive tax

A

a tax that decreases in percentage as income rises

ex. high income pays 20%, low income pays 30%

31
Q

Proportional tax (flat tax)

A

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

32
Q

The Laffer curve

A

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

33
Q

Price elasticity of supply

A

change % in QS/change % in price

34
Q

Why is a price floor ineffective under the equilibrium price?

A

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

35
Q

Why is a price ceiling ineffective above the equilibrium price?

A

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

36
Q

Are price controls inefficient even if they are not binding

A

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

37
Q

Deadweight loss

A

Fall in total surplus due to market distortion

38
Q

Why is an effective price control inefficient?

A

Because it causes deadweight loss

39
Q

What happens to consumer surplus when price increases?

A

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

40
Q

What happens to producer surplus when price increases?

A

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

Econ (14 decks)

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