Unit Three Flashcards by Kate Lester

Price elasticity

The measure of the responsiveness of the percent change in quantity demanded or quantity supplied to changes in price
OR
How much more or less someone is going to buy/sell of something when prices change
Q = (elasticity) x (price) + B

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Necessity

A good for which consumption tends to show a little to no response to a change in price
Aka necessity good

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Luxury good

A good for which consumption tends to show a significant response to a change in price

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Total revenue

Money flowing into a firm from sale of a given quantity
TR = price of a good x quantity sold
OR
TR = PQ

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Total revenue test

Used to determine if a good is price elastic or inelastic

Compares changes in price to changes in total revenue

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Elastic

A good is elastic if:
Decrease in price —> increase in quantity demanded —> increase in total revenue
Increase in price —> decrease in quantity demanded —> decrease in total revenue

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Inelastic

A good is inelastic if:
Decrease in price —> increase in quantity demanded —> decrease in total revenue
Increase in price —> decrease in quantity demanded —> increase in total revenue

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Price elasticity of demand

Percent change in quantity demanded / percent change in price OR
change in x-axis (run) / change in y-axis (rise)

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Coefficients in relation to elasticity

>1 is elastic
<1 is inelastic
=1 is unit elastic
0 is perfectly inelastic
Undefined/infinity is perfectly elastic

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Cross price elasticity of demand

Percent change in quantity demanded of good A / percent change in price of good B
Positive answer = substitutes
Negative answer = complements
Cross price = compares two goods, find out if subs or comps and strength of relationship

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Income elasticity of demand

Percent change in quantity demanded / percent change in income
Positive answer = normal good
Negative answer = inferior good
Normal or inferior

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Price elasticity of supply

Percent change in quantity supplied / percent change in price

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Price up Qd down TR up
Price up Qd down TR down
Price up Qd down TR no change

Inelastic, elastic, unit elastic

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Price down Qd up TR up
Price down Qd up TR down
Price down Qd up TR no change

Elastic, inelastic, unit elastic

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Unit elasticity

A good is unit elastic if
Decrease in price —> increase in Qd —> no change in total revenue
Increase in price —> decrease in Qd —> no change in total revenue
One to one slope

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Perfectly elastic

Fixed price

Horizontal line

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Perfectly inelastic

Fixed quantity
Vertical line
Regardless of price, fixed quantity

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Price ceiling

A legal maximum price for which a good can be sold

A binding ceiling can create a shortage (Qs

Binding price ceiling

Price control below equilibrium point

Price floor

A legal minimum price for which a good can be sold

A binding price floor can create a surplus (Qs>Qd)

Binding price floor

Price control above equilibrium point

Product markets

Consumers = demanders
Producers = suppliers

Consumer surplus

(Amount buyer is willing to pay) - (amount buyer actually pays)

Consumer surplus in a perfectly competitive market for a good/service

The portion of the demand curve above the equilibrium price represents consumers who are receiving surplus

Cost

What is given up to produce a good | Includes opportunity costs

Producer surplus

(Amount seller is paid) - (lowest amount seller is willing to sell at)

Producer surplus in a perfectly competitive market for a good/service

The portion of the supply curve below the equilibrium price represents producers who are receiving surplus

Total surplus

(Consumer surplus) + (producer surplus)

Efficient market

Market that is operating at the price and quantity with the most total surplus OR Market that is operating with "allocative efficiency" (at equilibrium) P up, CS down, PS up P down, CS up, PS down

Deadweight loss

The fall in total surplus due to a market distortion -government control (price control, taxes) -market power -externalities Occurs because the market is not at equilibrium

Taxes in perfectly competitive markets

Taxes are almost always split between producers and consumers -exception: perfectly elastic/inelastic demand or supply The burden of the tax falls more heavily on the part of the market that is more inelastic

Graphing taxes in perfectly competitive markets

Tax wedge | Tax is the rectangle formed by the lines of the CS, PS, and DWL

Efficiency vs equity

In economics there is a trade off between efficiency and equity Ex. Taxes make it so people in society can be allocated certain resources, however it disrupts market efficiency

Lump-Sum Tax

A tax that is an equal quantity for every person (ex. everyone pays $50) Ex. Excise taxes with cars, city tax/overnight tax—tourist cities people pay 1-4 euros/night)

Progressive tax

A tax that increases in percentage as income rises | Ex. High income pays 40%, low income pays 30%

Regressive tax

A tax that decreases in percentage as income rises | Ex. High income pays 20%, low income pays 30%

Proportional tax

A tax for which each taxpayer pays an equal proportion of their income

Laffer curve

The idea that at a certain point decreasing tax percentage actually increases tax revenue Applies the concept of elasticity to taxes Looks like an upside down parabola

Demand curve elasticity

Top is elastic, middle is unit elastic, bottom is inelastic

Are supply and demand more elastic in the short run or long run

More elastic in the long run more inelastic in the short run

Deadweight loss in relation to elasticity of supply and/or demand

More elastic means more deadweight loss

Excise tax

A sales tax (tax on consumption). Affects demand, but will be split between producers and consumers in almost all instances

Purchasing power

The amount of goods a consumer can purchase with their income

Expenditure

Spending