Unit Three Flashcards
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
Necessity
A good for which consumption tends to show a little to no response to a change in price
Aka necessity good
Luxury good
A good for which consumption tends to show a significant response to a change in price
Total revenue
Money flowing into a firm from sale of a given quantity
TR = price of a good x quantity sold
OR
TR = PQ
Total revenue test
Used to determine if a good is price elastic or inelastic
Compares changes in price to changes in total revenue
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
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
Price elasticity of demand
Percent change in quantity demanded / percent change in price OR
change in x-axis (run) / change in y-axis (rise)
Coefficients in relation to elasticity
>1 is elastic <1 is inelastic =1 is unit elastic 0 is perfectly inelastic Undefined/infinity is perfectly elastic
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
Income elasticity of demand
Percent change in quantity demanded / percent change in income
Positive answer = normal good
Negative answer = inferior good
Normal or inferior
Price elasticity of supply
Percent change in quantity supplied / percent change in price
Price up Qd down TR up
Price up Qd down TR down
Price up Qd down TR no change
Inelastic, elastic, unit elastic
Price down Qd up TR up
Price down Qd up TR down
Price down Qd up TR no change
Elastic, inelastic, unit elastic
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
Perfectly elastic
Fixed price
Horizontal line
Perfectly inelastic
Fixed quantity
Vertical line
Regardless of price, fixed quantity
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
