question
Consumer Surplus
answer
Difference between market price and what consumers (as individuals or the market) would be willing to pay
Equal to are above market price and below demand curve
Equal to are above market price and below demand curve
question
Producer Surplus
answer
Difference between market price and the price at which firms are willing to supply the product
Equal to area below market price and above the supply curve
Equal to area below market price and above the supply curve
question
Price Elasticity of Demand
answer
A measure of the responsiveness of quantity demanded to a change in price
Percentage change in Q Demanded
_________________________
Percentage change in Price
Percentage change in Q Demanded
_________________________
Percentage change in Price
question
Elastic Demand
answer
Absolute value of the price elasticity of demands is greater than 1
Responsive to changes in price
Percentage change in quantity demanded is greater than percentage change in price
Ex. Products with many close substitutes, Coke, Pepsi, Scott, Kleenex, Charmin
Responsive to changes in price
Percentage change in quantity demanded is greater than percentage change in price
Ex. Products with many close substitutes, Coke, Pepsi, Scott, Kleenex, Charmin
question
Inelastic Demand
answer
Absolute value of price elasticity of demand is less than 1
Inelastic demands are not very responsive to changes in price
Percentage change in quantity demanded is less than the percentage change in price
Ex. Gas
Inelastic demands are not very responsive to changes in price
Percentage change in quantity demanded is less than the percentage change in price
Ex. Gas
question
Perfectly Elastic
answer
Slightest change in price results in 0 output being sold
Horizontal Line
Horizontal Line
question
Perfectly Inelastic
answer
Quantity demanded does not change at all when price changes
Vertical Line
Vertical Line
question
Unitary Elastic Demand
answer
Absolute value of price elasticity of demand is equal to 1
Percentage change in quantity demanded is just equal to percentage change in price
Percentage change in quantity demanded is just equal to percentage change in price
question
Determinants of Elasticity
answer
Substituability:
More close substitutes or alternatives the easier it is for consumers to switch to a competing product, more elastic the demand
Proportion of Income:
Smaller percent lower the elasticity
Higher the percent great the elasticity
Luxuries VS. Necessities:
Luxury goods have more elastic demand
Necessities more inelastic
Time Period:
Consumer have more time to adjust to consumption pattern style, more elastic
Less time, inelastic
More close substitutes or alternatives the easier it is for consumers to switch to a competing product, more elastic the demand
Proportion of Income:
Smaller percent lower the elasticity
Higher the percent great the elasticity
Luxuries VS. Necessities:
Luxury goods have more elastic demand
Necessities more inelastic
Time Period:
Consumer have more time to adjust to consumption pattern style, more elastic
Less time, inelastic
question
Total Revenue
answer
TR= Q x P
question
Total Revenue Test
answer
Test to determine elasticity of demand between any two prices
ELASTIC if total revenue moves in opposite direction from price
Price Increases TR Decreases
Price Decreases TR Increases
INELASTIC moves in same direction as price
Price Increases TR Increases
Price Decreases TR Decreases
UNIT ELASTIC doesn't change when price changes
Price Increase or Decrease TR doesn't change
ELASTIC if total revenue moves in opposite direction from price
Price Increases TR Decreases
Price Decreases TR Increases
INELASTIC moves in same direction as price
Price Increases TR Increases
Price Decreases TR Decreases
UNIT ELASTIC doesn't change when price changes
Price Increase or Decrease TR doesn't change
question
Cross Price Elasticity
answer
Measures how responsive quantity demanded of one good is to change in price of another good
Substitutes= POSITIVE
Increase in price leads to increase in demand of substitute
Complements= NEGATIVE
Increase in price leads to decrease in demand of complement
Percentage Change in Quantity Demanded of Product A
________________________________________
Percentage Change in Price of Product B
Substitutes= POSITIVE
Increase in price leads to increase in demand of substitute
Complements= NEGATIVE
Increase in price leads to decrease in demand of complement
Percentage Change in Quantity Demanded of Product A
________________________________________
Percentage Change in Price of Product B
question
Income Elasticity of Demand
answer
Measures how responsive quantity demanded is to changes in consumer income
Ex. Normal, Luxury, Inferior Goods
Percentage Change in Quantity Demanded
_______________________________
Percentage Change in Income
Ex. Normal, Luxury, Inferior Goods
Percentage Change in Quantity Demanded
_______________________________
Percentage Change in Income
question
Mid Point Method
answer
...
question
Elasticity of Supply
answer
A measure of responsiveness of quantity supplied to changes in price
ELASTIC > 1
Percentage change in Q supplied greater than percentage change in price
INELASTSIC < 1
Percentage change in Q supplied less than percentage change in price
UNIT ELASTIC = 1
Percentage change in Q supplied is equal to percentage change in price
ELASTIC > 1
Percentage change in Q supplied greater than percentage change in price
INELASTSIC < 1
Percentage change in Q supplied less than percentage change in price
UNIT ELASTIC = 1
Percentage change in Q supplied is equal to percentage change in price
question
Types of Taxes
answer
Taxes decrease quantity supplied, S shifts LEFT
Flat Tax: Constant proportion of one's income
Regressive Tax: Tax that falls in percentage of income as income increases
Lump-Sum Tax: Fixed amount of tax regardless of income, regressive tax
Flat Tax: Constant proportion of one's income
Regressive Tax: Tax that falls in percentage of income as income increases
Lump-Sum Tax: Fixed amount of tax regardless of income, regressive tax
question
Price Elasticity and Burdens
answer
INELASTIC D=
Higher Consumers
Lower Producers
ELASTIC D=
Lower Consumers
Higher Producers
INELASTIC S=
Lower Consumers
Higher Producers
ELASTIC S=
Higher Consumers
Lower Producers
Higher Consumers
Lower Producers
ELASTIC D=
Lower Consumers
Higher Producers
INELASTIC S=
Lower Consumers
Higher Producers
ELASTIC S=
Higher Consumers
Lower Producers
question
Utility
answer
Hypothetical measure of consumer satisfaction
question
Test
answer
-Elastic, Decrease in price = increase in TR
-Price Floors benefit producers
-5% increase in labor market=10% decrease in employment then demand is elastic
-Perfectly competitive industry more elastic in long run than short run
-Income elasticity negative then good inferior
-Excise tax $4 demand perfectly inelastic price increase by exactly $4
-Income increases, inferior gods price decrease and q sold decreases
-Unit elastic portion is where quantity and price =quantity and price
-Revenue=quantity x price
-DONT FORGET ARROWS TO SHOW SHIFTS ON GRAPHS
-Price Floors benefit producers
-5% increase in labor market=10% decrease in employment then demand is elastic
-Perfectly competitive industry more elastic in long run than short run
-Income elasticity negative then good inferior
-Excise tax $4 demand perfectly inelastic price increase by exactly $4
-Income increases, inferior gods price decrease and q sold decreases
-Unit elastic portion is where quantity and price =quantity and price
-Revenue=quantity x price
-DONT FORGET ARROWS TO SHOW SHIFTS ON GRAPHS
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