question
the fundamental determinant of the elasticity of demand
answer
how easy it is to substitute one good for another
question
the more time people have to adjust to a change in price
answer
the more elastic the demand curve is
question
brand of a product, a product category
answer
the demand for a ___ is more elastic than the demand for ___
question
necessities
answer
demand is less elastic
question
luxuries
answer
demand is more elastic
question
higher income
answer
makes demand less elastic
question
the larger the share of a person's budget devoted to a good
answer
the more elastic the demand of the good is
question
Ed
answer
% change in quantity demanded / % change in price
question
Ed
answer
Qafter - Q before / (Qafter - Qbefore)/2 // Pafter - Pbefore / (Pafter-Pbefore)/2
question
revenue
answer
price * quantity
question
if demand curve is inelastic
answer
revenues go up when price goes up
question
if demand curve is elastic
answer
revenues go down when price goes up
question
how to calculate revenue
answer
area under the curve
question
if demand curve is unit elastic
answer
nothing happens
question
how an industry evolves over time
answer
is influenced by whether a demand curve is elastic or inelastic
question
the fundamental determinant of the elasticity of supply
answer
how quickly per-unit costs increase with an increase in production
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supply will be elastic
answer
if production can increase without much increasing per unit costs
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supply will be inelastic
answer
if production increases with a much higher per unit cost
question
supply of raw materials
answer
often inelastic
question
supply of manufactured goods
answer
often elastic
question
supply is more elastic
answer
when the industry can be expanded without causing a big increase in the demand for that industry's inputs
question
local supply, global supply
answer
___ of a good is much more elastic than ___
question
long run, short run
bc suppliers have more time to adjust
bc suppliers have more time to adjust
answer
supply tends to be more elastic in the ___ than in the ___
question
Es
answer
% change in quantity supplied / % change in price
question
Es
answer
Qafter - Qbefore / (Qafter-Qbefore)/2 // Pafter - Pbefore / (Pafter-Pbefore)/2
question
price change formulas
answer
make it possible to make quick predictions for price change using elasticity (10% or less)
question
% change from a shift in demand
answer
% change in demand / |Ed| + Es
question
% change from shift in supply
answer
% change in supply / |Ed| + Es
question
3 truths about commodity taxes
answer
1. who ultimately pays the tax does not depend on who writes the check to the government
2. who ultimately pays the tax does depend on the relative elasticity of demand and supply
3. commodity taxation raises revenue and creates deadweight loss
2. who ultimately pays the tax does depend on the relative elasticity of demand and supply
3. commodity taxation raises revenue and creates deadweight loss
question
as far as sellers are concerned
answer
a tax is the same thing as an increase in costs - shifts supply curve the exact same
question
price of tax on sellers
answer
does not increase the price of the good to consumers the same way
question
with taxes, buyers compete to keep the prices down
answer
bc Qs > Qd, as the price of the good is above equilibrium
question
the tax =
answer
price paid by buyers - price received by sellers
question
if government taxes buyer
answer
less money is paid to suppliers bc the price they are willing to pay includes the tax
question
the price buyers pay, the price sellers receive, and the quantity traded
answer
identical whether the government is taxing buyers or sellers
question
tax on suppliers
answer
market price includes tax
question
tax on buyers
answer
market price does not include tax
question
wedge breakdown
answer
top of wedge gives us price paid by buyers
bottom of wedge gives us price received by suppliers
quantity at which wedge sticks
bottom of wedge gives us price received by suppliers
quantity at which wedge sticks
question
when the demand is more elastic than the supply
answer
demanders pay less of the tax than the sellers
question
when the supply is more elastic than the demand
answer
suppliers pays less of the tax than the buyers
question
elasticity =
answer
escape =
question
tax analysis benefit
answer
helps us to see the true benefits and costs of economic policy
question
state taxes
answer
buyers will bear almost all of the tax bc manufacturers escape the tax by selling elsewhere
question
free market maximizes
answer
gains from trade
question
tax decreases consumer and producer surplus
answer
some to government as tax revenue
rest is DWL
both lost gains from trade that do not occur bc of the tax
rest is DWL
both lost gains from trade that do not occur bc of the tax
question
DWL from trade is larger
answer
the more elastic the demand curve
question
if the demand is relatively inelastic
answer
the tax doesn't deter many trades
question
broad based, narrow based
answer
___ taxes have less DWL than ___
question
3 truths about subsidies
answer
1. whoever gets the subsidy does not depend on who gets the check from the government
2. who benefits does depend on the relative elasticities of demand and supply
3. subsidies must be paid by taxpayers and the create inefficient increases in trade
2. who benefits does depend on the relative elasticities of demand and supply
3. subsidies must be paid by taxpayers and the create inefficient increases in trade
question
the subsidy =
answer
price received by sellers - price paid by buyers
question
the DWL of subsidies
answer
resources used to produce extra goods have opportunity costs - could have produced more value somewhere else
question
whoever bares the burden of the tax
answer
receives the benefit of the subsidy
question
5 important effects of a price ceiling
answer
1. shortages Qd > Qs
2. reductions in quality
3. wasteful lines and other search costs
4. loss of gains from trade
5. misallocation of goods
2. reductions in quality
3. wasteful lines and other search costs
4. loss of gains from trade
5. misallocation of goods
question
the lower the controlled price is relative to market equilibrium
answer
the larger the shortage
question
reductions in quality
answer
sellers can't raise prices to increase profits, so decide to cut quality (goods or service)
question
reactions to a shortage
answer
bribery
waiting in line
waiting in line
question
total value of wasted time
answer
time cost per an item x quantity
question
difference between paying in time and bribes
answer
time is more wasteful
question
DWL of a shortage
answer
lost consumer and producer surpluses
question
price ceilings prevent
answer
mutually profitable gains from trade being exploited
question
misallocation of resources
answer
demanders are prevented from bidding up the prices, so there is no signal and no incentive to ship goods where they are needed
question
different ways goods are allocated
answer
geographically
different uses of raw materials (don't flow to highest valued resources)
different uses of raw materials (don't flow to highest valued resources)
question
rent control
answer
price ceiling on rental housing
question
inelastic, elastic
answer
short-run supply curve for apartments is ___ but the long-run is ___
question
short-run, long-run
answer
shortage grows from ___ to ____
question
rent controls reduce
answer
housing quality - starve off losses by cutting costs
question
law of discrimination
answer
when the price of discrimination falls, the quantity of discrimination demanded will increase
question
misallocation of resources - rent edition
answer
people live in rooms with fewer or more rooms than if not lived in a rent controlled city
question
vouchers
answer
substitute for rent control that would actually increase the supply of housing
question
blat
answer
one has connections that can be used to gain resources
question
4 important effects of price floors
answer
1. surpluses Qs >Qd
2. lost gains from trade (DWL)
3. wasteful increases in quality
4. misallocation of resources
2. lost gains from trade (DWL)
3. wasteful increases in quality
4. misallocation of resources
question
unemployment
answer
surplus of labor
question
higher minimum wage =
answer
less people hired =
question
upping the minimum wage
answer
incentivizes people to move production to other cities
question
offer higher quality
answer
suppliers can't compete with lower prices, and so offer
question
less quality at lower prices
answer
customers prefer
question
deregulation
answer
lowered prices, increased quantity, and reduced wasteful quality competition
question
increased costs and reduced innovation
answer
regulation doesn't just increase prices, it also
question
book factors for demand
answer
substitutes (few vs most)
time (short vs long)
how specific is the good defined (less vs more)
necessity vs luxury
small budget vs large budget item
time (short vs long)
how specific is the good defined (less vs more)
necessity vs luxury
small budget vs large budget item
question
determinants of supply elasticity
answer
product type
time
production capacity
input substitution (flexibility/mobility)
constant, increasing, and decreasing cost
purchase of inputs, % of market
global and local source supply
short-run and long-run
time
production capacity
input substitution (flexibility/mobility)
constant, increasing, and decreasing cost
purchase of inputs, % of market
global and local source supply
short-run and long-run
question
why taxes
answer
raising revenue
changing behavior
internalizing externality
changing behavior
internalizing externality
question
more elastic (taxes)
answer
producers pay more
question
more inelastic (taxes)
answer
consumers pay more
question
why subsidies
answer
create/keep jobs at home
allow domestic producers to compete with foreign producers
internalizing externality
allow domestic producers to compete with foreign producers
internalizing externality
question
more elastic (subsidies)
answer
benefits consumers
question
more inelastic (subsidies)
answer
benefits producers
question
price floors
answer
cause production competition (quality waste)
question
price ceilings
answer
cause consumer competition (bribes and lines)
question
cross price elasticity
answer
Exy = % change Qx / % change Py
question
Exy > 0
answer
substitutes
as one increases the other increases, and vice versa
as one increases the other increases, and vice versa
question
Exy < 0
answer
complements
as one increases the other decreases, and vice versa
as one increases the other decreases, and vice versa
question
Exy = 0
answer
unrelated
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