question
HOW SHAPES OF SUPPLY AND DEMAND CURVES MATTER
answer
The shapes of these curves are determined by how much a shock affects the equilibrium price and quantity
question
ELASTICITY
answer
the % change in a variable
in response to
a given % in another variable
in response to
a given % in another variable
question
PRICE ELASTICITY OF DEMAND
answer
(A single point on demand curve) The % change in Qd in response to a given % change in the Pd.
ALSO:
(δQ/δP)*(P/Q)
ALSO:
(δQ/δP)*(P/Q)
question
LINEAR DEMAND CURVE AND ITS POINT ELASTICITIES
answer
if linear:
Q = a-b(p)
Ed = -b (P/Q)
Q = a-b(p)
Ed = -b (P/Q)
question
ELASTICITY ALONG THE DEMAND CURVE
answer
Y-AXIS intercept: perfectly ELASTIC
UPPER LEFT: Elastic
MIDDLE: Unitary
LOWER RIGHT: Inelastic
X-AXIS intercept: perfectly INELASTIC
UPPER LEFT: Elastic
MIDDLE: Unitary
LOWER RIGHT: Inelastic
X-AXIS intercept: perfectly INELASTIC
question
ELASTICITY TERMINOLOGY
answer
if Ed = -∞ : perfectly Elastic
if Ed < -1 : relatively Elastic
if 0 < Ed < -1 : relatively INElastic
if Ed = 0 : perfectly INElastic
if Ed < -1 : relatively Elastic
if 0 < Ed < -1 : relatively INElastic
if Ed = 0 : perfectly INElastic
question
PERFECTLY ELASTIC DEMAND CURVE
answer
Ed = -∞ : perfectly Elastic
Small increase in price leads to ∞ drop in quantity
Apparent in PERFECT COMPETITION (identical goods)
Small increase in price leads to ∞ drop in quantity
Apparent in PERFECT COMPETITION (identical goods)
question
PERFECTLY inELASTIC DEMAND CURVE
answer
Ed = 0 : perfectly INElastic
Quantity demanded is NOT affected by Price
Ex. necessity goods (Housing, Food, Medicine)
Quantity demanded is NOT affected by Price
Ex. necessity goods (Housing, Food, Medicine)
question
Ed AND REVENUE
answer
if relatively Elastic curve:
As Price INCREASES, Revenue DECREASES
if relatively INElastic curve:
As Price INCREASES, Revenue INCREASES too
As Price INCREASES, Revenue DECREASES
if relatively INElastic curve:
As Price INCREASES, Revenue INCREASES too
question
INCOME ELASTICITY OF DEMAND (PED, Ed, εd)
answer
% change in Qd in response to % change in income.
δQ .... Y
---- x ----
δY ..... Q
Ey < 0 : Inferior good (FOREVER 21)
Ey > 0 : Normal good
0 < Ey < 1 : Necessity
Ey > 1 : LUXURY
δQ .... Y
---- x ----
δY ..... Q
Ey < 0 : Inferior good (FOREVER 21)
Ey > 0 : Normal good
0 < Ey < 1 : Necessity
Ey > 1 : LUXURY
question
CROSS-PRICE ELASTICITY OF DEMAND
answer
% change in Quantity of item A
in response to
% change in PRICE of item B
δQa Pb
---- x ----
δPb Qa
XED < 0 : Complementary goods
XED = 0 : Non-related goods
XED > 0 : Substitute goods
in response to
% change in PRICE of item B
δQa Pb
---- x ----
δPb Qa
XED < 0 : Complementary goods
XED = 0 : Non-related goods
XED > 0 : Substitute goods
question
PRICE ELASTICITY OF SUPPLY (PES, Es, η)
answer
(A single point on supply curve) The % change in Qs in response to a given % change in the Ps.
ALSO:
δQs . Ps
---- x ----
δPs . Qs
ALSO:
δQs . Ps
---- x ----
δPs . Qs
question
AD VALOREM TAX
answer
Percentage tax
every $ consumer spends, gov't keeps fraction
i.e. sales tax
every $ consumer spends, gov't keeps fraction
i.e. sales tax
question
SPECIFIC TAX (per unit tax)
answer
a set amount of tax charged per unit of the product sold
ex. cigarettes
ex. cigarettes
question
SPECIFIC TAXES (on consumers)
answer
The share of a tax ultimately paid by consumers and sellers.
tax incidence on consumers FORMULA :
η . . . . . . . . . . change in PRICE
----------- = ----------------------
η - ε . . . . . . . .change in TAX
tax incidence on producer FORMULA:
just subtract ^^^ from 1.
tax incidence on consumers FORMULA :
η . . . . . . . . . . change in PRICE
----------- = ----------------------
η - ε . . . . . . . .change in TAX
tax incidence on producer FORMULA:
just subtract ^^^ from 1.
question
SPECIFIC TAXES (on producers)
answer
Perfectly Elastic Supply (η = ∞ )
CONSUMERS bear all tax incidence
CONSUMERS bear all tax incidence
question
TAX INCIDENCE
answer
Perfectly INElastic Supply (η = 0)
PRODUCERS bear all tax incidence
PRODUCERS bear all tax incidence
question
WHAT ARE THE EXTREME CASES OF TAX INCIDENCES? (SPECIFIC TAX)
answer
undefined
question
WHAT ARE THE EXTREME CASES OF TAX INCIDENCES? (AD VALOREM TAX)
answer
undefined