*Recently Updated* - Economics Chapter 5 and 6

elasticity

a measure of the responsiveness of the quantity demanded or quantity supplied to a charge in one of its determinants

price elasticity of demand

a measure of how much the quantity demanded of a good responds to a change in its price, calculated as the percentage change in quantity demanded divided by the percentage change in price

total revenue

the amount paid by buyers and received by sellers of a good, calculated as the price of the good times the quantity sold

sensitivity

when price changes for a good, quantity demanded is highly affected

insensitivity

when price changes for a good, quantity demanded is affected very little or not at all

factors to determine consumer sensitivity/insensitivity

consumers are more sensitive to price change *when products have many substitutes*

consumers tend to be more sensitive to price change for goods and services that *take large portion of budget*

the more *time* consumers have to *adjust* to price change, the more sensitive they will be

elastic vs. inelastic

elastic = more sensitive

inelastic = insensitive

true or false: narrowly defined markets tend to have more elastic demand than broadly defined ones

true

ex: food, a broad category, has a fairly *inelastic* demand because there are no good substitutes for food

ex: ice cream, a narrow category, has. amore elastic demand because it is easy to substitute other desserts for ice cream

how do economists compute the price elasticity of demand?

percentage change in the quantity demanded divided by the percentage change in price

when the quantity moves proportionately more than the price, the elasticity is greater than one, and demand is said to be...

elastic

when the quantity moves proportionately less than the price, the elasticity is less than one, and demand is said to be...

inelastic

when the percentage change in quantity equals the percentage change in price, the elasticity is exactly 1, and demand is said to have...

unit elasticity

when demand is *inelastic*, the price and total revenue...

move in the same direction

ex: when price increases, total revenue increases as well

when demand is *elastic*, the price and total revenue

move in opposite directions

ex: when price increases, total revenue decreases

if demand is *unit elastic*, the price and total revenue

remain constant when the price changes

price ceiling

a legal maximum on the price at which a good can be sold

price floor

a legal minimum on the price at which a good can be sold

because the price that balances supply and demand is below the ceiling, the price ceiling is...

binding

the forces of supply and demand tend to move the price toward equilibrium, but the ceiling prevents the market price from reaching it

because the equilibrium price is above the price ceiling, the ceiling is a....

not binding

market forces move the economy to the equilibrium, and the ceiling has no effect on the price or on the quantity sold

when the price ceiling is set below equilibrium, a _____ arises.

shortage

demand > supply

a binding price floor causes a...

surplus

just as shortages caused by price ceilings can lead to undesirable rationing mechanisms, so can the surpluses resulting from price floors

pros and cons of price controls

policymakers are often motivated to control prices because they view the current market as unfair. therefore, price controls are frequently aimed to help the poor

however, price controls can hurt some people they are intended to help. rent control keeps rent low, but it also discourages landlords from maintaining their buildings and makes housing hard to find

minimum wage is an example of a

price floor

rent control is an example of a

price ceiling

below the price floor, the equilibrium price is

non binding

when a price ceiling is set below the equilibrium price, it is considered

binding

when the government sets the legal maximum price at or above the market equilibrium price, the price ceiling is

not binding

when the price floor is set above the market equilibrium, a _____ arises.

surplus

possible results of price ceilings

shortages

long lines

rationing

underground markets

lowered quality

rent control

started after wwii when large cities experienced extreme housing shortages

puts a maximum on rent changed for a unit

goal: maintain a base of predictable housing prices

most common in cities like nyc, which has the larges trunning rent regulations in the u.s.

perfectly inelastic

PES = 0

ex: land, art from a deceased artist

relatively inelastic

PES < 1

ex: fossil fuels

unit elastic

PES = 1

relatively elastic

PES > 1

ex: shoe laces

perfectly elastic

PES = infinity

is salt elastic or inelastic?

inelastic

there are not a lot of substitutes, and salt is essential

are new cars elastic or inelastic?

elastic

it is not a necessity and there are substitutes such as used cars

are pork chops elastic or inelastic?

elastic

there are substitutes that you can buy instead of pork chops

is a european vacation elastic or inelastic?

elastic

there are substitutes, and it takes up a large portion of the budget

is insulin elastic or inelastic?

inelastic

it is a necessity, so you will still buy it

is insulin *at one of four drug stores in a shopping mall* elastic or inelastic?

elastic

there are other stores where you can buy it

is gasoline *purchased one day after a 20 percent price increase* elastic or inelastic?

inelastic

this is a short-term purchase

is gasoline *purchased one year after a 20 percent price increase* elastic or inelastic?

elastic

this is a long-term purchase/price change

when the government imposes a binding price floor, it causes...

a) the supply curve to shift to the left

b) the demand curve to shift to the right

c) a shortage of the good to develop

d) a surplus of the good to develop

d) a surplus of the good to develop

in a market with a binding price ceiling, increasing the ceiling price will

a) increase the surplus

b) increase the shortage

c) decrease the surplus

d) decrease the shortage

d) decrease the shortage

rent control causes larger shortages in the _______ run because over that time horizon, supply and demand are _______ elastic.

a) long; more

b) long; less

c) short; more

d) short; less

a) long; more

an increase in the minimum wage reduces the total amount paid to the affected workers if the price elasticity of _______ is ________ than one.

a) supply; greater

b) supply; less

c) demand; greater

d) demand; less

c) demand; greater

tax incidence

the manner in which the burden of a tax is shared among participants in a market

true or false: taxes discourage market activity

true

when a good is taxed, the quantity sold is smaller in the new equilibrium

true or false: buyers and sellers share the tax burden

true

the tax inserts a *wedge* between the price that buyers pay and the price that sellers receive

regardless of whether the tax is levied on buyers or sellers, the wedge remains the same.

the more _______ side of the market will pay the *smaller* share of tax

elastic

the more __________ side of the market will pay the *greater* share of tax

inelastic

rule of escape - demand

elastic demand = buyers have good *substitutes* for the tax good. therefore, they can escape the tax.

inelastic demand = buyers don't have good substitutes for taxed goods. therefore, they are stuck with the burden.

rule of escape - supply

elastic supply = resources to produce the taxed good can easily be moved to other industries. therefore, they can escape the tax.

inelastic supply = resources are fixed and can really only be used to produce the taxed good. therefore, they are stuck with the bigger tax burden

a good tends to have a small price elasticity of demand if

a) the good is a necessity.

b) there are many close substitutes

c) the market is narrowly defined

d) the long-run response is being measured

a) the good is a necessity.

an increase in a good's price reduces the total amount consumers spend on the good if the ________ elasticity of demand is ________ than one.

a) income; less

b) income; greater

c) price; less

d) price; greater

d) price; greater

a linear, downward-sloping demand curve is

a) inelastic

b) unit elastic

c) elastic

d) inelastic at some points and elastic at others

d) inelastic at some points and elastic at others

when a good is taxed, the burden falls mainly on consumers if

a) the tax is levied on consumers

b) the tax is levied on producers

c) supply is inelastic and demand is elastic

d) supply is elastic and demand is inelastic

d) supply is elastic and demand is inelastic