Ch 5 - Elasticity, Taxation, and Consumer Choice

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Elasticity

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is determined based on their sensitivity and response to changes in price.

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The law of demand

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Stresses that consumers will buy more of a product in the case when price falls and demand will decrease if the price decreases

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29 Terms

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Elasticity

is determined based on their sensitivity and response to changes in price.

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The law of demand

Stresses that consumers will buy more of a product in the case when price falls and demand will decrease if the price decreases

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Cross Elasticity of Demand (CPED)

This measures how the changes in price of a certain good can affect the quantity demanded of another product

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Substitute goods

are those which can be exchanged with one another.

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Complementary goods

are those with complement each other

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Income Elasticity of Demand

Another factor which affects the purchasing activity of consumers is income. Consumers have to take into consideration their own budget before purchasing goods and services

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Price Elasticity of Supply (PES)

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The price elasticity of supply takes into the consideration how a change in price affects the quantity supplied.

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Producer surplus

is the difference between the lowest price a producer would sell a product and the actual price received

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Consumer surplus

is the difference between the highest price a consumer would pay for a product minus the actual price paid.

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A price ceiling

is a maximum legal price that can be charged for a product or service.

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A price Floor

is a minimum legal that can be charged for a product or service

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Deadweight loss

is the loss of total surplus when a market fails to reach a competitive equilibrium

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tariff

is a tax on imports or exports, and a quota has a similar effect on trade that sets a limit on the quantity of goods imported and exported.

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negative output

means that the goods are complementary, while a Positive output means that the goods are substitutes.

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necessary good

If there is a(n) without any substitutes, a consumer is more likely to buy the same quantity as the price changes.

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Consumer choice theory

includes many factors, which are necessary to help them make choice accordingly.

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total surplus

When a market fails to maximise , a deadweight loss is created.

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normal goods

there is a direct relationship between an individuals income and the quantity demanded.

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inferior goods

an increase in income leads to a decrease in quantity demanded, as they appear to have an inverse relationship.

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Consumer surplus

can be located below the demand curve, above price, and left of quantity.

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Producer surplus

is the difference between the lowest price a producer would sell a product and the actual price received.

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total revenue

If the price increases and decreases, elasticity of demand is relatively elastic.

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tariff

After the , the quantity of imports decreases, and areas where consumer surplus before trade are now tax revenue from the and deadweight loss.

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Elasticity

is the measure of how consumers respond to changes in price.

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Total revenue

is the amount of money received from sales of a product.

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consumer

When and producer surpluses are maximised, the economy will experience efficiency and therefore lead to equity.

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total revenue

If price increases and increases, elasticity of demand is relatively inelastic.

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Total Utility

the total utility amount of satisfaction a person receives from the consumption of a good or service

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Marginal Utility

extra amount of satisfaction or utility from consuming one more unit of a good or service