Elasticity of Demand and Government Intervention

A collection of vocabulary flashcards focusing on key concepts related to elasticity of demand, government interventions, and market failures.

Elasticity of Demand

A measure of responsiveness of the quantity demanded of a good/service due to price changes.

Price Elasticity of Demand (PED)

Measures how much the quantity demanded of a good changes due to price changes.

Price Elastic Demand

PED > 1, indicating that the percentage change in quantity demanded is greater than the percentage change in price.

Inelastic Demand

0 < PED < 1, indicating that the percentage change in quantity demanded is less than the percentage change in price.

Unitary Elastic Demand

PED = 1, indicating that the percentage change in quantity demanded is equal to the percentage change in price.

Perfectly Inelastic Demand

PED = 0, meaning that quantity demanded does not change regardless of price changes.

Perfectly Elastic Demand

PED = ∞, meaning that any increase in price leads to a drop in quantity demanded to zero.

Determinants of PED

Factors that affect the price elasticity of demand, such as the availability of substitutes, degree of necessity, and time.

Time Period Effect on PED

Demand is typically more inelastic in the short term and more elastic in the long term.

Government Revenue from Indirect Taxes

Revenue generated by taxing goods/services, affecting the price consumers pay.

Price Ceiling

A maximum price set by the government to prevent prices from rising above a level that is considered unacceptable.

Consequences of Price Ceiling

Includes shortages, rationing issues, black markets, and allocative inefficiency.

Price Floor

A minimum price set by the government to prevent prices from falling below a level that is considered acceptable.

Consequences of Price Floor

Includes surpluses, black markets, and inefficiencies in production.

Welfare Loss

Loss of economic efficiency when the equilibrium outcome is not achievable or not achieved.

Consumer Expenditure with Subsidy

Total spending by consumers on a good when a subsidy reduces its price.

Negative Externalities of Consumption

When the consumption of a good causes a negative effect on third parties.

Positive Externalities of Production

When the production of a good has beneficial effects on third parties.

Direct Government Provision

Government offers goods or services directly to consumers, usually in public interest.

Pigouvian Tax

An indirect tax used to correct negative externalities of consumption.