Lecture Notes on Elasticity, Government Intervention, and Taxes

Flashcards on Elasticity, Government Intervention, and Taxes

Income Elasticity of Demand

How much the quantity demanded of a good responds to a change in the income of consumers. = (% change in quantity demanded) / (% change in income)

Normal Goods

Income Elasticity of Demand > 0

Necessities

Income Elasticity of Demand is between 0 and 1 (0 < < 1)

Luxuries

Income Elasticity of Demand > 1

Inferior Goods

Income Elasticity of Demand < 0 (e.g., Ramen noodles)

Cross-Price Elasticity of Demand

How much the quantity demanded of one good responds to a change in the price of another good = (% change in quantity demanded of good 1) / (% change in price of good 2)

Substitutes

Cross-Price Elasticity of Demand > 0

Complements

Cross-Price Elasticity of Demand < 0

Price Ceiling

A law forbidding anyone from selling a good for more than the ceiling price (e.g., Rent controls)

Price Floor

A law forbidding anyone from selling a good for less than the floor price

Tax

Any law requiring a payment to the government as part of a transaction

Incidence of a Tax

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

Tax Invariance

The effects on Price and Quantity, and the tax incidence are the same whether the tax is imposed on buyers or sellers!