AP Econ Unit 2B

elasticity

The degree to which one changes causes another change; typically calculated by ∆Q%/∆P%

Elastic

Substitutes and luxury goods; Very responsive to price change; ∆Q%>∆P%; shallow slope; Low Q high P, high resources and time

Inelastic

necessities, small fraction of income; Unresponsive to price change; ∆P%>∆Q%; slope is steep; low P high D, low resources and time

Total revenue test

If you increase the price: area increase = inelastic, area decrease = elastic

Perfectly inelastic

Vertical line, Da Vinci

Perfectly elastic

Horizontal line, farm products

Consumer surplus

Difference between what they are willing to pay and the actual price (negative = 0)

Producer surplus

Difference between seller’s willing to accept and actual price

Cross price

∆Qb%/∆Pa%

Regressive Tax

Higher % income = lower % tax. Example: payroll (hire more = pay less), sales tax

Progressive tax

Higher % income = higher % tax. Example: income tax.

Proportional/flat tax

Everyone pays the same %

Lump sum

Gov’t give $ to manufacturer of a type of stuff

Price effect

Demand that results from a price change

Output effect

Change in quantity that results in a price change

Total expenditure

revenue for EVERYONE (gov’t + producers) from products sold

Tax revenue

Revenue gov’t makes from a tax