ECO 2023 Exam 2 Concepts and Questions

Flashcards covering key concepts from ECO 2023 Exam 2 including elasticity, price controls, taxes, and their effects.

Elasticity

A unit-free measure that defines sensitivity; the percent change in quantity resulting from a percent change in price.

Midpoint Formula

%∆X = (Xnew − Xold)/((Xnew + Xold)/2) · 100, used to calculate percentage change.

Price Elasticity of Demand (ϵD)

Measures how sensitive consumers are to changes in a product's price.

Elastic Demand

Characterized by |ϵD| > 1; indicates that a price change results in a larger percentage change in quantity demanded.

Inelastic Demand

Characterized by |ϵD| < 1; indicates that a price change results in a smaller percentage change in quantity demanded.

Unit Elastic Demand

Characterized by |ϵD| = 1; indicates that a price change results in a proportional change in quantity demanded.

Determinants of Elasticity of Demand

Factors that influence demand elasticity, including availability of substitutes, passage of time, definition of market, necessity vs luxury, and share of budget.

Total Revenue Relationship with Elasticity

If demand is elastic, price increase decreases total revenue; if inelastic, price increase increases total revenue.

Cross-Price Elasticity (ϵx/y)

Measures the relationship between the price change of one good and the quantity demanded of another good.

Income Elasticity (ϵI)

Measures how changes in income relate to changes in consumption of a good.

Price Elasticity of Supply (ϵS)

Measures how a change in price relates to changes in quantity supplied.

Binding Price Ceiling

A maximum legal price below equilibrium; causes a shortage.

Binding Price Floor

A minimum legal price above equilibrium; causes a surplus.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer Surplus

The difference between what producers are willing to accept and what they actually receive.

Deadweight Loss

The loss of economic efficiency that occurs when equilibrium for a good or service is not achieved.

Taxes

Mandatory contributions levied on individuals or corporations by a government entity.

Subsidies

Payments the government makes to either a buyer or seller when a good or service is purchased or sold.

Tax Wedge

The difference between the price buyers pay and the price sellers receive due to tax.

Relative Elasticity

Determines who bears the burden of a tax; the more elastic curve bears the smaller burden.