2.4; 2.5 AP Microeconomics review

Elasticities

Elasticities

How one variable responds to a change in another variable.

Cross-Price Elasticity of Demand

Measures how price change in one product affects Qd of another.

CPED

percentage change in Qd of good A

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percentage change in Price of good B

Negative CPED

compliments

Positive CPED

Substitutes

IED stands for

Income Elasticity of demand

IED

% Change of quantity demanded /% change of in come

Negative IED

Inferior good

Positive IED

Normal good

Price elasticity of demand

Measures how a change in price affects quantity supplied.

PES

% Change in quantity supplied/% change in price

PES less than 1

Inelastic

PES equal to 1

Unit elastic

PES greater thank

Elastic

Relatively elastic supply

Percentage change in price causes a relatively larger change in quantity supply .

Relatively inelastic supply

Percentage change in price causes a relatively lesser change in quantity supplied.

Factors that determine price elasticity of supply

Input availability and time

Input availability

How easily can inputs be shifted in and out of production

Perfectly inelastic supply in a graph

Perfect vertical line ; an increase in price leaves the quantity supplied unchanged

Perfectly elastic supply in a graph

Perfect horizontal line; at x exact price, producers produce any quantity; at any price above x, quantity supplied is infinite; At any price below x, quality supplied is zero .

The government places higher taxes on goods more inelastic demand, this causes

Lower PED (price elasticity of demand )

Whoever has a more elastic curve, carries

A heavier tax burden

World trade is _ for consumers and _ for producers

Good; bad

Tariff

Per unit tax

Tariffs are good for

Domestic producers

Tariffs are bad for

Consumers

Markets with free world trade have no…

Shortage because it’s being filled with imports

Qs - Qd =

Imports

What happens to the consumer surplus in a market with a free world trade?

Increases

What happens to the producer surplus in a market with free world trade?

Decreases

What happens to the total surplus in a market with free world trade?

Increases

What happens to the consumer surplus in a market with free world trade and a tariff?

Decreases

What happens to the producer surplus in a market with a free world trade and a tariff?

Increases

What happens to the total surplus in a market with free world trade and a tariff?

Decreases

The Ws in a market with free world trade is

Elastic and has only one price