Economics: Elasticity, Price Controls, and Taxation Concepts

midpoint formula

%Δx = xnew - xold/(xnew + xold/2) x 100

elasticity

the percent change in quantity that results from a percent change in price

|ED| > 1

elastic

|ED| < 1

inelastic

|ED| = 1

unit elastic

availability of close substitutes

determinant of elasticity of demand

less subs = less elastic

more subs = more elastic

passage of time

determinant of elasticity demand

determinant of elastic supply

short run = less elastic

long run = more elastic

definition of market

determinant of elasticity demand

broad category = less elastic

specific products = more elastic

necessity of product

determinant of elasticity demand

necessity = less elastic

luxury = more elastic

share of budget

small share of budget = less elastic

large share of budget = more elastic

total revenue reaction to price increase with elastic demand

drop in quantity demanded, total revenue goes up

total revenue reaction to price increase with inelastic demand

small drop in quantity demanded, total revenue goes up

total revenue reaction to price increase with unit elastic demand

no change

elasticity along a linear demand curve

upper - elastic

midpoint - unit elastic

lower - inelastic

cross price elasticity

measures how a change in price relates to consumption of another good

cross price elasticity formula

E x/y = %ΔQdx / %ΔPy

E x/y > 0

substitute good

E x/y < 0

complementary good

E x/y = 0

goods are unrelated

income elasticity

measures how change in income relates to changes in consumption

Ei > 0

normal good

Ei < 0

inferior good

Ei = 0

change of income has no effect on consumption

price elasticity of supply

how a change in the price relates to changes in quantity supplied

Es > 1

elastic

Es < 1

inelastic

Es = 0

unit elastic

cost to scale up production

determinant of elastic supply

difficult to increase production = less elastic

easy to increase production = more elastic

market for inputs

determinant of elastic supply

big disturbance in market = less elastic

small disturbance in market = more elastic

scope of supply

determinant of elastic supply

global supply = less elastic

local supply = more elastic

price controls

government-mandated price

price ceiling

maximum price sellers can charge

causes shortage if below equilibrium

price floor

minimum price sellers can charge

causes surplus if above equilibrium

binding price ceiling (shortage) impacts

consumer surplus increases; producer surplus decreases; deadweight loss occurs

binding price floor (surplus) impacts

consumer surplus decreases; producer surplus decreases; deadweight loss occurs

price ceiling effects

shortages, reduction of quality, increased search costs, loss of gains from trade, misallocation of resources

price floor effects

surpluses, wasteful increase in quality, loss of gains from trade, misallocation of resources

most common price ceiling example

rent control

most common price floor example

minimum wage

taxes

mandatory contributions levied by government entity

subsidies

payment the government makes to buyer or seller when a good is purchased or sold

if tax is levied on a seller...

supply curve will shift to the left by amount of the tax

if tax is levied on buyers...

demand curve will shift to the left by amount of the tax

(t/f) tax burden is not dependent on who the tax is levied upon

true

the relatively more elastic curve will have a lower or higher tax burden

lower

if a subsidy is levied on a seller...

supply curve will shift to the right by the amount of the subsidy

if a subsidy is levied on buyers...

demand curve will shift to the right by the amount of the subsidy