Economics: Elasticities and Tax Incidence

Comprehensive vocabulary flashcards covering price elasticity of demand and supply, income elasticity, cross-price elasticity, and the incidence of per-unit taxes based on lecture notes.

Total Revenue Test

A quick method used to determine price elasticity of demand by observing the direction of total revenue ($\text{Price} \times \text{Quantity}$) in response to a price change.

Midpoint Formula

A mathematical formula used to compute the exact coefficient of elasticity by dividing the change in quantity by the average quantity, divided by the change in price over the average price.

Absolute Value in Price Elasticity of Demand

The mathematical operation applied to the price elasticity of demand calculation to disregard the negative sign produced by the law of demand and focus strictly on the coefficient's magnitude.

Relatively Elastic Demand

A condition where consumers are highly responsive to price changes, producing an elasticity coefficient whose absolute value is greater than $1$, causing total revenue to move in the opposite direction of price.

Relatively Inelastic Demand

A condition where consumers are relatively unresponsive to price changes, producing an elasticity coefficient whose absolute value is less than $1$, causing total revenue to move in the same direction as price.

Unitary Elasticity

A condition where the percentage change in quantity demanded is exactly equal to the percentage change in price, resulting in an elasticity coefficient equal to $1$.

Availability of Substitutes

A determinant of demand elasticity stating that the more close alternatives or competitor products a good has, the more elastic the demand will be.

Broadly vs. Narrowly Defined Goods

A determinant of elasticity where defining a good broadly makes demand relatively inelastic, whereas defining a good narrowly or specifically provides more substitutes, making demand more elastic.

Percentage Cost Relative to Budget

A determinant of elasticity where goods that cost a very small share of a consumer's budget have inelastic demand, whereas expensive goods that take up a large share make consumers more price-responsive and demand more elastic.

Necessity vs. Luxury Goods

A determinant of demand elasticity where necessities are goods consumers must have with few substitutes (inelastic), while luxuries are expensive goods that consumers pay closer attention to (elastic).

Price Elasticity of Supply ($\epsilon_s$)

The responsiveness of firms' quantity supplied to changes in the price of their good; it does not require absolute value bars because the upward-sloping law of supply maintains a positive relationship.

Time (Determinant of Supply Elasticity)

The primary determinant of supply elasticity; firms have more elastic supply over longer time frames (the long run) because they have more time to adjust production, compared to the short run or immediate run.

Perfectly Elastic Supply Curve

A horizontal supply curve representing infinite sensitivity to price changes.

Perfectly Inelastic Supply Curve

A vertical supply curve representing zero quantity adjustment regardless of changes in price.

Income Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in consumer income; absolute value bars must NOT be used because the sign identifies the type of good.

Normal Good

A good for which an increase in consumer income leads to an increase in demand, indicated by a positive income elasticity coefficient ($> 0$).

Inferior Good

A good for which an increase in consumer income leads to a decrease in demand, indicated by a negative income elasticity coefficient ($< 0$).

Cross-Price Elasticity of Demand

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another related good; absolute value bars must NOT be used because the sign reveals the relationship between the goods.

Substitute Goods (Cross-Price Relationship)

Goods that have a positive cross-price elasticity coefficient, meaning an increase in the price of one good leads to an increase in the quantity demanded of the other good.

Complementary Goods (Cross-Price Relationship)

Goods that have a negative cross-price elasticity coefficient, meaning an increase in the price of one good leads to a decrease in the quantity demanded of the other good.

Amount of the Tax

The per-unit tax value measured on a graph as the vertical distance between the original supply curve and the new parallel supply curve with the tax.

Tax Revenue

The total dollar amount collected by the government, graphically represented by the rectangular area calculated as the per-unit tax amount (height) multiplied by the new equilibrium quantity exchanged (base).

Tax Incidence with Relatively Elastic Demand

A market outcome where consumers are sensitive to price increases and cut back quantity, causing the majority of the tax burden to fall on the producers.

Tax Incidence with Relatively Inelastic Demand

A market outcome where consumers view the good as a necessity and are reluctant to adjust quantities, causing the majority of the tax burden to fall on the consumers.

Tax Incidence with Perfectly Inelastic Demand

An extreme market condition where consumers absorb the entire price increase, causing the full ($100\%$) burden of the tax to fall on the consumers.

Tax Incidence with Perfectly Elastic Demand

An extreme market condition where consumers accept no price increase, causing the full ($100\%$) burden of the tax to fall on the producers.