AP Micro Ch 2

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tax: demand and supply are equally price elastic

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tax burden is shared evenly between buyers and sellers

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tax: demand is less price elastic than supply

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buyers bear the burden of the tax

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44 Terms

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tax: demand and supply are equally price elastic

tax burden is shared evenly between buyers and sellers

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tax: demand is less price elastic than supply

buyers bear the burden of the tax

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tax: supply is less price elastic than demand

sellers bear the burden of the tax

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price ceiling below equilibrium

causes shortage

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price floor above equilibrium price

causes surplus

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price elasticity of demand > 1

elastic

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price elasticity of demand < 1

inelastic

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luxuries

more elastic

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habit-forming goods

more elastic

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in the long run

supply/demand is more elastic

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reasons for a change in demand

change in consumer expectations, tastes, number of consumers, income, price of substitute/complementary goood

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reasons for a change in supply

change in costs of inputs, technology, number of producers, government policies

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price elasticity of demand is always measured

along a demand curve, all other variables must be held constant

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income elasticity > 0

good is a normal good

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income elasticity < 0

good is an inferior good

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cross price elasticity > 0

goods are substitutes

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cross price elasticity = 0

goods are unrelated

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cross price elasticity < 0

goods are complementary

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determinants of price elasticity of demand

presence of substitutes, proportion of income spent, nature (durable, necessity),

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price and total revenue move in opposite directions

elastic price elasticity of demand

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price and total revenue move in the same direction

inelastic price elasticity of demand

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total revenue is unaffected by a change in price

unit elastic price elasticity of demand

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burden of tax on consumer

increase in equilibrium price resulting from tax

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burden of tax on producer

tax not paid by consumers

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burden of tax is totally on buyers

demand is perfectly inelastic

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burden of tax is totally on sellers

demand is perfectly elastic

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any factor that increases the cost of production

decreases supply

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price increase on elastic good

total revenue decreases

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price decrease on elastic good

total revenue increases

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price increase on unit elastic good

total revenue unchanged

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price decrease on unit elastic good

total revenue unchanged

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price increase on inelastic good

total revenue increases

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price decrease on inelastic good

total revenue decreases

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binding price floors and price ceilings will always result in

a smaller quantity being bought and sold than the equilibrium quantity

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binding price floor raises legal price

giving an incentive to sellers to produce and sell greater quantity; results in a surplus at the binding price

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for any linear demand curve, the absolute value of the price elasticity of demand will

fall as we move down and to the right along the curve

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when supply/demand is inelastic, deadweight loss of a tax

is small

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when supply/demand is elastic, deadweight loss of a tax

is large

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deadweight loss is

reduction in total surplus due to tax

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a tariff, a tax on imports, reduces the quantity of imports and moves a market closer to

the equilibrium that would exist without trade

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a low domestic price indicates that the country has

a comparative advantage in producing the good and that the country will become an exporter

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a high domestic price indicates that the rest of the world has

a comparative advantage in producing the good and that the country will become an importer

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at points with low price and high quantity

demand curve is inelastic

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at points with high price and low quantity

demand curve is elastic