Studied by 4 peopletax: demand and supply are equally price elastic
tax burden is shared evenly between buyers and sellers
tax: demand is less price elastic than supply
buyers bear the burden of the tax
tax: supply is less price elastic than demand
sellers bear the burden of the tax
price ceiling below equilibrium
causes shortage
price floor above equilibrium price
causes surplus
price elasticity of demand > 1
elastic
price elasticity of demand < 1
inelastic
luxuries
more elastic
habit-forming goods
more elastic
in the long run
supply/demand is more elastic
reasons for a change in demand
change in consumer expectations, tastes, number of consumers, income, price of substitute/complementary goood
reasons for a change in supply
change in costs of inputs, technology, number of producers, government policies
price elasticity of demand is always measured
along a demand curve, all other variables must be held constant
income elasticity > 0
good is a normal good
income elasticity < 0
good is an inferior good
cross price elasticity > 0
goods are substitutes
cross price elasticity = 0
goods are unrelated
cross price elasticity < 0
goods are complementary
determinants of price elasticity of demand
presence of substitutes, proportion of income spent, nature (durable, necessity),
price and total revenue move in opposite directions
elastic price elasticity of demand
price and total revenue move in the same direction
inelastic price elasticity of demand
total revenue is unaffected by a change in price
unit elastic price elasticity of demand
burden of tax on consumer
increase in equilibrium price resulting from tax
burden of tax on producer
tax not paid by consumers
burden of tax is totally on buyers
demand is perfectly inelastic
burden of tax is totally on sellers
demand is perfectly elastic
any factor that increases the cost of production
decreases supply
price increase on elastic good
total revenue decreases
price decrease on elastic good
total revenue increases
price increase on unit elastic good
total revenue unchanged
price decrease on unit elastic good
total revenue unchanged
price increase on inelastic good
total revenue increases
price decrease on inelastic good
total revenue decreases
binding price floors and price ceilings will always result in
a smaller quantity being bought and sold than the equilibrium quantity
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
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
when supply/demand is inelastic, deadweight loss of a tax
is small
when supply/demand is elastic, deadweight loss of a tax
is large
deadweight loss is
reduction in total surplus due to tax
a tariff, a tax on imports, reduces the quantity of imports and moves a market closer to
the equilibrium that would exist without trade
a low domestic price indicates that the country has
a comparative advantage in producing the good and that the country will become an exporter
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
at points with low price and high quantity
demand curve is inelastic
at points with high price and low quantity
demand curve is elastic
Note
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