AP Micro Ch 2

tax: 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