Elasticity and taxes

ECON 1030 Unit 4

Excise Tax

A tax based on the number of units purchased, not on the price paid for a good or service.

Elasticity

A measure of how responsive one variable is to a change in another variable; calculated as the percentage change in quantity divided by the percentage change in price

Price Elasticity of Demand

A measure of how responsive quantity demanded is to a change in price; calculated as the percentage change in quantity demanded divided by the percentage change in price.

Elastic Demand

Price elasticity of demand greater than 1 in absolute value; quantity demanded that is relatively more responsive to a change in price, such that if price changes by 1%, quantity demanded changes by more than 1% as a result.

Inelastic Demand

Price elasticity of demand less than 1 in absolute value; quantity demanded that is relatively less responsive to a change in price, such that if price changes by 1%, quantity demanded changes by less than 1% as a result.

Unit-Elastic Demand

Price elasticity of demand equal to 1 in absolute value; prices and quantities demanded change by equal percentages, such that if price changes by 1%, quantity demanded changes by 1% as a result.

Perfectly Elastic Demand

Infinite price elasticity of demand; quantity demanded that is so responsive to a change in price that if price increases or decreases, quantity demanded decreases to zero.

Perfectly Inelastic Demand

Price elasticity of demand equal to zero; quantity demanded is completely nonresponsive to price changes, such that any increases or decreases in price leave quantity demanded unchanged

Cross-Price Elasticity of Demand

A measure of the effect of a change in the price of one product on the quantity demanded of another; calculated as the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Income Elasticity of Demand

A measure of how responsive demand is to a change in consumer income; calculated as the percentage change in the quantity of a good or service demanded divided by the percentage change in income.

Price Elasticity of Supply

A measure of how responsive quantity supplied is to a change in price; calculated as the percentage change in quantity supplied divided by the percentage change in price.

Immediate Period

The time period in which producers cannot increase their use of economic resources to increase quantity supplied.

Short Run

The time period in which at least one input of production is fixed but other inputs can be changed.

Long Run

The time period in which all inputs of production can be changed.