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38 Cards in this Set
- Front
- Back
elasticity
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measures the proprtional responsiveness of one variable with respect to changes in another
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price elasticity of demand
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a measure of the proprtional change in units purchased when price is changed by a given small proportion
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Demand is PRICE INELASTIC if the absolute value of the elasticity coefficient is...
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less than 1.0
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Demand is PRICE ELASTIC if the absolute value of the elasticity coefficient...
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exceeds 1.0
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PRICES FALL
We know that demand is inelastic, then we know what concerning quantity and total revenue? |
If demand is inelastic, then when prices fall, the increase in quantity will be relatively less than the decrease in price and total revenue will fall.
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PRICES FALL
If we know demand is elastic, what do we know about quantity and total revenue? |
If demand is elastic and prices fall, the total revenue rises because quantity grows relatively far more than price falls.
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PRICES RISE
If we know demand is inelastic, what happens to quantity and total revenue? |
If demand is inelastic and prices rise, quantities decrease little relative to the increase in price, so total revenue rises.
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PRICES RISE
If we know demand is elastic, what happens to quantity and total revenue? |
If demand is elastic and prices rise, the total revenue falls because the quantity demanded decreases relatively more than prices rise, so total revenue falls.
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What does the curve of a perfectly elastic demand look like?
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horizontal, with price elasticities of infinity
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A) If demand is relatively elastic, then price changes trigger what as far as quantity?
B) Consequently, if elasticity of demand is greater than 1 but not perfectly elastic, then what will happen to total revenue when prices change? |
A) Price changes trigger proportionally larger adjustments in quantity.
B) When prices raise, total revenue will fall; when prices fall, total revenue will grow |
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What does the curve of a perfectly inelastic demand look like?
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vertical, with zero elasticity
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Zero price elasticity implies what about a good?
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Zero price elasticity implies a lack of substitutes for a good and that it is essential (consumers would pay any price to receive a specific quantity of it)
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A) If demand is relatively inelastic, then prices trigger what as far as quantity?
B) Consequently if elasticity of demand is less than 1 but not perfectly inelastic, what will happen to total revenue when prices change? |
A) If demand is relatively inelastic then price changes trigger proportionally smaller adjustments in quantity.
B) When prices rise, total revenue will increase; when prices fall, total revenue will decrease. |
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What does the curve of a perfectly elastic demand look like?
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horizontal, with price elasticities of infinity
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A) If demand is relatively elastic, then price changes trigger what as far as quantity?
B) Consequently, if elasticity of demand is greater than 1 but not perfectly elastic, then what will happen to total revenue when prices change? |
A) Price changes trigger proportionally larger adjustments in quantity.
B) When prices raise, total revenue will fall; when prices fall, total revenue will grow |
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What does the curve of a perfectly inelastic demand look like?
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vertical, with zero elasticity
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Zero price elasticity implies what about a good?
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Zero price elasticity implies a lack of substitutes for a good and that it is essential (consumers would pay any price to receive a specific quantity of it)
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A) If demand is relatively inelastic, then prices trigger what as far as quantity?
B) Consequently if elasticity of demand is less than 1 but not perfectly inelastic, what will happen to total revenue when prices change? |
A) If demand is relatively inelastic then price changes trigger proportionally smaller adjustments in quantity.
B) When prices rise, total revenue will increase; when prices fall, total revenue will decrease. |
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Explain unitarily elastic demand
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A unitarily elastic demand curve oocurs when the elasticity coefficient equals one, so total revenue from the good is unaffected by a change in price
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Price elasticities of demand tend to rise as what happens to price?
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Price elasticities of demand tend to rise as higher and higher prices are charged.
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3 major determinants of elasticity of demand include:
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1. the number, quality, and availability of SUBSTITUTES for a good
2. the proportion an item absorbs |
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income elasticity if demand
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measures the proportional change in the quantity demanded of a good resulting from a given small proportional change in income
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Income elasticity of demand for NORMAL GOODS
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income elasticities are positive -- rising incomes stimulate purchases of all normal goods
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Income elasticity of demand for all INFERIOR GOODS
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income elasticities are negative -- purchases of inferior goods decline as income rises
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Cross Price Elasticity of Demand
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estimates the proportional change in the quantity of one good demanded when the price of a related good is changed
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When cross price elasticities are positive, the items in questions are...
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substitute goods
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Sets of goods for which cross price elasticities of demand are negative are...
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complementary goods
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price elasticity of supply
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measures the responsiveness of quantity supplied to changes in price
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economic incidence of taxation
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aka tax burden
falls on person who suffers reduced purchasing power because of the tax |
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Inelastic supply -- who bears legal/economic incidence of tax?
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Suppliers
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Inelastic demand -- who bears tax burden?
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Consumer bears full burden
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Elastic demand -- who bears tax burden?
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Supplier bears full burden
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Elastic supply -- who bears tax burden?
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Consumer bears full burden
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Forward-shifted tax;
Backward-shifted |
borne by consumer;
borne by supplier |
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Taxes will be 100% forward-shifted if either:
a) b) |
a) demand is perfectly inelastic, e.g. salt
b) supply is perfectly elastic e.g. copper |
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Taxes will be 100% backward-shifted if either:
a) b) |
a) supply is perfectly inelastic
b) demand is perfectly elastic |
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General principle:
The greater the elasticity of market demand relative to the elasticity of the market supply... |
the greater the backward shifting of any tax burden.
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General principle:
The smaller the ratio of (elasticity of demand)/(elasticity of supply) ... |
the greater the forward-shifting of the tax burden
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