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The 4 Determinants of Price Elasticity:
- The price elasticity of demand depends on:
- the extent to which close substitutes areavailableh th th d i it l
- whether the good is a necessity or a luxury
- how broadly or narrowly the good is defined
- the time horizon – elasticity is higher in the long run than the short run
What is Total Revenue
TR = Price * Quantiy
When is the Price Ceiling a binding constraint on the price?
- -When the Price Ceiling is below equilibrium
- -this causes a shortage of goods
When is the Price Floor a binding constraint on the Price,
- -When the Price Floor is above equilibrium
- -this causes a surplus
What is the the Incidence of a Tax:
- -how the burden of a tax is shared among market participants (buyers and seller)
- -after tax the resulting equlibrium and tax incidence are thesame whether the tax is imposed on buyers or sellers
willingness to pay
the maximum amount the buyer will pay for that good
3 references for allocation of resources
- • how much of each good is produced
- • which producers produce it
- • which consumers consume it
the buyer who would leave the market if the Price were any higher
- -is the amount a buyer is willing to pay minus the amount the buyer actually pays
- -Total CS equals the area under the demand curve and above the price, from 0 to the Quantity.
the seller who would leave the market if the price were any lower.
- -the amount a selleris paid for a goodminus the seller’s cost
- -Total PS equals the area above the supply curve under the price,from 0 to Q.
- = CS + PS
- = total gains from trade in a market
- = (value to buyers) – (cost to sellers)
when is an allocation of resources efficient
when it maximizes total surplus
what is Efficiency whith regards to surplus
- The goods are consumed by the buyers who value them most highly.
- The goods are produced by the producers with the lowest costs.
- Raising or lowering the quantity of a good would not increase total surplus.