Percent in quantity demanded to the percent change in price. The larger the price elasticity, the more responsive the quantity demanded is to the price. To find the price elasticity of demand you must first find the % change in quantity demanded and the % change in price. Predicts the effect of a fall in price on total revenue. Tends to be high if the good is a luxury. Tends to increase as consumers have more time to adjust to a price change. Tends to be low when spending on a good accounts for a small share of a consumers income.
When the price elasticity of demand is infinite. Horizontal line. There is a change in the quantity demanded but no change in the price.
The demand is greater than 1. Find the price elasticity of demand. Greater amount of substitutes. An increase in price reduces total revenue. Quantity effect dominates the price effect
Demand is less then 1. Find price elasticity of demand. Few substitutes
A higher price increases total revenue. Price effect dominates the quantity effect. When the price is low the demand in inelastic
Price elasticity of demand is equal to 1. An increase in price does not change total revenue.
Total value of sales of a good or service. Total Revenue = Price x Quantity sold. Equal to the area of the rectangle who's height is the price and width is the quantity demanded. If the strenghts of the price effect and quantity are equal, total revenue is unchanged by the price increase
After a price increase, each unit sold sells at a higher price, which tends to raise revenue.
After a price increase, fewer units are sold, which tends to lower revenue
Cross-Price Elasticity of Demand
The ratio of the % in the quantity demanded of one good to the % in the price of the other. When two goods are substitutes like hot dogs and hamburgers, the cross-price elasticity of demand is positive. When two goods are complement like hot dogs and hot dog buns, the cross price elasticity is negative.
Income Elasticity of Demand
% change in quantity demanded/ % change in income. A measure of how much the demand for a good is affected by changes in consumer's income. It allows us to determine whether a good is a normal good or inferior. When the income elasticity of demand is positive it is a normal good. When the income elasticity of demand is negative the good is inferior.
Demand for that good is greater then 1. When income rises, the demand for income elastic goods rises faster then income. Luxury goods tends to be income-elastic
Quantity demanded falls when income rises. Price elasticity of demand is negative
Perfectly Inelastic Supply
Vertical line. Change in the quantity supplied is zero, whatever the change in price. Vertical supply curve. Price has no effect on quantity supplied or demanded.
Perfectly Elastic Supply
Increase in price leads to a huge increase in the quantity supplied. Price elasticity would be infinite. Horizontal supply curve
What determines price elasticity of supply?
It tends to be large when inputs are readily availible. Tends to grow larger as producers have more time to respond to a price change. Long term price elasticity of supply is often higher than the short- run elasticity
Quantity demanded of one good falls when the price of another rises. Price elasticity of demand is negative
Quantity demanded of one good rises when the price of another rises. Price elasticity of demand is positive
Normal good, income inelastic
Quantity demanded rises when income rises, but not as rapidly as income. The price elasticity of demand is positive, less than 1
Normal good, income inelastic
Quantity demanded rises when income rises, and more rapidly then income. Price elasticity of demand is greater then 1
Price elasticity of supply
% change in quantity supplied/ % change in price. It is affected by the availability of inputs and the time period for adjustments.
When is Demand more elastic
When there are close substitutes, when the good i s a luxury, and when there is more time to adjust to the price change.
What way is the line sloping when demand is inelastic
What way is the line sloping when the demand is elastic
When demand is elastic and price increases what happens to total revenue and does price effect or quantity effect dominate?
Total revenue decreases and quantity effect Dominates
When demand is elastic and price decreases, what happens to total revenue and does price effect or quantity effect dominate?
Total Revenue increases and quantity effect dominates
When demand is inelastic and price increases, what happens to total revenue and does price effect or quantity effect dominate?
Total Revenue increases and price effect dominates.
When demand is inelastic and price decreases, what happens to total revenue and does price effect or quantity effect dominate?
Total Revenue decreases and Price Effect dominates
When demand is unit elastic and price increases, what happens to total revenue, and does price effect, or quantity effect dominate?
There is no effect on total revenue and is exactly offsets quantity, and price effect
When demand is unit elastic and price decreases, what happens to total revenue and which dominates, price effect or quantity effect?
There is no effect on total revenue and price effect and quantity effect exactly offset
A tax on sales of goods or service. Vertical distance between the supply curves.
Incidence of the tax
A measure of who really pays the tax. It is dependent on the price elasticity of demand and supply curves.
When demand is inelastic and supply in elastic, who does the incidence of the tax fall on?
When demand is elastic and supply is is inelastic, who does the incidence of the tax fall on?
The amount of tax people are required to pay per unit of what ever is being taxed
The resources used by government to collect tax, and by taxpayers to pay it
The principle of tax fairness by which those who benefit from public spending should bear the burden of the tax that pays for that spending
Ability to pay principle
The principle of tax fairness by which those with greater ability to pay a tax should pay more
A tax that is the same for everyone, regardless of any actions people take. Does not distort incentives
Trade-off between equity and efficiency
A well designed tax system can be made more efficient only by making it less fair and vice versa
The measure or value, such as income or property value, that determines how much tax individuals pay
Specifies how a tax depends on the tax base
A tax on the income of an individual or family
A tax on the earnings an employer pays to an employee
A tax on the value of goods sold
A tax on the profits of a firm
A tax on the value of a property
A tax on the wealth of an individual
A tax that is the same percentage of the tax base regardless of the taxpayer's wealth or income
A tax that takes a larger share of the income of high-income tax payers than of low-income tax payers
A tax that takes a smaller share of the income of high-income taxpayers than of low-income taxpayers
Marginal Tax Rate
The percentage of an increase in income that is taxed anymore
Ricardian model of international trade
A model that analyses international trade under the assumption that opportunity costs are constant
A situation in which a country does not trade countries.
The difference in the ratio of factors used to produce a good in varies industries
A model of international trade in which a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available
Domestic Demand Curve
A demand curve that shows how the quantity of a good demanded by domestic consumers depends on the price of that good
Domestic Supply Curve
A supply curve that shows how the quantity of a good supplied by domestic producers depends on the price of that good
The price at which a good can be bought or sold abroad
Industries that produce goods and services that are also imported
Trade that is unregulated by government tariffs
Policies that limit imports
An alternative term for trade protection; policies that limit imports
A tax levied on imports
A legal limit on the quantity of a good that can be imported from abroad
International Trade Agreeement
Treaties by which countries agree to lower trade protections against one another
A trade agreement among the U.S., Canada and Mexico
A customs union among 27 European nations
An international organization of member countries that oversees international trade agreements and rules on disputes b/t countries over those agreements
Businesses hiring people in another country to perform various tasks
In contrast to taxes at the Federal level, taxes at the state and local levels of government in the U.S.
Tends to be more regressive
When the world price is below domestic equilibrium and the country in open to trade, does the country export or import
When the world price of a goof is less then the autarky price, will the country export or import goods?
Differences in Factor Endowments
The relationship between comparative advantage and factor availability is found in
an influential model of international trade: the Heckscher–Ohlin model.
The factor intensity of production of a good is a measure of which factor is used
in relatively greater quantities than other factors in production.