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AU / Economics / ECON 200 / What is elasticity of demand?

What is elasticity of demand?

What is elasticity of demand?

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Study Guide #2  


What is elasticity of demand?



Chapter 5  

∙ Price elasticity of demand- sensitivity of quantity demanded to a price change ∙ % quantity demanded / % price change= elasticity  

∙ The more substitutes there are for a good= more likely it is elastic  Less substitutes= likely to be inelastic  

∙ Time horizon:  

More time people have to buy good becomes inelastic  

Less time people have to buy good becomes elastic

∙ Importance: When something is a necessity, you have more inelastic  demand, luxuries have more elastic demand  

∙ Share of budget: when it concerns a large share of budget (rent), people are  much more concerned about price increases than an item that is a small  share of budget (pack of gum)


What is price ceilings?



∙ Price x quantity= total revenue  

∙ Inelastic demand goods with prices raised= somewhat less customers, but  ppl still need the good so increases in revenue offsets loss of customers  ∙ Elastic demand goods with prices raised=a lot less customers bc ppl don’t  

need the good and aren’t willing to pay for price increase, so revenue  increase per sale doesn’t offset drop in # of sales If you want to learn more check out What is bacterial flagella?

∙ Inelastic goods with prices lowered=customers don’t respond much to price  changes so only slightly more sales which aren’t enough to offset money lost  by company for charging less

∙ Elastic goods with prices lowered= Many more sales, which offset the money  lost by company per sale bc price cut  

∙ Price Elasticity of Supply- sensitivity of quantity supplied to a price change  ∙ To determine elasticity: % change in quantity/ % change in price (# less than  1= inelastic, # greater than 1= elastic)


What is rent subsidy?



∙ Perfectly inelastic- quantity bought doesn’t change when price goes up  ∙ Perfectly elastic- price does not change when quantity bought increases  (reason why gun buybacks don’t work)  

Inelastic Elastic  

Can you produce more at constant cost? Difficult Easy Share of input market? Large Small Source of Supply? Global Local  Time Horizon? Short run Long run Chapter 6  

∙ When businesses pay the tax on a product and raise the price, not an  equilibrium price and creates a surplus bc there is a smaller quantity of  product sold since the cost is higher If you want to learn more check out What is the formula of magnification?

∙ Price is higher for buyers and businesses keep less profit when buyer is  directly taxed as well bc people don’t want to buy the product if they have to  pay a tax and less of product are sold  Don't forget about the age old question of What is nativism?

∙ The price will be higher for buyers and businesses keep less profit in order to pay tax (same outcome no matter who is responsible for tax) ∙ Government determines who pays a tax, not who feels the burden of the tax  ∙ Elasticity determines the tax

∙ The more elastic a buyer or seller is in supply or demand, the more burden of  tax they feel

∙ The more inelastic, the steeper the supply or demand curve, the more elastic  the flatter the supply or demand curve  

∙ When gov subsidizes businesses, quantity sold rises, buyers pay less, and  sellers receive more money for the good  We also discuss several other topics like Who are the members of a construction team?

∙ When gov subsidizes individuals, ppl are richer and willing to pay more for a  good, but since they are using the subsidy to pay for that good they are  actually paying less than the normal equilibrium price sellers receive more  and quantity sold increases

∙ Gov determines who receives a subsidy, but not who feels benefit of the  subsidy  

∙ The more inelastic, the larger the benefit of a subsidy  

Chapter 8  

∙ Price ceilings- highest legal price you can charge in a specific market ∙ Ex: rent control  We also discuss several other topics like What is the chemical symbol?

∙ Causes shortage because supply decreases since people don’t want to rent  out their property for less/ build properties that will earn them less, demand  increases since the apartment is more affordable (although more people can  afford the apartment, there are less apartments available)

∙ Outcomes: weakly targeted benefits (Rent control is transfer of wealth from  poor to rich bc rich get rent controlled apartments and receive benefits,  regressive), black market, bundling  

∙ Rent subsidy- lower rent, more housing (landlords can still charge market rate and then those who can’t afford can be reimbursed), strongly targeted  ∙ Rich pay more taxes, which means they would pay most of cost for rent  subsidies and the poor would actually benefit bc poor are the only ones who  are eligible (would go to the right place, progressive)  

∙ Price floor- lowest legal price  

∙ When wages are raised, more people are willing to work (larger supply of  workers)

∙ But demand becomes less because businesses aren’t willing to employ as  many people when they have to pay employees higher wages (smaller  demand for workers)  Don't forget about the age old question of What is a dipole moment?

∙ Outcomes: surplus of labor (unemployment, less people are able to have  jobs) black markets (employers offering less than legal wage to ppl who are  willing to accept less to gain employment), concessions by sellers (sellers are  employees selling their labor), weakly-targeted benefits (no law that says

companies only have to hire adults in poverty to receive higher minimum  wage)

∙ Raising the minimum wage primarily helps people who are above the poverty line, only a small portion of benefits goes to people below poverty line  ∙ Enacting minimum wage laws is similar to imposing taxes on businesses bc  those businesses are now required to pay more to operate their business  ∙ When gov. subsidizes wages, the actual wage goes down and therefore price  of labor falls, so there is a higher supply of jobs available from employers, but there are people who want to fill those jobs because they will receive the  lower wage plus the subsidy which is more than the original “higher” wage  ∙ Wage subsidy higher wage, higher employment, strongly targeted (bc  government can regulate who receives a subsidy), progressive policy  (subsidies are funded by income tax which is tiered depending on income,  people who make the most pay the most taxes and therefore will shoulder  most of the burden of subsidies instead of the poor people who subsidies are  trying to help)  

Chapter 19  

∙ Property rights- institution that uses self interest to avoid the tragedy of the  commons  

∙ Limit the number of users (in the case of property, owner determines who  gets to use the property)

∙ Create incentives for owners to take care of resources on the property, if  resources are not taken care of owner will lose money bc resources lose value when they are damaged (people are self-interested bc monetary incentive)

∙ Markets are necessary for economic prosperity (Great Leap Forward in China,  market for food)

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