Term
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Definition
The ratio of the proportional change in one variable with respect to proportional change in another variable.
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Term
What is price elasticity of demand?
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Definition
The responsiveness of buyers (in terms of their buying decisions) to changes in the price of a product.
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Term
How do we measure the coefficient, Ed?
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Definition
Percentage change in quantity demanded
Percentage change in price
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Term
| How can we interpret absolute values of Ed to evaluate how sensitive consumers are to a percent change in price? |
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Definition
| If the demand is elastic, the coefficient will have an absolute value greater than 1. If the demand is inelastic, the coefficient's absolute value will be a fraction less than 1. |
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Term
| What do we know about Ed if we have a vertical demand curve? |
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Definition
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Term
| What do we know about Ed if we have a horizontal demand curve? |
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Definition
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Term
| Discuss the determinants of Ed. Give an example of each. |
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Definition
1. Necessities vs. Luxuries - It is harder to find substitutes for necessities so quantity demanded will change less.
2. Availability of close substitutes - If there are close substitutes, buyers will move away from more expensive items and demand will be elastic.
3. Definition of the market - The more broadly we define an item, the more possible substitutes and the more elastic the demand.
4. Time Horizon - The longer the time available, the easier to find substitutes and the more elastic the demand.
5. Relative size of purchase - Purchases which are a very small portion of total expenditure tend to be more inelastic, because consumers are not worried about the extra expenditure. |
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Term
| How does the burden or incidence of a sales or excise tax relate to price elasticity of demand? |
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Definition
| The burden of the tax falls most heavily on the group (consumers or suppliers) with the more inelastic curve. |
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Term
| In a case where a sales tax is imposed in a market where demand is relatively inelastic, how is the tax shared between producers and consumers? Is most of the impact of this tax seen in the change in Pe or Qe? |
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Definition
The greater burden of the tax falls upon consumers.
Most of the impact of this tax is seen in the change in the price. |
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Term
In a case where a sales tax is imposed in a market where demand is relatively elastic, how is the tax shared between producers and consumers? Is most of the impact of this tax seen in the change in Pe or Qe?
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Definition
The greater burden of the tax falls upon the suppliers.
Most of the impact of this tax is seen in the change in the quantity. |
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Term
| Before imposing a sales or excise tax, government must be concerned about causing an unemployment problem. When does this large drop in Qe occur? |
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Definition
| When there is a relatively elastic demand and the burden of the tax falls on the suppliers. |
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Term
| Before imposing a sales or excise tax, government must be concerned about how much revenue this tax will generate. What types of products are the best revenue-producers for the government? |
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Definition
| Products like cigarettes, alcohol, and gasoline. |
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Term
| Do taxes placed on cigarettes and liquor cause a large change in the smoking and drinking habits of the consumer? |
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Definition
Yes, because these taxes lower the supply, resulting in a higher price.
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Term
| When could suppliers be unable to shift any of the tax to consumers, meaning the supplier bears the entire burden of the tax? |
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Definition
| When the supply is perfectly inelastic. |
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Term
| A local city council has just passed a rent control ordinance. Present this market as an example of a price ceiling. |
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Definition
A rent control ordinance sets a price ceiling, or limit, on how much rent can be charged. An effective price ceiling is set below the equilibrium price, so due this lower price more people will want to to rent, but the quantity will not be high enough to meet this increased demand, causing a permanent shortage.
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Term
| What is the long term consequence of rent controls in a community? Explain. |
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Definition
In the long run, rent controls cause shortages that lead to a deteriorating stock of affordable housing. They hurt the poor that were supposed to be helped by the rent control, and instead help the wealthy.
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Term
| What option besides rent control might be considered to reduce rent in a community? |
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Definition
| Public housing, which is housing units owned by a local public housing authority but are federally subsidized and regulated, and subsidies to developers where thegovernment pays landlords who build housing for the poor. |
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