EC120 Lecture Notes - Lecture 2: Normal Good, Price Ceiling, Economic Equilibrium
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Elasticity: a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. Price elasticity of demand = percentage change in quantity demanded. Price elasticity of demand = (q2-q1)/[(q2+q1)/2] (p2-p1)/[(p2+p1)/2: elastic= greater than 1, less steep. Inelastic= less than 1: bottom right to top left; steep, perfectly elastic= infinity, horizontal line, perfectly inelastic= 0, vertical line, unit elastic= 1, slope of 1/1. Total revenue (in a market): the amount paid by buyers and received by sellers of a good, computed as the price of the good times the quantity sold. Price floor: a legal minimum on the price at which a good can be sold. Tax incidence: the manner in which the burden of a tax is shared among participants in a market. Elasticity and tax incidence: buyers and sellers share the burden of tax, only rarely it is shared equally, to determine the burden of the impact of taxation on each market is measured.