Income elasticity of demand- measures how quantity demanded changes as consumer income changes
= % change in Q demanded/ % change in income
- Higher income raises Q demanded (move in same direction)
- Normal goods have positive income elasticities
- Inferior goods- higher income lowers Q demanded, negative income elasticities
Cross- Price Elasticity of Demand- how Q demanded of one good responds to change in P of another
= % change in Q demanded of good 1/ % change in P of good 2
- Substitutes (hamburgers vs hot dogs)- inc P in hot dog= inc Q of hamburger positive cross price
- Complements (computer + software)- inc P in computer= dec Q of software negative cross price
Price Elasticity of Supply= how much quantity supplied responds to change in price
- Supply more elastic in long run than short run
- Short run- cannot easily make more or less of good, so is inelastic
- Long run- can build new factories or close old ones, so is elastic
Price ceiling- legislated max price, can’t rise above that level
Price floor- legal minimum price, can’t fall below this level Tax on good reduces the good’s market [and sellers get lower price of product, buyer pay higher price
than the effective/ equilibrium price]
Taxes levied on sellers and taxes levied on buyers are equivalent. A tax burden falls more heavily on the side of the market that is less elastic.
- Elasticity measures willingness of B/S to leave market when conditions become unfavorable
- Inelastic demand= buyers don’t have good alternatives to consume particular good
- Inelastic supply= suppliers don’t have good alternative to producing the good
- When good is taxed, side w fewer good alternatives less willing to leave market and bears more
of tax burden CHAPTER 7
Consumer surplus is the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.
marginal buyer, the buyer who would leave the market first if the price were any higher.
The area below the demand curve and above the price measures the consumer surplus in a market.
Producer Surplus is the amount a seller is paid minus the cost of production
- Cost= opportunity cost= lowest price one would accept for one’s services- measure of
willingness to sell their services
Offered to do the job for $800 or less: Georgia and Grandma willing to work at that price, but Mary &
- Grandma PS: 800-500= $300
- Georgia PS: $200
- Total PS= $500
marginal seller, the seller who would leave the market first if the price were any lower.
Total Surplus= value to buyer