Elasticity Basics
This is the ratio of the percent change in quantity demanded to the percent change in price as you move along the demand curve
What is the price elasticity of demand?
If this elasticity between two goods is positive, the goods are considered substitutes
What is the cross-price elasticity of demand?
This term refers to the maximum price a potential buyer is willing to pay for a good
What is willingness to pay?
This is a tax charged on each unit of a particular good or service that is sold
What is an excise tax?
This is a hypothetical unit used to measure personal satisfaction
What is a util?
This effect explains why consumers buy less of a good that has become relatively more expensive compared to other goods
What is the substitution effect?
This mathematical technique calculates percent changes using the average of initial and final values to ensure the elasticity is the same regardless of whether the price rises or falls
What is the midpoint method?
This type of good has a negative income elasticity of demand, meaning consumers buy less of it as they get richer
What is an inferior good?
This is the net gain to an individual buyer from a purchase, calculated as willingness to pay minus the price paid
What is individual consumer surplus?
This term describes the actual distribution of the tax burden between consumers and producers, regardless of who officially pays the tax
What is tax incidence?
This is the change in total utility generated by consuming one additional unit of a good
What is marginal utility?
This effect is the change in quantity demanded resulting from a change in a consumer's purchasing power due to a price change
What is the income effect?
When the price elasticity of demand is exactly 1, demand is classified as this
What is unit-elastic?
A supply curve that is a vertical line represents this extreme case where the quantity supplied does not change regardless of price
What is perfectly inelastic supply?
On a graph, total producer surplus is equal to the area in this location relative to the supply curve and market price
What is above the supply curve but below the price?
When the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls mainly on this group
Who are consumers?
According to this principle, each successive unit of a good consumed adds less to total satisfaction than the previous unit
What is the principle of diminishing marginal utility?
A market is considered this if there is no way to make some people better off without making others worse off
What is efficient?
If demand for a good is inelastic, a rise in price will have this effect on total revenue
What is an increase in total revenue?
A good is considered to be this if its income elasticity of demand is greater than 1, meaning demand rises faster than income
What is income-elastic (or a luxury)?
This is the total net gain to both consumers and producers from trading in a market
What is total surplus?
An excise tax causes this type of inefficiency, representing the total surplus lost to society because mutually beneficial transactions do not occur
What is deadweight loss?
This rule states that to maximize total utility, a consumer must equate the marginal utility per dollar spent on each good in their bundle
What is the optimal consumption rule?
These represent the resources used by the government to collect a tax and by taxpayers to pay or evade it
What are administrative costs?
This factor generally causes the long-run price elasticity of demand to be higher than the short-run elasticity
What is time?
This is the main determinant of the price elasticity of supply, often being higher for goods like pizza than for those requiring limited natural resources
What is the availability of inputs?
This is the lowest price at which a potential seller is willing to sell a good
What is cost (or opportunity cost)?
This type of tax is the same for everyone regardless of their actions, causing no deadweight loss but often being perceived as unfair
What is a lump-sum tax?
This line shows all the possible combinations of goods a consumer can purchase if they spend all of their income
What is the budget line?
This is the term for a rare hypothetical good where a price increase might actually lead to an increase in quantity demanded because the income effect outweighs the substitution effect
What is a Giffen good?