Elasticity
What is the formula for calculating elasticity of demand?
% change in Qd / % change in Price
Name three things that can shift the demand curve right
Favorable changes in Tastes and Preferences
Increase in price of substitutes
Increase in consumer income
Increase in the number of consumers
Positive Expectations about the future
Decrease in the cost of complimentary goods
Favorable changes in gov't taxes and subsidies for consumers
Define consumer and producer surplus
Consumer surplus is the difference between what consumers are willing to pay for a good and what they actually pay.
Producer surplus is the difference between what producers are willing to accept for a good and the market price they actually receive.
What is a price ceiling? What is the goal of the gov't in setting a price ceiling.
A maximum price set by the government that can be charged for a good or service. The gov'ts goal with a price ceiling is to keep prices affordable for consumers.
What is market efficency?
Market efficiency occurs when resources are allocated in a way that maximizes total surplus with no waste or inefficiencies.
Define elastic demand and inelastic demand with examples.
Elastic Demand: A small change in price causes a large change in quantity of a demanded. Examples: Brands of Coffee and non-essential electronics
Inelastic Demand: when a change in price has a small or insignificant effect on quantity demanded. Examples: Gas, medicine, staple foods
What are the shifters of supply?
Input prices
Technology
Number of firms
Producer future expectations
Government policies
Price of other goods (a producer could produce)
How does consumer surplus change when price changes?
How does producer surplus change when price changes?
An increase in price usually decreases consumer surplus, while a decrease in price increases consumer surplus.
An increase in price usually increases producer surplus, while a decrease in price decreases producer surplus.
What is a price floor? What is the gov'ts goal in setting a price floor.
A price floor is a minimum price set by the gov't that must be paid for a good. It is intended to help producers ensure a fair income.
Explain Dead Weight Loss
The loss of economic efficiency that occurs when the equilibrium outcome is not achievable or not achieved, often due to market distortions (taxes, ceilings, floors tariffs...etc)
What are the factors that determine the elasticity of a good?
1. Availability of substitutes (many vs. few)
2. Necessity vs. Luxury
3. Proportion of Income Spent (large vs. small)
4. Time period (Short run vs. Long run)
Describe the change in price and quantity demanded for in the cellphone market based on the following scenario:
The gov't introduces subsidies for cell phone buyers
The price of tablets drops significantly
(Send one team member to draw the scenario on the board)
Price will increase and quantity demanded is uncertain
How do gov't interventions affect consumer and producer surplus?
Gov't interventions, such as price ceilings and floors, can distort market equilibrium and affect both consumer and producer surpluses, often leading to inefficiencies.
What is an excise tax? How does an excise tax effect the market for a good or service?
An excise tax is a tax imposed on a specific good or service, often used to discourage harmful products. Excise taxes make goods and services more expensive, which decreases quantity demanded for the good. It also creates an inefficiency deadweight loss in the market.
In the rental housing market of City B, the government imposes a price ceiling on monthly rent that is set below the equilibrium price. Which of the following statements correctly describes the effects of this policy?
(A) A binding price ceiling creates a surplus of rental housing, increases producer surplus, reduces consumer surplus, and increases total surplus.
(B) A binding price ceiling creates a shortage of rental housing, reduces producer surplus, increases consumer surplus for those who obtain apartments, and creates deadweight loss.
(C) A non-binding price ceiling creates a shortage, increases producer surplus, and decreases deadweight loss.
(D) A binding price ceiling lowers the equilibrium price to the ceiling level, eliminates shortages, and maximizes total surplus.
(E) A non-binding price ceiling redistributes income from producers to consumers but has no effect on equilibrium quantity.
B
Assume that the price elasticity of demand for good M is equal to –3.0, and the price elasticity of demand for good N is constant and to –0.8. Both goods have identical upward-sloping linear supply curves with a price elasticity of supply equal to +1. A per-unit excise tax of the same dollar amount is imposed on both good M and good N. Which of the following is true?
(A) The deadweight loss created by the tax on good M will be larger than the deadweight loss created by the tax on good N.
(B) The percentage decrease in equilibrium quantity will be greater for good N than for good M.
(C) Consumers of good M will bear a greater share of the tax burden than consumers of good N.
(D) Producers of good N will bear a smaller share of the tax burden than producers of good M.
(E) The total tax revenue generated from good M will necessarily exceed that from good N.
A The good with more elastic demand experiences larger decline in quantity in response to a tax, so the deadweight loss for good m will be larger than DWL for good N
In the housing market of a large city, the following changes are observed over the past year:
The equilibrium price of apartments has increased.
The equilibrium quantity of apartments rented has also increased.
Which of the following combinations of real-world events best explains these changes?
(A) A major construction boom adds thousands of new apartment buildings, while city residents move away to suburban areas.
(B) A wave of young professionals moves into the city, while stricter building regulations increase the cost of construction.
(C) A surge in urban population due to migration, while new building technologies make apartment construction cheaper and faster.
(D) Rising interest rates make mortgage loans more expensive, while a local government rent-control policy caps prices.
(E) Demand for apartments stays steady, but several construction companies go bankrupt, reducing the available supply.
C
Four consumers are willing to pay the following maximum amounts for a ticket to a concert:
Alex: $100
Bailey: $80
Chris: $60
Dana: $40
The market price of a ticket is $50, and each consumer can only purchase one ticket. What is the total consumer surplus in this market?
Total CS: (100 - 50) + (80 - 50) + (60 - 50) = $90
What is a tariff? How do tariffs effect the market for a good or service. How do the price and quantity of goods change from the World Price to the Tariff price.
he market for gourmet coffee in City D is described as follows:
Price elasticity of demand is −2
Price elasticity of supply is 0.5
The government imposes a per-unit excise tax of $1 on coffee.
Questions:
(A) Calculate the fraction of the tax that will be paid by consumers and the fraction paid by producers.
Use the formula for consumers share of the taxes = Es / (Es + l Ed l)
Use the formula for producers share of the taxes = l Ed l / (Es + l Ed l)
(B) Explain, in economic terms, why the more elastic side of the market bears less of the tax burden.
A: Consumers share of tax: 20% Producers share of tax: 80%
B: The inelastic side of the market bears more of the tax burden b/c the quantity supplied has little change in response to a price change.
The market demand for good Z is linear and downward sloping. At a price of $20 per unit, the quantity demanded is 80 units, and the price elasticity of demand at that point is –1.5.
Suppose the government introduces a per-unit subsidy of $4, which lowers the market price consumers pay to $16.
Which of the following statements is correct regarding total revenue in this market after the subsidy?
(A) Total revenue decreases because demand is elastic in this range of the demand curve.
(B) Total revenue increases because demand is elastic in this range of the demand curve.
(C) Total revenue is unchanged because the price elasticity of demand is unit elastic at $20.
(D) Total revenue decreases because demand is inelastic in this range of the demand curve.
(E) Total revenue increases because demand is inelastic in this range of the demand curve.
B At price $20, elasticity is -1.5 therefore demand is elastic. Price falls from $20 to $16 due to the subsidy. Demand is elastic therefore price increases the total revenue.
In the smartphone market, the following changes are observed over the past year:
The equilibrium price of smartphones has increased.
The equilibrium quantity of smartphones has decreased.
Which of the following combinations of real-world events best explains these changes?
(A) A surge in consumer preference for smartphones due to new features, while advances in production technology reduce manufacturing costs.
(B) A decline in consumer interest as people shift to wearable devices, while shortages of critical microchips reduce smartphone production.
(C) Higher consumer incomes increasing demand for smartphones, while global supply chains become more efficient in producing components.
(D) An increase in advertising for smartphones that boosts demand, while government subsidies lower production costs for smartphone makers.
(E) No major change in consumer tastes, but stricter environmental regulations raise the cost of smartphone production.
B
Jordan's willingness to pay for cups of coffee is shown below. Each row represents the maximum Jordan is willing to pay for that particular cup of coffee (marginal benefit)
1st Cup WTP: $5, 2nd Cup WTP: $4, 3rd Cup WTP: $3, 4th Cup WTP: $2, 5th Cup WTP: $1
The market price of a cup of coffee is $2.50.
How many cups of coffee will Jordan purchase?
Calculate Jordan's total consumer surplus.
A. Rule buy until WTP is greater than or equal to price. 3 cups of coffee.
Consumer Surplus: (5 - 2.50) + (4 - 2.50) + (3 - 2.50) = $4.50
Country A is a small nation that imports steel. The world price of steel is below Country A’s autarky (no-trade) price.
Which of the following best defines the effects of a tariff or a quota on imported steel in this situation?
(A) Both a tariff and a quota lower the world price of steel and raise total surplus in Country A.
(B) A tariff raises the domestic price of steel above the world price, but a quota leaves the price unchanged while only limiting the quantity of imports.
(C) A tariff generates government revenue, while a quota increases consumer surplus but reduces producer surplus.
(D) A tariff reduces domestic producer surplus but increases government revenue, while a quota increases domestic producer surplus without affecting consumer surplus.
(E) Both a tariff and a quota raise the domestic price of steel above the world price, reduce consumer surplus, increase domestic producer surplus, and create deadweight loss.
E
The market for one-bedroom apartments in City C is described by the following linear demand and supply schedules.
Rent ($/month) Quantity Demanded Quantity Supplied
1000 50 110
900 70 90
800 90 70
700 110 50
600 130 30
500 150 10
The Gov't imposes a price ceiling of $800 per month.
A. Determine the equilibrium price and quantity before price ceiling
B. Determine the quantity rented under the price ceiling
C. Calculate deadweight loss created by the price ceiling.
A: EQ Price b/w $900 and $800 = ($850) EQ Quantity b/w 90 and 70 = (80)
B: Quantity at Price Ceiling $70
C: DWL = 1/2 (Price difference) x (Quantity Lost)
1/2 (850 - 800) x (80 - 70) = 250