Cross-price elasticity of demand
the percentage change in the quantity demanded of good A as a result of a percentage change in price of good B
Since elasticity measures responsiveness, it can also be used to measure the own-price elasticity of supply, the cross-price elasticity of demand, and the income elasticity of demand.
Elasticity
an economics concept that measures responsiveness of one variable to changes in another variable
The answers to those questions will be explored in this chapter with a concept economists call elasticity.
Income elasticity of demand
the percentage change in quantity demanded of a good or service as a result of a percentage change in income
This responsiveness can also be measured with elasticity by the income elasticity of demand.
Own-price elasticity of demand
percentage change in the quantity demanded of a good or service divided the percentage change in price
If supply is perfectly inelastic, then producers bear none of the burden of a tax, no matter what the value of own-price elasticity of demand.
Mid-point Method
Involves multiplying the inverse of the slope by the values of a single point.
The mid-point method gives an average of elasticities between two points.
Own-price elasticity of supply
percentage change in the quantity supplied divided by the percentage change in price
Whereas elasticity of demand measures responsiveness of quantity demanded to a price change, own-price elasticity of supply measures the responsiveness of quantity supplied.
Point Slope Method
A method of calculating elasticity between two points. Involves calculating the percentage change of price and quantity with respect to an average of the two points.
Mid-point gives an average of elasticities between two points, whereas point-slope gives the elasticity at a certain point.
Elastic
when the elasticity is greater than one, indicating that a 1 percent increase in price will result in a more than 1 percent increase in quantity; this indicates a high responsiveness to price.
The more elastic a firm, the more it can increase production when prices are rising, and decrease its production when prices are falling.
Inelastic
when the elasticity is less than one, indicating that a 1 percent increase in price paid to the firm will result in a less than 1 percent increase in quantity; this indicates a low responsiveness to price.
If we were to calculate elasticity at every point on a demand curve, we could divide it into these elastic, unit elastic, and inelastic areas, as shown in Figure 4.2a.
Unitary elastic
when the calculated elasticity is equal to one indicating that a change in the price of the good or service results in a proportional change in the quantity demanded or supplied
Elasticities can be divided into three broad categories: elastic, inelastic, and unitary.
Perfectly Elastic
the extremely elastic situation of demand or supply where quantity changes by an infinite amount in response to any change in price; horizontal in appearance
The concepts of perfectly elastic and perfectly inelastic lead us into a discussion of relative elasticity.
Perfectly Inelastic
the highly inelastic case of demand or supply in which a percentage change in price, no matter how large, results in zero change in the quantity; vertical in appearance
This is an example of a situation where demand is nearly perfectly inelastic.
Price Ceiling
a legal maximum price
Policies like price ceilings are often intended to help consumers in low-income brackets.
Price Control
government laws to regulate prices instead of letting market forces determine prices
The first government policy we will explore is price controls.
Price Effect
the impact when price differs from equilibrium, causes a transfer of surplus between parties
When you increase price, you increase revenue on units sold (The Price Effect).
Price Floor
a legal minimum price
Whereas price ceiling aims to lower the price, price floors aim to raise it.
Quantity Effect
the impact when quantity differs from equilibrium, causes a deadweight loss to society
When you increase price, you sell fewer units (The Quantity Effect).
Quota
A government-imposed restriction on the number of goods bought and sold
A policy to reduce quantity is called a quota, a government-imposed restriction on the number of goods bought and sold.
Economic Tax Incidence
the distribution of tax based on who bears the burden in the new equilibrium, based on elasticity
First, we must examine the difference between legal tax incidence and economic tax incidence.
Legal Tax Incidence
the legal distribution of who pays the tax
First, we must examine the difference between legal tax incidence and economic tax incidence.
Subsidy
a benefit given by the government to groups or individuals, usually in the form of a cash payment or a tax reduction It is often to remove some type of burden, and it is often considered to be in the overall interest of the public
While a tax drives a wedge that increases the price consumers have to pay and decreases the price producers receive, a subsidy does the opposite.
Domestic Equilibrium
The equilibrium acheived by a market if it is not open to trade
In the domestic market, the domestic equilibrium price and quantity are $1,000/board feet, and 40 million board feet, respectively.
Tariff
a tax imposed on imported goods or services
The problem – the U.S. may increase its tariff (a common trade policy) from 15% to up to 25%, in response to what they say are unfair subsidies from the Canadian government.
World Price
the equilibrium price of the world market
In this case, the world price, or PW is substantially lower than the domestic price.
These terms were extracted from Principles of Microeconomics by Dr. Emma Hutchinson, University of Victoria, eCampusOntario which is licensed under a Creative Commons Attribution 4.0 International License. Based on Principles of Microeconomics by OpenStax, licensed under CC BY 4.0.