Chapter 6 Flashcards
(26 cards)
what is a price ceiling?
a government imposed limit on how high a price can be charged for a product or service.
what is a price floor?
a government imposed minimum price that must be charged for a good or service.
how is the burden of tax divided?
a tax burden falls more heavily on the side of the market that is less elastic
when does a tax burden fall more heavily on producers?
when demand is more elastic than supply
when does a tax burden fall more heavily on consumers?
when supply is more elastic than demand
what happens when a government levies a tax on a good?
the equilibrium quanitity of the good falls
what causes a shortage of a good?
a price ceiling
what causes a surplus of a good?
a price floor
what mechanisms allolcate resources when the price of a good is not allowed to bring supply and demand into equilibrium
waiting in lines, rationing by government, black markets, favoritism
why do economists oppose price controls?
because it disrupts the markets natural inclination towards inclination and causes either surpluses or shortages.
how do you know if a price control is binding?
if it prevents the market from reaching equilibrium (if it is above equilibrium)
when is a price ceiling binding?
if it is below equilibrium
whats the main reason for using the midpoint method?
its more precise and it gives the same answer regardless of the direction of change
what does it mean if the cross price elasticity of demand is positive?
the goods are substitutes
what does it mean if the cross price elasticity of demand is negative?
they are complements
what is cross price elasticity of demand?
a measure of how demand for one good changes in response to a change in the price of another good
What is one disadvantage of government subsidies over price controls?
if a good is a necessity the demand tends to be what?
inelastic
what happens as elasticity of supply rises
the supply curve flattens
what does a steep supply curve mean?
it means the product has less elastic supply
for the PED formula which is always on top of the forumla, quantity or price?
quantity is over price
what is unti elastic supply?
supply that is perfectly responsive to price changes
what is the difference between slope and elasticity?
elasticity considers relative (percentage) changes and slope consider absolute unit changes
when a tax is imposed on the buyer, the demand curve shifts downward in which amount?
equal to the tax
