Week 4: costs of production Flashcards
(48 cards)
Income elasticity (Ei)
the responsiveness of a product’s quantity demanded to changes in consumer income
Positive Income Elasticity
= normal good
ex. expensive cars
Negative Income Elasticity
= inferior good
ex. turnips
Cross-price elasticity (Exy)
the responsiveness of the quantity demanded of one product (x) to a change in price of another (y)
Positive Cross-Price Elasticity
= substitutable
ex. apples and oranges
Negative Cross-Price Elasticity
= complementary
ex. milk and cereal
Price Elasticity of Supply
measures the responsiveness of quantity supplied to changes in price
Elastic supply
quantity supplied greater than price
Inelastic supply
quantity supplied less than price
Perfectly elastic supply
• supply for which a product’s price remains constant regardless of quantity supplied
• a constant price and a horizontal supply curve
Perfectly inelastic supply
• supply for which a product’s quantity supplied remains constant regardless of price
• a constant quantity supplied and a vertical supply curve
Immediate run
• not enough time to react
• perfectly inelastic
ex. getting more resources (more supplies and new employees) will be difficult
Short run
• some time to react and get more resources
• either elastic or inelastic
Long run
more time to react and get more resources
Constant-cost industry
• increase in price increases production but not resource prices
• as new businesses enter the industry in the long run due to the higher price, this price is gradually pushed back down to its original level
• the long-run supply curve is perfectly elastic
Increasing-cost industry
• increase in price increases production and resource prices
• as new businesses enter the industry in the long run due to the higher price, this price is gradually pushed back down to its lowest possible level, but this level is higher than it was originally
• the long-run supply curve is very elastic
Formulas
• Income elasticity
• Cross-price elasticity
• Elasticity of supply
Excise taxes
• a tax on a particular product expressed as a dollar amount per unit of quantity
• such a tax creates a new supply curve (S1) seen by consumers
• it is vertically above the initial supply curve (S0) seen by producers
• the price seen by consumers is now higher than that seen by producers
ex. alcohol, cigarettes
Who pays Excise taxes?
• consumers and producers
• goes to gov not producers
• if producers don’t respond to tax they could lose revenue especially if their product is elastic
ex. $1 tax each pay $0.50
The Effect of Elasticity Supply Curve
the more elastic the demand curve the greater the proportion of an excise tax paid by producers
The Effect of Elasticity Demand Curve
the more elastic the supply curve the greater the proportion of an excise tax paid by consumers
Price Controls
• price floor
• price ceiling
Price floor
• min price set above the equilibrium price
• creates surplus
• at top of graph
ex. min wages, agricultural goods
Agricultural Price Supports
• they help overcome unstable agricultural prices
• economists assert that farmers win from these supports
• but consumers and taxpayers lose from these supports
