Cheat Sheet (Exam 2) - Chapter 5 Elasticity Elasticity will be more inelastic if expenditures on the good are a small portion of the budget E =%Q%P In

Cheat Sheet (Exam 2) - Chapter 5 Elasticity Elasticity will...

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Chapter 5 - ElasticityElasticity will be more inelasticif expenditures on the good are a small portion of the budget. E = Δ%Q/Δ%PIn the long run, demand of a good will become more elastic. Revenue is P x Q|Edemand| > 1, demand is elastic|Edemand| < 1, demand is inelastic|Edemand| = 1, demand is unit elasticCross-price E = (%∆Qx) / (%∆Py) (- is complement) (+ is substitute) Inelastic Elastic Difficult to increase production at constant unit price (raw materials) Easy to increase production at constant unit price (manufactured goods) Large share of market inputs Small share of market inputs Global Supply Local Supply Short Run Long Run %∆P = (%∆D) / (|Ed| + |Es|) shift in demand%∆P = (-%∆S) / (|Ed| + |Es|) shift in supply Chapter 6 - Taxes and Subsidies Tax incidence - who pays the tax is determined by elasticity It doesn't matter who pays, both parties pay tax. The more inelastic, the more you pay, the more elastic, the less you pay. The relative burden of tax is (Esupply ÷Edemand)Perfectly inelastic party pays all the tax [elasticity equals escape], The larger the tax wedge, the smaller the Q traded Chapter 7 Price System and Signals Kenyan flower industryprovides an example of how shifts of supply and demand in one market have effects on other markets Immense cooperation that links the world is voluntary and undirected Market participants role isdue to their own interestand their product is too complexto understand The Great Economic Problemof planning is Information& IncentivesFree market pricereflects value of the good's next highest-value useand
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