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

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Chapter 5 - Elasticity Elasticity will be more inelastic if expenditures on the good are a small portion of the budget . E = Δ%Q/Δ%P In the long run , demand of a good will become more elastic . Revenue is P x Q |E demand | > 1, demand is elastic |E demand | < 1, demand is inelastic |E demand | = 1, demand is unit elastic Cross- price E = (%∆Q x ) / (%∆P y ) (- 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) / (|E d | + |E s |) shift in demand %∆P = ( - %∆S) / (|E d | + |E s |) 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 (E supply ÷ E demand ) 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 industry provides 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 is due to their own interest and their product is too complex to understand The Great Economic Problem of planning is Information & Incentives Free market price reflects value of the good's next highest-value use and
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