econ cheat sheet exam 2 - Review Steeper curve less elastic...

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Review: Steeper curve: less elastic | Flatter curve: more elastic - More elastic: worse it works Elasticity = quantity / dollars or Q s / E d +E s E d = (p / q) / (change in p / change in q) E s = % change in Q s / % change in p Consumer surplus: the amount a buyer is willing to pay for a good - the amount the buyer actually pays for it Producer surplus: the amount a seller is paid for a good - the seller’s cost of providing it. Chapter 6 Taxes and Subsidies: Commodity taxes: taxes on goods; raises revenue and creates DWL (reduces gains from trade); fuel, liquor, cigarettes; who ultimately pays the tax does not depend on who writes the check, it depends on the relative elasticities of demand and supply. *Same effects whether the seller or buyer is taxed for an item; who pays it is decided by laws of supply and demand not by Congress* Tax = Price paid by buyers – price received by sellers With tax, demand curve shifts down 6.2 Wedge shortcut: the most important effect of a tax is to drive a tax wedge between the price paid by buyers and price received by sellers. 6.3 *When demand is more elastic than supply, demanders pay less of the tax than sellers; when supply is more elastic than demand, suppliers pay less of the tax than buyers* Elasticity = escape; more substitutes if you try to tax an industry with an elastic supply curve, they will go to another industry; whether they pay more depends who can escape the best. Firms can escape tax but not so easy for workers (sellers of labor). *Free market trade occurs when the buyer’s willingness to pay exceeds the supplier’s willingness to sell (demand curve is above supply curve), maximizes gains from trade (CS+PS)* 6.5 *Elasticity of supply and demand determines DWL of a tax; it’s better to tax a good with inelastic demand.* Subsidy: reverse tax; instead of taking money away, the government gives them money; Who gets the subsidy does not depend on who gets the check from the government, who benefits does depend on the relative elasticities of demand and supply, must be paid for by taxpayers and create inefficient increases in trade (DWL). Same as tax wedge except just push wedge from right side to left side; buyers are receiving more than sellers are paying; whoever bears the burden of the tax gets the benefit of the subsidy *Suppliers receive more of the benefit than the buyers when the elasticity of demand is greater than the elasticity of supply* Subsidy = price received by sellers – price paid by buyers If a tax causes no DWL, either demand or supply is perfectly IE Chapter 7 The Price System: Price is a signal wrapped up in an incentive. Great economic problem: to arrange our limited resources to satisfy as many of our wants as possible. Speculation: attempt to profit from future price changes. Futures: contract to buy or sell at a specific date in the future as the price is today. 7.2 Prediction markets: a speculative market designed so that the prices can be interpreted as probabilities and used to make predictions.
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