Study Guide Exam 2 - Study Guide Exam 2 Price Floor only...

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Study Guide Exam 2 Price Floor - only effective if set above equilibrium price (if effective you get surpluses) Price Ceiling- only effective if set below equilibrium price (shortages) Black Market - people take advantage of shortage (Q Demanded > Q Supplied) Either Supply or Demand shifted Both Curves Shifted Price Elasticity of Demand Q2-Q1 P2+P1 Q2+Q1 x P2-P1 >1= elastic (P down TR up) <1= inelastic (P down TR down) =1= unitary elastic Factors that affect elasticity of demand 1. Ability to substitute some other product with the one you are using good potential substitute is elastic bad potential substitute is inelastic 2. Time period to adjust to price change shorter= inelastic longer=elastic 3. Percentage of total spending
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Small amount of budget=inelastic Large= elastic Necessities vs. Luxuries % change Q= 0 Perfectly Inelastic % change P= 0 Perfectly Elastic Excise Tax- tax something relatively inelastic in demand 1. Gasoline 2. Tobacco 3. Alcohol Income Elasticity of Demand
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