ECON 2020 EXAM 2 Study Guide

# ECON 2020 EXAM 2 Study Guide - ECON 2020 EXAM #3 STUDY...

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ECON 2020 EXAM #3 STUDY GUIDE TERMS: Elasticity : is a measure of the relative responsiveness of one variable to a change of another Price elasticity of demand : (Ep) is the ratio of the percent change in the quantity demanded to the percent change in the price as we move along the demand curve. Elastic : the percent change in Qd is greater than the percent change in P. If a product is elastic, the price can be lowered only a little but quantity demanded will rise significantly. Happens often in brand name products. Perfectly elastic : a tiny change in P causes an infinite change in Qd. This doesn’t happen in real life, but agriculture is a close example. Small firms produce perfect substitutes. If one dairy farmer decides to raise his price, the customers have other producers to buy milk from. Unit elasticity : happens when the percent change in Qd is equal to the percent change in P. Inelastic : the percent change in Qd is greater than the percent change in P. (most desirable situation for producers). If there is a large change in P, quantity demanded barely shifts. Gas, cigarettes, and alcohol. Tend to be heavily taxed because the government knows that ppl will always buy them Perfectly inelastic : a huge change in P causes no change in Qd. Only happens when the product is either highly addictive (heroin) or necessary for survival (insulin). Excise tax : a tax that is per unit. It is not proportional or percentage tax, like sales tax. For every unit you sell, you get taxed. Government tends to tax inelastic demands. Producers raise the price to include a percent of the excise tax to consumer price. Implicit cost of capital : income that could have been from capital used in its next best way; for example, machines, buildings, trucks, etc. The next best thing to do with capital is sell equipment and get what the capital is worth. Opportunity cost of time:

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## This note was uploaded on 04/07/2008 for the course ECON 2020 taught by Professor Finck during the Spring '07 term at Auburn University.

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ECON 2020 EXAM 2 Study Guide - ECON 2020 EXAM #3 STUDY...

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