4 Applications of Equilibrium and Elasticity Free Online FlashCards

How does an own-price change differ from a change in another market factor?

A change in a good’s own price causes movement along its curve; a change in another factor, such as income or input costs, shifts the curve.

What happens to coffee price and quantity after a frost reduces supply?

A frost reduces coffee supply, shifting the supply curve left. With demand unchanged, equilibrium price rises and equilibrium quantity falls.

What defines market equilibrium?

Equilibrium is the price and quantity at which quantity demanded equals quantity supplied.

What does a price above equilibrium create?

A price above equilibrium creates a surplus because quantity supplied exceeds quantity demanded.

How do elastic, inelastic, and unit-elastic demand differ?

Elastic demand responds proportionally more than price; inelastic demand responds proportionally less; unit-elastic demand responds proportionally equally.

How is a seller’s total revenue calculated?

A seller’s total revenue is price multiplied by quantity sold: $\text{Total revenue} = \text{price} \times \text{quantity sold}$.

What tends to happen to total revenue when price rises and demand is elastic?

With elastic demand, a price increase tends to reduce total revenue because the proportional fall in quantity outweighs the higher price.

What tends to happen to total revenue when price rises and demand is inelastic?

With inelastic demand, a price increase tends to raise total revenue because quantity falls proportionally less than price rises.

How does a per-unit tax affect prices and quantity traded?

A per-unit tax creates a wedge between the buyer’s price and the amount the seller keeps. Typically, buyers pay more, sellers receive less, and fewer units are traded.

Which side of a market generally bears more of a tax’s economic burden?

The less elastic side of the market generally bears more of the tax burden because it has fewer ways to avoid the tax.

How is tax revenue calculated?

Tax revenue equals the tax per unit multiplied by the quantity sold after the tax: $\text{Tax revenue} = \text{tax per unit} \times \text{quantity sold after the tax}$.

What happens under a binding price ceiling?

A price ceiling is a legal maximum. If it is below equilibrium and binding, buyers want more than sellers offer, creating a shortage.