Economics 2 Summary
Inhoud
Chapter 5 Elasticity................................................................................................................ 1
Chapter 6 Supply, Demand & Government............................................................................2
Chapter 10 Externalities.......................................................................................................... 2
Chapter 11 Public Goods & Common Resources......................................................................2
Chapter 13 The Cost of Production........................................................................................... 2
Chapter 14 Firms in Competitive Markets................................................................................2
Chapter 18 Markets for Factors of Production..........................................................................2
Chapter 20 Income Inequality and Poverty..............................................................................2
Chapter 37 Financial Crisis....................................................................................................... 2
Chapter 38 Economic Union..................................................................................................... 3
Chapter 39 Macroeconomic Policies.........................................................................................3
Chapter 5 Elasticity
Elasticity of Demand:
Consumer buy more when
- The price is lower
- Their income is higher
- Price of substitute product is higher
- Price of complementary good is lower
Elasticity measures the response of consumers to changes in the above
mentioned influences
‘’ How much quantity demanded responds to a change in price’’
Elastic: quantity demanded responds substantially
Inelastic: quantity demanded responds slightly
+ necessities have inelastic demands – luxury goods are elastic
+ Narrowly defined markets (BMW) tend to have a more elastic demand than
broadly defined markets (car industry)
+ High portion of income dedicated to a product means a higher elasticity of the
product
+ availability of close substitutes
+ time horizon: goods become more elastic over a longer period of time: Petrol price
rises means people will use public transport more/use efficient cars/move closer to
work
, Elasticity = 0 Perfect inelastic
Change in P = No change in Q
Elasticity < 1 Inelastic
Change P = 2 Q=1
Elasticity = 1 Unit Elastic
Change P = 2 Q=2
Elasticity > 1 Elastic
Change P = 1 Q =2
Elasticity = infinity Perfect elastic
Change P = x Q = any
Above top price Q = 0
Total Expenditure = Total Revenue = P x Q
Elasticity measures used to describe the behavior of buyers in markets
Income Elasticity of Demand = %∆ QD / %∆ Income
Normal goods: higher income increases quantity demanded
Inferior goods: higher income lowers quantity demanded
Cross-Price Elasticity = %∆ QD product1 / %∆ P product2
Substitutes: price elasticity is positive
Complementary Goods: price elasticity is negative (May change when effects last
longer: electricity/gas)
Price Elasticity of Supply = %∆ QuantitySupplied / %∆ P
Higher prices raise the quantity supplied. It depends on the flexibility of the sellers
to change the amount they produce/willingness of companies to enter the market.
Elastic: the quantity supplied responds substantially to a change in price.
Chapter 6 Supply, Demand & Government
Subsidy: incentive for encouraging the supply of an under produced product
Price ceiling/floor: legal maximum/minimum price at which a product can be sol
The price ceiling is binding when the equilibrium price is above the price ceiling
Ceiling = shortage Floor = Surplus P.122
TAX
Tax incidence: the distribution of a tax burden over buyer/supplier
When supply is more elastic than demand – the consumer pays more tax than the
supplier
P131
Inhoud
Chapter 5 Elasticity................................................................................................................ 1
Chapter 6 Supply, Demand & Government............................................................................2
Chapter 10 Externalities.......................................................................................................... 2
Chapter 11 Public Goods & Common Resources......................................................................2
Chapter 13 The Cost of Production........................................................................................... 2
Chapter 14 Firms in Competitive Markets................................................................................2
Chapter 18 Markets for Factors of Production..........................................................................2
Chapter 20 Income Inequality and Poverty..............................................................................2
Chapter 37 Financial Crisis....................................................................................................... 2
Chapter 38 Economic Union..................................................................................................... 3
Chapter 39 Macroeconomic Policies.........................................................................................3
Chapter 5 Elasticity
Elasticity of Demand:
Consumer buy more when
- The price is lower
- Their income is higher
- Price of substitute product is higher
- Price of complementary good is lower
Elasticity measures the response of consumers to changes in the above
mentioned influences
‘’ How much quantity demanded responds to a change in price’’
Elastic: quantity demanded responds substantially
Inelastic: quantity demanded responds slightly
+ necessities have inelastic demands – luxury goods are elastic
+ Narrowly defined markets (BMW) tend to have a more elastic demand than
broadly defined markets (car industry)
+ High portion of income dedicated to a product means a higher elasticity of the
product
+ availability of close substitutes
+ time horizon: goods become more elastic over a longer period of time: Petrol price
rises means people will use public transport more/use efficient cars/move closer to
work
, Elasticity = 0 Perfect inelastic
Change in P = No change in Q
Elasticity < 1 Inelastic
Change P = 2 Q=1
Elasticity = 1 Unit Elastic
Change P = 2 Q=2
Elasticity > 1 Elastic
Change P = 1 Q =2
Elasticity = infinity Perfect elastic
Change P = x Q = any
Above top price Q = 0
Total Expenditure = Total Revenue = P x Q
Elasticity measures used to describe the behavior of buyers in markets
Income Elasticity of Demand = %∆ QD / %∆ Income
Normal goods: higher income increases quantity demanded
Inferior goods: higher income lowers quantity demanded
Cross-Price Elasticity = %∆ QD product1 / %∆ P product2
Substitutes: price elasticity is positive
Complementary Goods: price elasticity is negative (May change when effects last
longer: electricity/gas)
Price Elasticity of Supply = %∆ QuantitySupplied / %∆ P
Higher prices raise the quantity supplied. It depends on the flexibility of the sellers
to change the amount they produce/willingness of companies to enter the market.
Elastic: the quantity supplied responds substantially to a change in price.
Chapter 6 Supply, Demand & Government
Subsidy: incentive for encouraging the supply of an under produced product
Price ceiling/floor: legal maximum/minimum price at which a product can be sol
The price ceiling is binding when the equilibrium price is above the price ceiling
Ceiling = shortage Floor = Surplus P.122
TAX
Tax incidence: the distribution of a tax burden over buyer/supplier
When supply is more elastic than demand – the consumer pays more tax than the
supplier
P131
