Ch 5 - Elasticity, Taxation, and Consumer Choice

Elasticity

is determined based on their sensitivity and response to changes in price.

The law of demand

Stresses that consumers will buy more of a product in the case when price falls and demand will decrease if the price decreases

Cross Elasticity of Demand (CPED)

This measures how the changes in price of a certain good can affect the quantity demanded of another product

Substitute goods

are those which can be exchanged with one another.

Complementary goods

are those with complement each other

Income Elasticity of Demand

Another factor which affects the purchasing activity of consumers is income. Consumers have to take into consideration their own budget before purchasing goods and services

Price Elasticity of Supply (PES)

The price elasticity of supply takes into the consideration how a change in price affects the quantity supplied.

Producer surplus

is the difference between the lowest price a producer would sell a product and the actual price received

Consumer surplus

is the difference between the highest price a consumer would pay for a product minus the actual price paid.

A price ceiling

is a maximum legal price that can be charged for a product or service.

A price Floor

is a minimum legal that can be charged for a product or service

Deadweight loss

is the loss of total surplus when a market fails to reach a competitive equilibrium

tariff

is a tax on imports or exports, and a quota has a similar effect on trade that sets a limit on the quantity of goods imported and exported.

negative output

means that the goods are complementary, while a Positive output means that the goods are substitutes.

necessary good

If there is a(n) ________ without any substitutes, a consumer is more likely to buy the same quantity as the price changes.

Consumer choice theory

includes many factors, which are necessary to help them make choice accordingly.

total surplus

When a market fails to maximise ________, a deadweight loss is created.

normal goods

there is a direct relationship between an individuals income and the quantity demanded.

inferior goods

an increase in income leads to a decrease in quantity demanded, as they appear to have an inverse relationship.

Consumer surplus

can be located below the demand curve, above price, and left of quantity.

Producer surplus

is the difference between the lowest price a producer would sell a product and the actual price received.

total revenue

If the price increases and ________ decreases, elasticity of demand is relatively elastic.

tariff

After the ________, the quantity of imports decreases, and areas where consumer surplus before trade are now tax revenue from the ________ and deadweight loss.

Elasticity

is the measure of how consumers respond to changes in price.

Total revenue

is the amount of money received from sales of a product.

consumer

When ________ and producer surpluses are maximised, the economy will experience efficiency and therefore lead to equity.

total revenue

If price increases and ________ increases, elasticity of demand is relatively inelastic.

Total Utility

the total utility amount of satisfaction a person receives from the consumption of a good or service

Marginal Utility

extra amount of satisfaction or utility from consuming one more unit of a good or service