MicroEconomics Exam 2
Labor taxes may distort labor markets greatly if
the number of hours many part-time workers want to work is very sensitive to the wage rate.
Total surplus equations (3)
CS+PS WTP-WTS Value to buyers-cost to sellers
In cross price elasticity of demand: a negative is a
Compliment
Inelastic or Elastic? Goods with substitutes
Elastic
Inelastic or Elastic? Long term
Elastic
Inelastic or Elastic? Luxuries
Elastic
Inelastic or Elastic? Narrow categories
Elastic
Inelastic or Elastic? Broad categories
INElastic
Inelastic or Elastic? Necessities
INElastic
Inelastic or Elastic? Short term
INElastic
In Income Elasticity of demand: negative means
Inferior good
In cross price elasticity of demand: 0 is a
No relationship
Price ceiling above equilibrium
Nonbinding
Price floor below equilibrium
Nonbinding
In Income Elasticity of demand: positive means
Normal goods: necessities, luxuries
How is the burden of a tax divided?
Regardless of whether the tax is levied on the buyers or the sellers, the buyers and sellers bear some proportion of the tax burden.
In cross price elasticity of demand: a positive is a
Substitute
Suppose that Jane enjoys Diet Coke so much that she consumes one can every day. Although she enjoys gourmet cheese, she consumes it sporadically. If the price of Diet Coke rises, Jane decreases her consumption by only a very small amount. But if the price of gourmet cheese rises, Jane decreases her consumption by a lot. These examples illustrate the importance of
a necessity versus a luxury in determining the price elasticity of demand
Price ceiling below equilibrium
are binding, causes deficiency and price will lower (sellers favor)
Price floors above equilibrium
are binding. cause excess supply which will raise prices (suppliers favor)
Demand effects
consumers
A tax imposed on the buyers of a good will lower the
effective price received by sellers and lower the equilibrium quantity.
Other things equal, the deadweight loss of a tax
increases as the size of the tax increases, and the increase in the deadweight loss is more rapid than the increase in the size of the tax.
The deadweight loss from a tax of $2 per unit will be smallest in a market with
inelastic supply and inelastic demand
The minimum wage, if it is binding, lowers the incomes of
only those workers who have become unemployed
Supply effects
suppliers
Buyers of a product will bear the larger part of the tax burden, and sellers will bear a smaller part of the tax burden, when the
supply of the product is more elastic than the demand for the product.
If a change in the price of a good results in no change in total revenue, then
the demand for the good must be unit elastic.
The "invisible hand" refers to
the marketplace guiding the self-interests of market participants into promoting general economic well-being.
Whichever one is more INelastic
will pay more tax
