Microeconomics Final (Definitions)

when demand is more elastic:

demanders pay less of the tax - an elastic demand curve means that demanders have lots of substitutes and can't tax someone who has a good substitute because they will just buy the substitute. Thus, when demand is elastic, sellers will end up paying more of the tax

a surplus drives prices _____

down

economic forces push and pull prices towards their _____

equilibrium

market competition brings about an:

equilibrium in which the quantity supplied equals the quantity demanded

gains from trade push the quantity towards the _____

equilibrium quantity

only at the ______ are there no unexploited gains from trade

equilibrium quantity

elderly wealthy people commonly move from ___ estate tax states to ____ estate tax states

high to low

ideally, sellers want ____ prices and buyers want ____ prices

higher, lower - sellers want higher prices, but when sellers compete with other sellers they lower the price - buyers want lower prices, but when buyers compete with buyers they raise the price

flooding in Iowa destroys some of the corn and soybean crops. what will happen to the price and quantity for each of these crops?

if flooding destroys some of the corn and soybean crops, these crops will have a decrease in supply. this decrease in supply will lower the equilibrium quantity and increase the equilibrium price

higher income makes demand

less elastic - b/c they are less concerned with the price of products

slightly declining prices over time are common for _____

minerals and other natural resources supplied under competitive conditions

the demand for a specific brand of a product (Orange Crush) is _____ than the demand for a product category

more elastic - there are more substitutes for a specific brand of orange soda than there are for orange soda - what counts as a good substitute depends on the buyer's preference

demand is less elastic for goods that people consider to be a _______, and more elastic for goods that people consider to be a _____

necessity, luxary

no matter if the tax is on apple buyers or apple sellers, they both have identical

price buyers pay, price sellers receive, and the quantity traded

estimating elasticities of supply and demand is the first step in ______ how changes in supply and demand will effect prices and quantities

quantifying

what changes the equilibrium price and quantity?

shift in supply and demand

Competition pushes prices up when there is a _____

shortage

what exists when the price is below the equilibrium price

shortage - sellers are encouraged to raise their prices to eliminate the shortage - the amount that producers want to sell is less than the amount that consumers want to buy

the equilibrium price and quantity are the only price and quantity that are _____ in a free market

stable

when supply is more elastic:

suppliers pay less of the tax - an elastic supply curve means that the workers and capital in the industry can easily find work in another industry, so if you tax them, the industry inputs will escape to other industries. Thus, when supply is elastic, buyers will end up paying more of the tax

Competition pushes prices down when there is a _____

surplus

what exists when the price is above the equilibrium price

surplus - sellers are encouraged to lower their prices to eliminate the surplus - the amount that producers want to sell is more than the amount that consumers want to buy

the more time people have to adjust to a change in price,

the more elastic the demand curve will be

what happens when demand increases in a closed-access city

the price of housing increases a lot and the quantity of housing increases only slightly (mostly increases prices) (P large increase / Q small increase)

what happens when demand increases in a open-access city

the price of housing increases only slightly and the quantity of housing increases a lot (mostly increases quantities) (P small increase / Q large increase)

what is the most important effect of a tax

to drive a wedge b/w the price paid by buyers and the price received by sellers

Unexploited gains from trade exist when at least one potential buyer places a value on a good that is higher than the cost of producing the good to at least one potential seller." This statement is:

true - If this buyer and this seller were to trade, producer surplus or consumer surplus (or both) would be generated.

a shortage drives prices _____

up

free market

- An economic system in which prices of goods and services are determined by supply and demand expressed by sellers and buyers - the free market maximizes gain from trade (producer + consumer surplus) - operates without the intervention of the government or any other external authority - in a free market business owners are free to come up with new ideas based on the consumer's needs - ex: restaurant owners decide what food they'll offer, what they charge for their meals, and where they're located

the elasticity of demand for eggs has been estimated to be 0.1. if the price of eggs increases by 10%, what will happen to the total revenue of egg producers or in other words the total spending on eggs?

- An elasticity of demand of 0.1 is an inelastic demand - with inelastic demand, revenue and price move together - thus, if the price of eggs increases, the total revenue will increase - with an elasticity of 0.1, when the price goes up by 10% quantity goes down by 1%, so revenues increase by 9% (R = P x Q / R = 10% x 1% = 9%)

competitive price theory

Businesses set prices close to the price offered by other businesses (which should already be set close to the equilibrium price)

Resveratrol, a component of red wine found in the plant Japanese Knotweed, has recently been shown to increase life expectancy in worms and fish. What are your expectations about the price and quantity of Japanese Knotweed?

If resveratrol increases the life expectancy of fish, people might think it will have the same effect on humans, and so more people will demand it, increasing demand. This will increase the price of Japanese Knotweed and lead to an increase in the quantity grown

if high gasoline prices lead to a decrease in demand for trucks and SUVs, what will automobile companies due to sell the trucks and SUVs already manufactured?

If the demand for trucks and SUVs falls unexpectedly, auto companies will find that at the current price, they have a surplus of trucks and SUVs. The quantity supplied is greater than the quantity demanded, so they will lower prices in order to sell already manufactured trucks and SUVs

supply is more elastic when the industry can be expanded without causing a

big increase in the demand for that industry's inputs (ex: input of wood for toothpicks instead of houses)

shifts in the supply curve create

changes in quantity demanded

shifts in the demand curve create

changes in the quantity supplied

Vernon Smith 4

- In 1956, Vernon Smith launched a revolution in economics by testing the supply and demand model in the lab - Smith took a group of undergraduate students and broke them into two groups, buyers and sellers. - Buyers were given a card that indicated their maximum willingness to pay - Sellers were given a card that indicated their cost, the minimum price at which they'd be willing to sell - each student could earn their profit by the difference between their willingness to pay or sell and their contract price - Smith found that all prices, quantities, and gains from trade all converge quickly to those predicted by economic theory - producer + consumer surplus (total surplus) was maximized with trade (gains from trade was maximized) - 50 years later he won the 2002 Nobel Prize in economics

Suppose that Kiran values a good at $50. Store A is willing to sell the good for $45, and store B is willing to sell the same good for $35. In a free market, what will be the total consumer surplus? Now that store B is prevented from selling. What happens to the total consumer surplus?

- Kiran values the good at $50, and in a free market will buy it from store B for $35, earning a total consumer surplus of $15 ($50 - $35). - if store B is prevented from selling, say by a regulation or a tax, then Kiran will buy from store A for $45, but total consumer surplus will fall to $5 ($50 - $45).

Gary S. Becker suggested a way to win the war on drugs

- Legal but taxed system - Becker suggested that drugs become legal and taxes - the tax would be set so it raises sellers cost the same as prohibition - since the tax is raised by the same amount as prohibition the quantity of drugs sold would be the same, but the tax would increase government revenues instead of seller revenues

Will the same increase in the demand for housing increase prices more in Manhattan or in Des Moines, Iowa?

- Manhattan is an island with very little land available for development, so the supply for housing is very inelastic - A lot of unbuilt land is available in the Des Moines area, so the supply is more elastic - the same increase in demand will increase the supply more when the demand is inelastic, thus the same increase in demand will increase the prices more in Manhattan

an example of an elastic demand 5

- Orange Crush has many other orange soda substitutes like Fanta, Orangina, and Slice - The demand curve for Orange Crush is very elastic because even a small increase in the price of Orange Crush will result in a large decrease in the quantity demanded as people switch to other substitutes - The demand curve for orange soda is less elastic because there are fewer substitutes for orange soda than there are for Orange Crush and the substitutes such as root beer and ginger ale are not as good

the result of a decrease in demand (shifts down and to the left) is:

- a decrease in demand will lower the market price and decrease the market quantity - shifting the demand curve moves the market equilibrium point down and to the left. To move to the new equilibrium point there must be a decrease in the equilibrium price and a decrease in the equilibrium quantity.

the result of higher production costs and a decrease in supply (shifts up and to the left) is:

- a decrease in supply will raise the market price and decrease the market quantity - shifting the supply curve moves the market equilibrium point up and to the left. To move to the new equilibrium point there must be an increase in the equilibrium price and a decrease in the equilibrium quantity.

How to calculate total revenue 5

- a firm's revenue is equal to the price per unit times quantity sold - Revenue = Price x Quantity (R = P x Q)

demand for a good is likely to be more elastic when

- a large share of a person's budget is devoted to that good - (ex: a house) - when the price of housing increases, we buy smaller houses

elasticity of demand 5

- a measure of how responsive the quantity demanded is to a change in price - the more responsive the quantity demanded is to a change in the price, the more elastic the demand curve is - elasticity is not the same thing as slope - the percentage change in the quantity demanded divided by the percentage change in price

elasticity of supply

- a measure of how responsive the quantity supplied is to a change in price - if increased production requires much higher per-unit costs, then supply will be less elastic (inelastic) - ex: it is difficult to increase the supply of raw materials such as coal, oil, and gold, without increasing cost - if production can increase without much increasing per-unit costs, then supply will be more elastic - ex: the supply of manufactured goods is usually elastic b/c production can be increased at similar costs by building more factories

A perfectly inelastic vs. perfectly elastic supply curve

- a perfectly inelastic supply curve is a vertical line - a perfectly inelastic supply curve indicates that even a very large increase in price won't increase the quantity supplied (ex: Picasso will not make any more paintings no matter how much the price of his paintings rises) - a perfectly elastic supply curve is a horizontal (flat) line - a perfectly elastic supply curve indicates that even a tiny increase in price increases the quantity supplied by a very large amount (ex: toothpick manufacturers can increase the supply of toothpicks without any increase in their cost per toothpick by cutting down just a few more trees)

the truths about commodity taxation 2. who ultimately pays the tax does depend on the relative elasticities of demand and supply

- a tax functions to drive a wedge b/w the price paid by buyers and the price received by sellers - instead of shifting curves, you push the vertical tax wedge into the diagram until the top of the wedge touches the demand curve and the bottom touches the supply curve - the top of the wedge tells us the price paid by buyers - the bottom of the wedge tells us the price received by sellers - using the wedge shortcut we determine whether buyers or sellers pay a tax by determining the relative elasticity of the supply and demand curve - when demand is more elastic than supply, demanders pay less of the tax than sellers - when supply is more elastic than demand, suppliers pay less of the tax than buyers

a computer manufacturer makes an experimental computer chip that critics praise, leading to a huge increase in the demand for the chip. How elastic is the supply in the short run? How about the long run?

- supply is not usually very elastic in the short run. - in the case of computer chips, factories can run 24 hours a day and pay overtime, but it takes years to build a new factory. - in the long run, supply is more elastic because over time a computer chip firm can respond to increased demand by building new factories

the truths about commodity taxation 3. commodity taxation raises revenue and creates deadweight loss (reduces the gains from trade)

- a tax generates revenues for the government but also reduces the gains from trade - a tax decreases producer and consumer surplus, some is transferred to the government in the form of tax revenue and the rest is deadweight loss (caused by the tax) - deadweight loss: the reduction in total surplus caused by a market distortion or inefficiency (lost gains from trade) - deadweight loss of a tax is the lost gains from the trips (trades) that do not occur because of the tax - deadweight loss from taxation is larger the more elastic the demand curve - if the demand curve is elastic, the tax deters a lot of trades - if the demand curve is inelastic, the tax does not deter trades - if the supply curve is elastic, the tax deters a lot of trades - if the supply curve is inelastic, the tax does not deter trades (if a tax deters a lot of trade it creates a lot of deadweight loss)

shortage 4

- an excess demand - point below the market equilibrium - when there is a shortage, sellers have an incentive to increase their prices and buyers have an incentive to offer higher prices - the price will increase until equilibrium is reached, quantity supplied equals quantity demanded - if sellers discover they can sell all of their output and still have buyers asking for more, they raise the prices - competition will push prices up in a shortage - as the price is pushed up, the quantity demanded decreases, and the quantity supplied increases

surplus 4

- an excess supply - point above the market equilibrium - when there is a surplus, sellers have an incentive to decrease their prices and buyers have an incentive to offer lower prices - the price will decrease until equilibrium is reached, the quantity supplied equals the quantity demanded - if sellers can not sell all their output at a certain price, they will hold a sale (lower price = sell more) - competition will push prices down during a surplus - as the price is pushed down, the quantity demanded increases, and the quantity supplied decreases

the result of an increase in demand (shifts up and to the right) is:

- an increase in demand will raise the market price and increase the market quantity - shifting the demand curve moves the market equilibrium point up and to the right. To move to the new equilibrium point there must be an increase in the equilibrium price and an increase in the equilibrium quantity.

the result of lower production costs and increase in supply (shift down and to the right) is:

- an increase in supply will lower the market price and increase the market quantity - shifting the supply curve moves the market equilibrium point down and to the right. To move to the new equilibrium point there must be a decrease in the equilibrium price and an increase in the equilibrium quantity.

Demand compared with quantity demanded

- an increase in the quantity demanded is a movement along a fixed demand curve, caused by an increase (shift) in supply (b/c the increase in supply pushes the prices down, thereby causing an increase in the quantity demanded) - a decrease in the quantity demanded is a movement along a fixed demand curve, caused by a decrease (shift) in supply (b/c the increase in supply pushes the prices down, thereby causing an increase in the quantity demanded) - an increase in the demand is a shift of the entire demand curve up and to the right - a decrease in the demand is a shift of the entire demand curve down and to the left

supply compared with quantity supplied

- an increase in the quantity supplied is a movement along a fixed supply curve, caused by an increase (shift) in demand (b/c the increase in demand pushes the prices higher, thereby causing an increase in the quantity supplied) - an increase in the quantity supplied is a movement along a fixed supply curve, caused by a decrease (shift) in demand (b/c the decrease in demand pushes the prices down, thereby causing a decrease in the quantity supplied) - an increase in the supply is a shift of the entire supply curve down and to the right - a decrease in the supply is a shift of the entire supply curve up and to the left

as the price of cars goes up, which marketplace wants will be the first to go unsatisfied?

- as the price of cars goes up, the least-valued wants will be the first to stop being satisfied. - ex: parents may be more reluctant to buy their teenage sons and daughters a new automobile

As with demand, supply tends to be more elastic in the long run than in the short run. Why?

- because in the long run suppliers have time to adjust by building more factories

why are more children born in late December than early January

- because parents get a tax deduction for dependents as long as the child is born before December 31st ends - Leonhardt coined "national birthday" to indicate the day of the year when the largest number of births occur. - it used to be September, but has now moved to December due to the increase in C-sections, induced labor, and tax

primary factors determining the elasticity of the supply curve less elastic

- difficult to increase production at a constant unit cost - ex: some raw materials - large share of market for inputs (ex: wood for houses) - global supply - short run

primary factors determining the elasticity of the supply curve more elastic

- easy to increase production at a constant unit cost - ex: some manufactured goods - small share of market for inputs (ex: wood for toothpicks) - local supply - long run

elastic demand curve and revenue

- elastic: Ed > 1 - price and revenue move in opposite directions (ex: price increase = revenue decrease)

Why is the quantity demanded equal to the quantity supplied at the market equilibrium?

- every buyer can buy as much as they want at the equilibrium price, so there is no incentive to push prices up - every seller can sell as much as they want at the equilibrium price, so there is no incentive to push prices down

a free market maximizes the gains from trade

- ex: Joe is willing to pay $50 for the good and there are two sellers; Alice with costs of $40 and Barbara with costs of $20. A free market maximizes gains from trade, so Joe would trade with Barbara because the gains from trade are $30 1. the goods are bought by the buyers with the highest willingness to pay 2. the goods are sold by the sellers with the lowest cost 3. there are no unexploited gains from trade and no wasteful trades

commodity taxes

- taxes placed on goods - ex: cigarettes, liquor, and fuel

unexploited gains from trade 4

- exists when the quantity is below the equilibrium quantity (shade left triangle of graph) - the unexploited gain from trade is the sum of the price buyers are willing to pay and the price sellers are willing to sell - ex: buyer is willing to pay $57 for additional product, and seller is willing to accept $15 for additional product. so trade at any price between $1 5- $57 can make both buyers and sellers better off - unexploited gains from trade exist as long as buyers are willing to pay more as sellers are willing to accept - in a free market unexploited gains from trade will not last long, as the quantity bought and sold will increase until the equilibrium quantity is reached

Application of supply elasticity on the housing supply 5

- housing prices fluctuated but were relatively flat from 1950 - 2000, but are higher now than any other time - Economists Edward Glaeser and Joseph Gyourko argue that housing prices have been increasing (but not in every city) because regulations have made it harder to build new housing in "closed access" cities - closed access cities: cities where it is difficult to build new housing and the supply of housing is INELASTIC - housing prices have not been increasing in "open access" cities b/c they have built more housing - open access cities: cities where it is easy to build new housing and the supply of housing is ELASTIC - Restrictions on building in "closed access" cities, such as San Francisco and New York, make the housing prices increase

why did the housing supply not increase by very much and fluctuate from 1950 - 1999, despite large increases in population and income? 5

- housing prices fluctuated but were relatively flat from 1950 - 2000, but are higher now than any other time - the housing prices fluctuated and were relatively flat because the US built a lot more housing during this period - the housing prices are now increasing dramatically because population and income have increased demand, pushing up housing prices

what is the fundamental determinant of the elasticity of demand

- how easy it is to substitute one good for another - the fewer substitutes for a good, the less elastic the demand - the more substitutes for a good, the more elastic the demand

what is the fundamental determinant of the elasticity of supply

- how quickly per unit costs increase with an increase in production - elastic = increased production requires higher per-unit costs - inelastic = increased production requires similar per-unit costs

what is the relationship between elasticity of demand and revenue 5

- if the demand curve is inelastic (not responsive to price), then revenue goes up when the price goes up and revenue goes down when the price goes down - if the demand curve is elastic (responsive to price), then revenue goes down when the price goes up and revenue goes up when the price goes down - if the demand curve is unit elastic, then revenue stays the same as the price goes up and down

elasticity rule

- if two linear demand (or supply) curves run through a common point, then at any given quantity the curve that is flatter is more elastic

the truths about commodity taxation 1. who ultimately pays the tax does not depend on who writes the check to the government (government taxes sellers

- imagine a government is considering a tax on apples - the government can collect the tax in two ways: the government can tax apple suppliers $1 for every apple supplied or the supplier can tax apple buyers $1 for every basket of apples bought - there is no difference whether the tax is paid for by buyers or sellers - the laws of supply and demand determine who ultimately pays a tax - a tax is the same as an increase in cost - a $1 tax on suppliers will shift the supply curve up at every quantity by $1 - a $1 tax on buyers will shift the demand curve down at every quantity by $1 - tax is the difference between the price that buyers pay and the price that sellers receive

when a tax is placed on suppliers, the market price _____ the tax, but when a tax is placed on buyers, the market price _____ the tax

- includes - does not include

inelastic demand curve and revenue

- inelastic: Ed < 1 - price and revenue move together (ex: price increase = revenue increase)

some factors determining the elasticity of demand less elastic

- less elastic when there are fewer substitutes - less elastic when there is a short run (less time) - less elastic when the good is a category of a good - less elastic when the goods are necessities - less elastic when the good comprises a small part of your budget

some factors determining the elasticity of demand more elastic

- more elastic when there are more substitutes - more elastic when there is a long run (more time) - more elastic when the good is a specific brand - more elastic when the goods are luxuries - more elastic when the good comprises a large part of your budget

you can predict how shifts in demand and supply will change market prices by using two price-changing formulas

- predict price changes using elasticity - these formulas work well when the percent change in supply or demand is less than 10% - percent change in a price from a shift in demand ( = percent change in demand / Ed + Es) - percent change in a price from a shift in supply ( = percent change in supply / Ed + Es)

elasticity and revenue of farming and computer chips

- productivity improvements have increased the supply of food and the supply of computer chips, thus reducing the price of these goods. - the demand for food is inelastic, so the decrease in the price of food has driven down farm revenues - the demand for computer chips is elastic, so the decrease in the price of computer chips has driven up computer chip revenue

Wasteful trade 4

- resources are wasted when the quantity is above the equilibrium quantity (shade left triangle of graph) - ex: sellers want at least $50 for the last manufactured product, but buyers are only willing to pay $15, so selling the last manufactured product wastes $35 in resources - only at the equilibrium quantity are there no wasted resources - if quantity supplied exceeds the equilibrium quantity, it costs the sellers more to produce a product, than that product is worth to buyers - this is not only loss to supplier, but also loss to society because resources are wasted - in a free market we expect the quantity bought and sold will decrease until the equilibrium quantity is reached

how does tax affect suppliers and buyers

- suppliers: A $1 tax will shift the supply curve up at every quantity by $1 - buyers: A $1 tax on buyers will shift the demand curve down at every quantity by $1

elasticity and revenue of the war on drugs

- the demand for illegal drugs is inelastic (not responsive to price) - the war on drugs is hard to win because seller revenues increase with greater enforcement - As the government deters the supply of drugs it increases the cost of smuggling and dealing drugs - prohibition increases the cost of selling drugs, which raises the price. But at higher prices, revenues from drug selling are greater even if the quantity sold is smaller - the more effective prohibition is at raising costs, the greater the drug industries revenues

Vernon Smith began his experiments thinking they would prove the supply and demand model wrong. BUT instead he found that

- the market Smith created converged rapidly to the equilibrium price and quantity exactly as predicted by the supply and demand model - the total surplus was very close to being maximized throughout the experiment - the outcome was very consistent to the competitive price theory

calculating the elasticity of demand 5

- the percentage change in the quantity demanded divided by the percent change in price (Ed = % Change in Quantity Demanded / % Change in Price) - the percentage change is calculated by dividing the change by the average (% change in Qd = (Qafter - Qbefore / (Qafter + Qbefore / 2)) (% change in P = (Pafter - Pbefore / (Pafter + Pbefore / 2)) - the elasticity of demand is always negative because when the price goes up, the quantity demanded always goes down and when the price goes down, the quantity demanded always goes up - elastic: > 1 - unit elastic: = 1 - inelastic: < 1

calculating the elasticity of supply 5

- the percentage change in the quantity supplied divided by the percentage change in price (Es = % Change in Quantity Supplied / % Change in Price) - the percentage change is calculated by dividing the change by the average (% change in Qs = (Qafter - Qbefore / (Qafter + Qbefore / 2)) (% change in P = (Pafter - Pbefore / (Pafter + Pbefore / 2))

market equilibrium 4

- the point where the supply curve intersects with the demand curve (when quantity demanded equals quantity supplied) - the price at the meeting point is called the equilibrium price - the quantity at the meeting point is called the equilibrium quantity - consumers and producers are content with this price and quantity (no incentive to change) - the quantity demanded is exactly equal to the quantity supplied

one of the remarkable lessons of economics is that under the right conditions,

- the pursuit of self-interest leads not to chaos but to a beneficial order - the maximization of the gains from trade (consumer + producer surplus) in markets populated solely by self-interested individuals is one application of this central idea

why are oil prices difficult to predict?

- the social, technological, or geopolitical factors that shift the supply and demand curve are hard to predict - war causes a decrease in oil supply, which leads to higher prices and a decrease in demand - an increase in other countries' economies causes an increase in oil demand, which leads to higher prices and an increase in supply

Why is the local supply of a good much more elastic than the global supply

- the supply of oil to the world is inelastic b/c world production won't increase without a significant increase in the cost of production per barrel - the supply of oil to Austin is elastic b/c it is very easy to ship more oil to Austin from other parts of the US

Application of supply elasticity on gun buy back program 5

- the theory of gun buybacks is that: they reduce the amount of guns in circulation, and therefore reduce crime - simple economic theory suggests that it is false that they reduce the amount of guns in circulation - when police buy guns, the demand for guns increases, but since the supply of guns to a local region is very elastic the street price of guns does not increase - as a result the police can buy as many guns as they want but there is no decrease on the number of guns on the street (too small to influence the price) - if the police can not drive up the price of guns then they can not reduce the quantity of guns demanded on the streets - gun buybacks may increase the amount of guns in circulation, because a buyback makes new guns more valuable

what would be the elasticity of the demand curve for oil 5

- there are few substitutes for oil in its major use, transportation. so when the price increases by a lot, the quantity demanded falls by only a little (when the price of oil goes up, few people will stop using cars) - Thus, the demand curve for oil is not very elastic - The demand for oil tends to become more elastic over time because the more time people can adjust to a price change, the better they can substitute one good for another

which is more elastic, the demand for computers or the demand for Dell computers?

- there are more substitutes for a brand than there are for a general product category, so there are more substitutes for Dell computers than there are for computers - when there are more substitutes demand is more elastic, so demand is more elastic for Dell computers than for computers

unit elastic demand curve and revenue

- unit elastic: Ed = 1 - when price changes, revenue stays the same (ex: price increase = revenue stays the same)

what happens to seller revenues when the demand curve is elastic and the price rises

- when the demand curve is elastic, an increase in price decreases seller revenues - similarly a decrease in price will increase seller revenues

what happens to seller revenues when the demand curve is inelastic and the price rises

- when the demand curve is inelastic, an increase in price increases seller revenues - similarly a decrease in price will decrease seller revenues

whether buyers or sellers pay a tax depends on

- who can escape the best (aka which is more elastic) - elasticity = escape

what are the truths about commodity taxation

1. who ultimately pays the tax does not depend on who writes the check to the government 2. who ultimately pays the tax does depend on the relative elasticities of demand and supply 3. commodity taxation raises revenue and creates deadweight loss (reduces the gains from trade)

Consider clothes sold at outlet malls. Have sellers produced too few or too many of the items based on demand? What actions are sellers taking to move their goods out the door?

Sellers have produced too many clothes if they have them available at outlet malls where price discounts are the norm. Sellers are cutting their prices to reduce the surplus and move the clothes out the door

if a fashionable clothing store raises its prices by 25%, what does that suggest about the stores estimate of the elasticity of demand for its product

a fashionable clothing store may raise its prices by 25% if it thought there was inelastic demand for its products: the increase in price on everything would more than makeup for the decrease in sales (quantity)