| Front | Back | | --- | --- | | A firm faces elastic demand ($PED > 1$) and decides to increase the price of its product. Predict the effect on its total revenue. | Total revenue will decrease (the percentage drop in quantity demanded is larger than the percentage increase in price). | | A firm faces inelastic demand ($PED < 1$) and decides to decrease the price of its product. Predict the effect on its total revenue. | Total revenue will decrease (the percentage increase in quantity demanded is smaller than the percentage decrease in price). | | A firm wants to maximize its total revenue along a linear demand curve. Predict the price elasticity of demand ($PED$) at which this maximum occurs. | It occurs where demand is unit elastic ($PED = 1$). | | A firm's product currently has an elastic demand ($PED > 1$). If the firm wants to increase its total revenue, predict whether it should raise or lower its price. | The firm should lower its price. | | A government imposes an indirect tax on a good with highly inelastic demand (e.g., tobacco). Predict the effect on:
1. Government tax revenue
2. Quantity demanded (consumer behavior) |

1. Government tax revenue will be high.
2. Quantity demanded will fall by a very small amount.

| | A government imposes an indirect tax on a good with highly elastic demand (e.g., sugary drinks). Predict the effect on:
1. Government tax revenue
2. Quantity demanded (consumer behavior) |

1. Government tax revenue will be relatively low.
2. Quantity demanded will fall by a significant amount (strong behavioral change).

| |

Looking at the two diagrams, explain why the shaded government revenue region on the left (inelastic demand) is larger than the one on the right (elastic demand) for the same tax per unit.

| Because demand is inelastic, the price increase causes quantity demanded to fall by a much smaller amount, leaving a larger quantity base to be taxed. | |

If a government's primary policy goal is to discourage consumption of a harmful product, explain why the market structure on the right (elastic demand) is a more successful target.

| The high price elasticity of demand means consumers are highly responsive to the tax-induced price increase, leading to a large reduction in quantity demanded. | | Why is an indirect tax on an inelastic necessity (like tobacco or fuel) often criticized on equity grounds? | It is a regressive tax, meaning it takes a disproportionately larger percentage of income from low-income households than high-income households. | | Distinguish between how a firm calculates total revenue versus how it calculates profit. |

Total Revenue is $\text{Price} \times \text{Quantity Demanded}$.
Profit is $\text{Total Revenue} - \text{Total Costs}$.

| | Why might heavy indirect taxation on highly inelastic goods (like cigarettes) lead to the emergence of black markets? | Because consumers are highly dependent and unresponsive to price increases, they will seek cheaper, untaxed illegal alternatives to avoid the high legal price. | | How does the imposition of an indirect tax physically affect the position of the market supply curve? | It shifts the supply curve upwards vertically by the exact amount of the tax per unit. | | Why are taxes on spending (like VAT or excise duties) specifically classified as indirect taxes? | Because the tax is paid by consumers to the suppliers (firms), who then collect and transfer it to the government. | | Total revenue is maximized when the price elasticity of demand ($PED$) is equal to 1. | Total revenue is maximized when the price elasticity of demand ($PED$) is equal to 1. | | When demand is inelastic ($PED < 1$), price and total revenue move in the same direction; when demand is elastic ($PED > 1$), price and total revenue move in opposite directions. | When demand is inelastic ($PED < 1$), price and total revenue move in the same direction; when demand is elastic ($PED > 1$), price and total revenue move in opposite directions. | | Government revenue from an indirect tax is calculated using the formula: $\text{Government Revenue} =$ Tax Per Unit $\times$ Quantity Demanded. | Government revenue from an indirect tax is calculated using the formula: $\text{Government Revenue} =$ Tax Per Unit $\times$ Quantity Demanded. | | If a government's main goal is to change consumer behavior, it should target goods with elastic demand; if its main goal is to raise revenue, it should target goods with inelastic demand. | If a government's main goal is to change consumer behavior, it should target goods with elastic demand; if its main goal is to raise revenue, it should target goods with inelastic demand. | |

| D | |

| Price ($) | |

| Quantity |

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics

IB Economics 2.5.3 Importance of PED for Firms and Government Decision Making Flashcards

Flashcards for 2.5.3 Importance of PED for Firms and Government Decision Making

Flashcards for 2.5.3 Importance of PED for Firms and Government Decision Making - IB

1. Introduction to Economics2 subtopics

2. Microeconomics12 subtopics

3. Macroeconomics7 subtopics

4. The Global Economy10 subtopics