Date post: | 11-Dec-2015 |
Category: |
Documents |
Upload: | rodrigo-stinger |
View: | 215 times |
Download: | 1 times |
1
Determinants of Elasticity
1. Availability of substitutes2. Necessities vs. Luxuries3. Importance in the Buyer’s Budget4. Time Horizon• The demand is more price elastic:
– close substitutes are easy to find– The less of a “necessity” (luxurious)– The more of total budgets spent on
good– The longer the time horizon
2
Two Practical Examples
1. Elasticity and Mass Transit• long-run demand for mass transit is
inelastic• An increase in fares
– would increase revenue– would decrease ridership
2. Elasticity and an Oil Crisis• to bring about 1% percent decrease in
world oil demand• oil prices would have to rise by 6.67%
3
Income Elasticity of Demand
• Percentage change in quantity demanded divided by the percentage change in income–percentage increase in quantity demanded for each 1% rise in income
Income
QE DY
%
%
4
Income Elasticity of Demand
• Differences– Price elasticity of Demand
• sensitivity of demand to price as we move along a demand curve
• virtually always negative
– Income elasticity of Demand• relative shift in demand curve • positive or negative
5
Cross-Price Elasticity of Demand
• Percentage change in quantity demanded of one good (x) caused by a 1% change in the price of another good (y)
y
Dxy P
QE x
%
%
• Substitutes: Exy >0
• Complements: Exy <0
6
Price Elasticity of Supply
• Percentage change in quantity of a good supplied, caused by a 1% change in the price of the good
P
QE SS
%
%
• The more easily suppliers can switch from/to alternate goods, the more elastic the supply
7
Taxes and Market Equilibrium
• Excise tax - tax on a specific good – to raise the price and discourage the use – A tax collected from sellers
• shifts the supply curve upward by the amount of the tax
– A tax collected from buyers• shifts the demand curve downward
8
An Excise Tax on Sellers - Airlines• Figure 7 A Tax on Sellers Shifts the Supply Curve Upward
S1
SAfter Tax
$360
300
10
Price per
Ticket
Millions of
Tickets per Year
A
A’
with a $60 tax, the
airlines must get $60 more
than before to supply any
given number of tickets.
9
An Excise Tax on Sellers - Airlines• Figure 8 The Effect of an Excise Tax Imposed on Sellers
S1
Safter tax$360
300
10
Price per
Ticket
Millions of
Tickets per Year
A
B
Before the tax
After the tax
Buyers pay $40 of the tax
Sellers pay $20 of the tax
340
D
7.5
10
An Excise Tax on Buyers• Figure 9 A Tax on Buyers Shifts the Demand Curve Downward
$300
240
10
Price per
Ticket
Millions of
Tickets per Year
A’
A
D1
D After Tax
with a $60 tax imposed on buyers
they must be charged $60 less
than before to demand any
given number of tickets.
11
An Excise Tax on Buyers• Figure 10 The Effect of an Excise Tax Imposed on Buyers
300
10
Price per
Ticket
Millions of
Tickets per Year
A
D1
D After Tax
Before the tax
S
C280
$340
7.5
After the tax
Buyers pay $40 of the tax
Sellers pay $20 of the tax
280
$340
Incidence of tax
• The incidence of a tax is the same no matter the tax is imposed on buyers or imposed on sellers
• The incidence of a tax depends on the elasticity of demand and supply. – The more elastic side will take less of the tax
burden, and vice versa– Because the elastic side has more options.
(switch to substitute or alternative good)
12
13
The War on Drugs
• Figure 11(a) - Market for drug without government intervention
• Figure 11(b) - Result of government efforts to restrict supply (current policy)– Price rises; – Total expenditure increases
• Figure 11(c) - Results of an effective policy of reducing demand– Price falls; – Total expenditure falls
14
The War on Drugs
P1
Q1
D1
A
S1
Quantity
Price per Unit
• Figure 11a The War on Drugs
15
The War on Drugs
B
Q1
S2
P2
Q2
P1
D1
S1
Quantity
Price per Unit
A
• Figure 11b The War on Drugs
16
The War on Drugs
P1
Q1
D1
A
S1
Quantity
Price per Unit
C
D2
Q3
P3
• Figure 11c The War on Drugs