Ch. 15 Market Demand (contd)

Transcription

1 Ch. 5 Market Demand (contd) III. Income Elasticity of Demand Outline Definition: I. Market Demand II. Price Elasticity of Demand a. Definition III. b. Relationshi with revenue Income Elasticity of Demand η Income Elasticity of Demand (contd.) η=%change in demand/%change in income η= Income Elasticity of Demand (contd.) Find η when D()= 9 +m/ - /, and = Find η when D()= m/ 3 5 6

2 Motivation Ch. 6 Euilibrium Two fundamental rinciles of microeconomic analysis Otimization Euilibrium Otimization Consumers => demand function Producers => suly function 7 Outline I. Suly Curve S() I. Suly Curve and Elasticity II. III. IV. Cometitive Euilibrium Comarative Statics Taxation i. Who ays the tax? Definition: The suly curve demonstrates how much the industry is willing to suly of a good at each market rice. Sloe? ii. Dead weight loss 9 Suly Elasticity є S Price elasticity of suly є S =%change in suly/%change in rice є S = Suly Elasticity <є S <: Suly is inelastic/elastic? є S =: Suly is unit elastic є S >: Suly is inelastic/elastic? Perfectly inelastic Perfectly elastic

3 Finding the rice elasticity of suly Finding the rice elasticity of suly What is є S when S()=3? What is є S when S()=-+ and =3? 3 II: Cometitive Euilibrium Assume a large number of buyers and sellers who all take the rice as given Definition: A cometitive euilibrium is a ( *, * ) such that uantity demanded euals uantity sulied i.e., a ( *, * ) such that S( * )=D( * )= * II: Cometitive Euilibrium 5 6 II: Cometitive Euilibrium > * Excess suly II: Cometitive Euilibrium < * Excess demand 7

4 Examle: D()=6- and S()=- + Examle (contd) Find where D()=S(): 6 Demand Suly Examle: D()=6- and S()=- + Oil crisis 973 and 979 Excess suly at =7> * : Argued that shortage of oil due to OPEC countries cutting roduction: True/False? Excess demand at =3< * : II: Cometitive euilibrium (contd.) II: Cometitive euilibrium (contd.) Euilibrium ( *, * ) jointly determined by the ositioning of the demand and suly curve. Excetions when demand or suly erfectly inelastic or elastic If one side of market erfectly inelastic => determines * If one side of market erfectly elastic => determines * D() S() S() * D() Suly erfectly inelastic Suly erfectly elastic 3 * Demand erfectly inelastic Demand erfectly elastic

5 III: Comarative Statics Comaring euilibria that result under different sets of arameters Why do rices of some goods like ales decrease during heavy consumtion, while others like beachfront cottages increase during heavy consumtion? III: Comarative Statics (contd.) Shift in suly Shift in demand * * S() S() D() D() * e.g., rice of inut increases * e.g., rogram change increases demand 5 6 Great Plains Labor Market Why might fluctuations in wages be greater in Iowa? IV. Taxation Let S -uantity sulied D -uantity demanded S -rice suliers face D -rice demanders face D D 7 Examle: D()=6- and S()=-+ imose a $3 uantity tax on suliers Demand Suly Suly Examle: D()=6- and S()=-+ imose a $3 uantity tax on suliers S = D 3 D = 6 D S = - + S D = S 9 3

6 IV: Taxation continued Unit tax imosed on sulier S = D -t S = D Transactions take lace at D Suly curve shifts to the left Unit tax imosed on demander D = S +t Taxation (contd) Is the euilibrium sensitive to who has the legal burden of aying the tax? Taxes are on transactions not on individuals S = D Transactions take lace at S Demand curve shifts to the left 3 3 IV.I. Who Pays the Tax? Examle: D()=6- and S()=-+ imose a $3 uantity tax on suliers Demand New Suly Suly Who bears the larger share of the tax burden? Relatively elastic suly Perfectly Elastic suly 33 3 Who bears the larger share of the tax burden? Relatively inelastic suly Perfectly Inelastic suly The less elastic side of the market ays a higher roortion of the tax t D = D - * t S = * - S Find t D / t S = є S / є D D S S D 35 36

7 t D / t S = є S / є D : The less elastic side of the market ays a higher roortion of the tax t D / t S = є S / є D t D > t S if є S > є D t D < t S if є S < є D Consider extreme cases є D = or є S = є D - or є S D D S S S 37 3 Examle: D()=6- and S()=-+, $3 uantity tax. Who aid the tax? Original euilibrium: ( *, * )=(6,) After tax euilibrium: ( *, * )=(7,) $ of tax aid by consumer, and $ aid by roducer Which side of the market it most elastic? 39