price elasticity of demand; cross-price elasticity of demand; income elasticity of demand; price elasticity of supply.

Transcription

1 Unit 3: Elasticity

2 In accorance with the APT rogramme the objective of the lecture is to hel You to comrehen an aly the concets of elasticity, incluing calculating: rice elasticity of eman; cross-rice elasticity of eman; income elasticity of eman; rice elasticity of suly.

3 Require reaing Mankiw, N.G. Princiles of Microeconomics. 6th eition. South-Western Chater 5. Elasticity an Its Alication. Begg, D., R.Dornbusch, S.Fischer. Economics. 8th eition. McGraw Hill Chater 4. Elasticities of eman an suly.

4 Questions to be revise Deman scheule an the law of eman; Factors of eman, comlements an substitutes; Suly scheule an the law of suly; Market equilibrium: welfare asects of government controls.

5 Price Elasticity of Deman Percentage change in quantity emane that results from one ercent change in rice:

6 Price Elasticity of Deman Price elasticity may be efine with resect to infinitesimal changes in rice:

7 Elasticity an Sloe of a Deman Curve Equal elasticities an ifferent sloes

8 Elasticity an Sloe of a Deman Curve Different elasticities an equal sloes

9 Elasticity an Sloe of a Deman Curve Consier an arbitrary function: y=f(x) Elasticity is a imension free measure of change:

10 Elastic an Inelastic Deman Elastic: 1 Unit - elastic: 1 Inelastic: 1

11 Unit tax: examle (APT 2009) (a) Calculate the roucer surlus before tax. (b) Now assume a er-unit tax of $2 is imose whose imact is shown in the grah above. i. Calculate the amount of tax revenue ii. What is the after-tax rice that the sellers now kee? iii.calculate the roucer surlus after tax. (c) Is the eman elastic, inelastic, or unit elastic between the rices of $5 an $6. Exlain.

12 Price elasticity of eman: examle (APT 2010) The table below gives the quantity of goo X emane an sulie at various rices. Price (ollars) Quantity Demane (units) Quantity Sulie (units) (i) Is the eman for goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain.

13 Total Revenue an Marginal Revenue Total Revenue = Total Exeniture = P(Q)Q Marginal Revenue: Marginal Revenue with infinitesimal changes in quantity of the goo:

14 Price Elasticity of Deman, Total an Marginal Revenue If, Total revenue is an increasing function of quantity of the goo: when Q goes u, TR grows as well; when Q goes own, TR also eclines.

15 Price Elasticity of Deman, Total an Marginal Revenue If, Total revenue is a ecreasing function of quantity of the goo: when Q goes u, TR eclines; when Q goes own, TR grows.

16 Price Elasticity of Deman, Total an Marginal Revenue If, Total revenue is at the maximum.

17 TR Elasticity of linear eman an revenues of roucers: variations of sales TR rice-elastic eman rice-inelastic eman E E P, MR 0 E E 1 E 0 a Q MR D 0 a/2b a/b Q

18 Elasticity of linear eman an revenues of roucers: variations of sales P a E E 1 rice-elastic eman MR D E E 0 rice-inelastic eman E 0 a/2b a/b Q E E TR E 1 q

19 Price Elasticity of Deman an Total Exeniture Total Exeniture = Revenue = P Q(P).

20 Price Elasticity of Deman an Total Exeniture (cont ) Total exeniture is highest when 1. If eman is Elastic: 1 Inelastic: 1 A rice increase will reuce total exeniture increase total exeniture A rice reuction will increase total exeniture reuce total exeniture

21 Elasticity of linear eman an revenues of roucers: variations of rice P a E E 1 E 1 rice-elastic eman E 1 TR 1 0 E a/2 0 E 1 a/2b 1 E 0rice-inelastic eman E 0 a/b Q

22 Elasticity of linear eman scheule an revenues of roucers: grahical exosition P E a E 1 E 1 rice-elastic eman E 1 TR 1 0 E a/2 0 E 1 a/2b 1 E 0rice-inelastic eman E 0 a/b Q E E TR E 1

23 Cross-Price Elasticity of Deman Cross-rice elasticity of eman the ercentage by which quantity emane of the first goo changes in resonse to a 1 ercent change in the rice of the secon. Substitutes >0, Comlements <0 Markets for substitutes P x P y D y S y E 1 E Q x Q y

24 Cross-Price Elasticity of Deman Cross-rice elasticity of eman the ercentage by which quantity emane of the first goo changes in resonse to a 1 ercent change in the rice of the secon. Substitutes >0, Comlements <0 Markets for comlementary goos P x P y D y S y E 0 E Q x Q y

25 Cross-rice elasticity of eman: examle (APT 2009) Assume that the cross-rice elasticity of eman between eanuts an bananas is ositive. A wiesrea ecease has estroye the banana cro. What will haen to the equilibrium rice an quantity of eanuts in the short run? Exlain.

26 Income Elasticity of Deman Income elasticity of eman the ercentage by which quantity emane of the first goo changes in resonse to a 1 ercent change in income. Normal goos: E I >0; inferior goos: E I <0.

27 Income elasticity of eman: examle (APT 2010) Assume that the income elasticity of eman for goo Y is -2. Using a correctly labele grah of the market for goo Y, show the effect of a significant increase in income on the equilibrium rice of goo Y in the short run.

28 Price Elasticity of Suly - the ercentage change in quantity sulie that occurs in resonse to a 1 ercent change in rice. Q P P Q Always ositive..

29 Determinants of Price Elasticity of Suly - Flexibility an mobility of inuts; - Ability to rouce substitute inuts; - Time: short-run vs. long-run.

30 Price elasticity of eman an suly : examle (APT 2010) The table below gives the quantity of goo X emane an sulie at various rices. Price (ollars) Quantity Demane (units) Quantity Sulie (units) (i) Is the eman for goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain. (ii) Is the suly of goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain.

31 Elasticity of suly an eman an tax buren of consumers an roucers Incience of a tax escribes who eventually bears the buren of it. Let s calculate tax buren of consumers an roucers to rove that it eens on the relative elasticities of eman an suly: where T c is the tax buren of consumers, T tax buren of roucers, T is the total tax revenue of the government

32 Elasticity of suly an eman an tax buren of consumers an roucers Use the exressions of elasticities of eman an suly to get: The relative tax buren of consumers an roucers is the inverse ratio of absolute values of corresoning elasticities, i.e. to the negative of the ratio of elasticities of suly an eman.

33 Elasticity of suly an eman an tax buren of consumers an roucers The more elastic eman an the less elastic suly curves are the greater is the share of the tax levie on roucers as comare to that of consumers:

34 Tax incience an rice elasticity of eman an suly : examle (APT 2010) The table below gives the quantity of goo X emane an sulie at various rices. Price (ollars) Quantity Demane (units) Quantity Sulie (units) (i) Is the eman for goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain. (ii) Is the suly of goo X relatively elastic, relatively inelastic, unit elastic, erfectly elastic, or erfectly inelastic when the rice ecreases from $30 to $20? Exlain. (iii)if a er-unit tax is imose on goo X, how is the buren of the tax istribute between the buyers an sellers of goo X?

35 Tax incience an rice elasticity of eman: examle (APT 2008) Assume that consumers always buy 20 units of goo R each month regarless of its rice. (i) What is the numerical value of the rice elasticity of eman for goo R? (ii) If the government imlements a er-unit tax of $2 on goo R, how much of the tax will the seller ay?