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SU ECN 203 - Elasticity and Cross Price Elasticity

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ECN 203 1nd Edition Lecture 9Outline of Last Lecture II. Why does product demand slope down?III. Own Price Elasticity of Demand a. Elastic vs. Inelastic IV. Perfectly Inelastic Demand a. More Elastic vs. Less Elastic V. Representing Own Price Elasticity Mathematically VI. Why does it matter?Outline of Current Lecture VII. Elasticity VIII. Own Price Elasticity of Demand and Public Policy a. Change actual prices, change time prices b. Generate revenuec. Change behavior IX. Tax Incidence/Burden X. Intro to Cross Price Elasticity XI. Product Demand Shift Variables Current LectureLecture 9 2/4/15- Elasticity o Inelastic = x < 1o Elastic = x > 1  Luxury is more elastic because it isn’t necessary right away. When a price goes up, it is okay because you don’t need it. - Own Price Elasticity of Demand and Public Policy o How can public policy affect the “price” of choices? It can change actual prices These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Ex. Taxes on cigarettes  It can change time prices - Ex. With regulations on commuting rules o Why policies? To generate revenue To change behavior- To generate revenue…o Suppose the gov’t wanted to generate revenue with a new tax paid on each unit bought… Tax revenue = tax x quantity o What must the own price elasticity of demand be for this to work must effectively?  Inelastic - Tax Incidence/Burden o Who actually pays the tax?o What is the tax incidence?o Who bears the tax burden? Is it the sellers or the buyers?o If you are going to impose a tax, one must understand how the market is going to respond and who will bear the burden  For the consumer to bear the tax, tax goods where the demand is inelastic  For the market, tax elastic demand goods. - To change behavior…o Would a tax on cigarettes be effective? The market is segmented  You could generate revenue and change a behavior Tobacco is addictive so the demand is inelastic – addicted smokers will buy them always.  But this high price may discourage new smokerso Policy is not simple - Intro to Cross Price Elasticity o If your data indicates the elasticity is high, you should ask yourself: is there a good substitute?- Product Demand Shift Variables o One of the shift variables for Product Demand is the Price of Related Goodso The measure of the responsiveness of a good to a change in the price of related good is called cross price elasticity o If burger king raises the price of its burgers, what happens to the quantity of burgers McDonalds sells? BK/McD burgers are substitutes…- If one gets more expensive, people replace it with the other - If one gets less expensive, people buy it instead of the


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