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U of A ECON 2023 - Elasticity of Demand Part 2.

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Econ 2023 1st Edition Lecture 8Outline of Last Lecture I. Elasticity of Demanda. Definition of elasticity of demandII. What the elasticity shows us and how to find it.III. Determinants of Elasticitya. Time horizon, classification, nature, and size.Outline of Current Lecture II. Elasticity of Demanda. Own price elasticity of demand.b. Own price elasticity of supply.c. Cross-price elasticity of demand.d. Income elasticity of demand.e. Tax Incidence.Current LectureI. 5. Elasticity of Demand: the law of demand tells us that when price goes up, quantity demanded goes down and vice-versa. This will answer the question: how much does quantity demanded change when price changes?a. A demand curve is said to be elastic when as increase in price reduces the quantity demanded a lot (and vice versa) b. When the same increase in price reduces quantity demanded just a little, then the demanded curve is said to be INELASTIC. II. 6. The elasticity of demand is going to be a measure of how responsive for the quantity demanded is to a change to the price. a. Elastic: on the demand curve where the quantity demanded is responsive to the price. b. Inelastic: on the demand curve where the quantity demanded isn’t responsive or less responsive to the price.c. Elasticity doesn’t equal slope but: if two linear demand (or supply) curves runthrough a common point, then at any given quantity the curve that is FLATTER is more ELASTIC.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.III. 7. (Own-) Price elasticity of demand--"Percentage change in quantity demanded of a good or service divided by the percentage change in its price, other factors remaining unchanged" (i.e., ceteris paribus). It measures the reaction of consumers' purchases to a change in price. By using percentage changes in quantity demanded and price, the price elasticity of demand is "units free;" i.e., its value does not depend on the units in which quantity demanded or price are measured. The (own-) price elasticity of demand ranges from zero to infinity; different ranges have specific names: IV. a. εD = 0 Perfectly inelastica. 0 <εD< 1 (Relatively) InelasticV. c. εD = 1 Unit elastica. 1 <εD< ∞ (Relatively) ElasticVI. e. εD = ∞ Perfectly ElasticVII. 8. Determinants of the Elasticity of demand.a. Availability of Substitutes*** this is the fundamental determinant. The more substitutes the more elastic the curve. It strongly influences the sensitivity to changes in price.i. For goods with many substitutes, switching brands when prices change is easy, so demand is elastic.ii. For goods with fewer substitutes, consumers find it hard to adjust quantity demanded much when prices change so demand is inelastic. b. Time horizon influences elasticity of demand for a good: immediately following a price increase, consumers may not be able to alter their consumption patterns (inelastic), over time, however, consumers can adjust their behavior by finding substitutes (making demand elastic.)c. The classification of the good influences the elasticity of demand for a good (broad and narrow): The broader the classification, the less likely consumers will be to finding a substitute (inelastic), the narrower the classification, the more likely the consumer will be to find substitutes (making demand elastic).d. The nature of the good to the consumer can also affect the elasticity of demand. For necessities, consumers do not change quantity demanded muchwhen the price changes (inelastic). For luxuries, consumers will alter their behavior when the price rises (elastic).e. The size of the purchase (relative to the consumer’s budget) influences elasticity of demand: Consumers are less concerned about price changes when the good feels cheap (inelastic). Consumers become much more concerned about price change when the good feels expensive (elastic). VIII. 9. (Own-) Price elasticity of supply--"...a measure used in economics to show the responsiveness, or elasticity, of the quantity supplied of a good or service to a change inits price." It is defined as "...is defined as the percentage change in the quantity supplieddivided by the percentage change in price."a. Elastic supply--"...when the coefficient is greater than one, the supply can be described as elastic." I.e., there will be a relatively small change in quantity supplied relative to b. Inelastic supply--"When the [price elasticity of supply's] coefficient is less than one, the said good can be described as inelastic..." I.e., there will be a relatively small change in quantity supplied relative to IX. Wage elasticity of labor supply--The elasticity of hours worked with respect to the wage rate (i.e., the price of labor). The wage elasticity of labor supply is important to employers because it provides information on how much it would cost to increase employment. It is also important to policymakers, especially when income tax rates are set since changes in income tax rates affects "take home pay."X. 10. Cross-price elasticity of demand--"...measures the responsiveness of the demandfor a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good."a. Substitutes--There is "...a positive cross elasticity denotes two substitute products."b. Complements--"A negative cross elasticity denotes two products that are complements..."XI. 11. Income elasticity of demand--"...measures the responsiveness of the demand for a good to a change in the income of the people demanding the good, ceteris paribus. It is calculated as the ratio of the percentage change in demand to the percentage change in income. For example, if, in response to a 10% increase in income, the demand for a good increased by 20%, the income elasticity of demand would be 20%/10% = 2."XII. 12. Tax incidence--"...the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of


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