Econ 142 1st Edition Lecture 8Outline of Last Lecture I. Imposing a tax, market failure Outline of Current Lecture II. ElasticityIII.Elasticity of DemandIV. Elasticity of SupplyCurrent LecturePrinciples of Microeconomics (third lecture after first exam) Dr. Staihr Feb 18th 2015- Elasticity = responsiveness- when price changes in either direction quantity demanded will change- will it change little or big- What makes a good have a demand that is elastic or inelastic? LIST TO KNOW- Number of substitutes- Luxury or Necessity- theres 5 total will add later.- Chart to know pg 183- Price elasticity = percentage change in quantity demanded/- Calculating elasticity = - (change in quantity demand/average quantity demanded) / (change in price/average price)- Answer to calculating elasticity: Between 0-1 Demand is Inelastic; above 1 Demand is Elastic- Some examples- Tobacco products 0.25 - very inelastic- Gasoline 0.06 - very inelastic- Beer 0.23 - inelastic- DVDs 3.1 - Elastic- Cocaine 0.28 - inelasticThese 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.- Test exampleThese 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.- You work at starbucks Last week lattes sold for $4.50 each and you sold 120 a ay. This week lattes sell for $4.90 and you sell 112 a day. The price elasticityof demand for lattes comes closest to.,.- 8/116 = .069 - 0.069/0.085 - .81 =- .40/4.70 = .085- Answer is 0.81- Any two points on a demand curve you can calculate elasticity- (Change in quantity/average quantity)/(change in price/average price)- If the price increases the quantity is negative and the change of price is positive therefore ...- If the price drops the quantity demanded will increase and the price will drop therefore ….- Using Elasticity- a/b = c- What is a? a = b*c- What is b? a/c = b- % Change in Q demanded /% change in price = Elasticity- i.e. you are going to change the % change in price by 10%- ? % Change in Demanded/ 10 = 1.8- 18 % change in demanded- It’ll be an 18% quantity decrease- If it is a 10% price increase- %Change in Q Demanded/15 = 0.80- % change in Q demanded = 12%- if 15 % price decrease 12 % quantity increase vice versa- If 15% price increase 12% quantity decrease- Example :- You’ve estimated the demand elasticity for your product at 2.4 - ELASTIC- The current quantity demanded is 200 units per day- The current price is $20 per unit- Your boss wants to have a sale, a 5% price decrease- What is your estimate of the additional revenues this sale will produce- what are your current revenues- You know this- %Change in Q Demanded / % change in price = Elasticity- % change in Q demanded / 5 = 2.4- %Change in Q Demanded = 12- Current price will decrease 5%- New Price:(1-.05)$20 = $19 = Price with the price decrease- Current quantity will increase 12% - New Quantity: (1+.12)*200 = 224 at $19 each- Additional revenues produced by the sale: $256- If you want to make more money lower the price- Elasticity is NOT slope- The Elasticity changes as you move along the Demand Curve- The lower part is elastic of the slope, higher part is elastic- Cross Price Elasticity of Demand- Cross price elasticity- What if Good X and Good Y are Substitutes- Cross price elasticity is positive when two goods are substitutes- Price Increase +/+- Price Decrease -/-- Change in price of hot dogs- Change in Q Demanded of Hot Dog buns- If price of hot dogs go up you buy less buns, you buy less- If price of hot dogs go down you buy more hot dogs, you buy more buns- Cross Price elasticity is negative when two goods are complements- If two goods are substitutes Cross-price elasticity is Positive- If two goods are complements Cross-price elasticity is Negative- Pg 185- Elasticity of Supply- Pg 190- When the price changes, the quantity supplied will change..- Will it change a little, or a lot?- How responsive is the supply to a change in the price?- Same FORMULA % change in price quantity supplied/ % change in price- (Change in quantity supplied/average quantity) / (change in price/average price)- The only thing that matters is Time, as more time passes, supply becomes more elastic- Income elasticity of Demand- How does the quantity demanded change when your income changes?- pg 186- Combining Elasticity with what we’ve done before (which is applying a tax) NOT IN BOOK BUT ON EXAM- Find Elasticity of Demand and Supply Curve- Calculate this:- (Elasticity of Supply) / (Elasticity of Supply + Elasticity of Demand)- That is the percentage of any tax that will fall on the buyer- Portion that FALLS ON THE BUYER- (Elasticity of Demand) / (Elasticity of Supply + Elasticity of Demand)- That is the percentage of any tax that will fall on the seller- Portion that FALLS ON THE SELLER- Not Explicitly in your book- The more elastic the supply is, the more the tax falls on the Buyer- The more elastic the demand is, the more of the tax falls on the Seller- Example Problem:P Q P Q7614 50 107016 52 14- Calculate what portion of a $10 tax will fall on the buyer, and what portion on the seller. 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