Econ 201 1st Edition Lecture 10Outline of Last Lecture I. ElasticityII. Determinants of ElasticityIII. Cross price elasticityIV. Income elasticityOutline of Current LectureI. Price elasticity of supplyII. TaxesIII. Deadweight LossIV. VocabV. The Tax SystemCurrent LectureMeasuring the Price Elasticity of Supply-Price elasticity of supply = (% change in quantity supplied) / (%change in price)E = (%∆Q) / (%∆P) = [(∆Q/ ∆P) x ((P1 + P2)/(Q1 + Q2))]-A supply curve is elastic if a rise in price increases the quantity supplied a lot (and vice versa).-It’s inelastic if sellers change quantity just a little.-Elasticity of supply captures the sensitivity of quantity supplied to changes in price.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.-Factors that determine the price elasticity of supply:1. Availability of inputs-If increased production is very expensive, then the supply curve will be inelastic.-If production can be increased cheaply, then the supply curve will be elastic.2. Time-Price elasticity of supply increases as producers have more time to respond to price changes.-Long-run price elasticity of supply is usually higher than the short-run elasticity.-Classification of price elasticity of Supply:- If the |Es| < 1, the supply curve is inelastic.- If the |Es| >1, the supply curve is elastic.- If the |Es| = 1, the supply curve is unit elastic.Taxes-An excise tax is a tax on sales of a good or services-It can be imposed on either consumers or producers, or both of them-After imposing the tax, there will be effects on the quantities and prices-Excise tax is shared between buyers and sellersEx. A hotel’s price increased $20 due to a new excise tax. Customers pay more and the hotel makes less money-Tax incidence: a measure of who really pays for it-When the price elasticity of demand is low and the price elasticity of supply is high, the burden of an excise tax falls mainly on consumers.-When the price elasticity of demand is high and the price elasticity of supply is low, the burden of an excise tax falls mainly on producers.Tax Revenue Changes Increase of the price has two effects on tax revenue◦ Increase tax revenue for each unit of the good sold◦ Decrease revenue due to the reduced quantity of sales The total change depends on ◦ Elasticities of both supply and demand◦ The initial level of tax◦ Elasticities are low◦ Tax revenue will definitely goes up Other cases: uncertainDeadweight Loss and Elasticities If the goal in tax policy is efficiency (minimizing deadweight loss), and getting tax revenue as much as possible, then policymakers should choose the goods with the lowest price elasticities.Tax Fairness and Tax EfficiencyTwo principles of tax fairness: The benefits principle:Those who benefit from public spending should bear the burden of the tax that pays for that spending. (e.g. highway fee) The ability-to-pay principleThose with greater ability to pay a tax should pay more tax. (e.g. aggressive income taxes) There is usually a trade-off between equity and efficiency: The system can be made more efficient only by making it less fair, and vice versa.Some important taxes and terms: The tax base is the measure, such as income or property value, that determines how much tax an individual or firm pays. Lump-sum tax is the same for everyone, regardless of any actions people take. (e.g. tag fees on vehicles) Income tax depends on income from wages and investments. Payroll tax depends on the earnings an employer pays to an employee.  Sales tax depends on the value of goods sold. Profits tax depends on a firm’s profits. Property tax depends on the value of property, such as a home. Wealth tax: a tax that depends on an individual’s wealth.Understanding the Tax System The tax structure specifies how the tax depends on the tax base. A progressive taxtakes a larger share of the income of high-income taxpayers than of low-income taxpayers. A regressive tax takes a smaller share of the income of high-income taxpayers than of low-income taxpayers. The marginal tax rate is the percentage of an increase in income that is taxed