ECON 221 Lecture 10Outline of Last Lecture I. Advantages II. TradeIII. World MarketsIV. ConsequencesOutline of Current Lecture I. Elasticity OverviewII. TaxationIII. Elasticity of DemandIV. Elasticity of Supply Current LectureElasticity - Government involvement – some circumstances where gov. involvement benefits society(increases total surplus)- Gov. activity require money- how does it get money? Taxationo Taxation creates inefficiency- Central struggle- find ways to tax that don’t cause too much inefficiency so that gov. can pay for things that reduce inefficiency elsewhereTaxation- Two main questionso Who suffers when taxes are implemented? Ex. Cigarettes are $3 per packThese 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. Gov. decides to implement a tax – sellers must send the gov. $1 for every pack sold Makes sellers worse off because they have to send money Impacts buyers because sellers will have to raise the prices  Most cases, both sides suffer Answer to both depends on ELASTICITY - Elasticity – responsiveness to price changes o Suppose the price of cereal and cigarettes both increased by 1%- Price Changes – impact of price decreases depends on whether the gain in quantity sold outweighs the loss stemming from the lower price. - Elasticity of demand- measures how responsive buyers are to changes in prices. o ED = % change in QD / % change in Po Measures percentage change in quantity demanded for each percentage change in price o Changes throughout the demand curveo If we’re comparing two demand curves, we can say the shallower one is relativelymore elastic- Calculating Elasticity – use midpoint formula o Midpoint formula - % ΔX (change X) = ((Xnew – Xold) /.5 (Xnew + Xold)) x 100- Steepness and elasticityo More shallow demand curve, the more relatively elastic it iso What determines relative elasticity? Availability of substitutes – “broad categories” tend to be less elastic that specific goods within those two categories. Demand for “coffee drinks” is less elastic than demand for latteso Necessity – gas priceso Share of income spent on a good – toothpaste vs. apartmento Time Long run vs. short run elasticity  Gas prices o How much inefficiency is there when taxes are implemented? How can we minimize inefficiency o Elasticity is defined at particular price levels Elasticity changes as we move throughout the demand curve When comparing two demand curves, we say the shallower one is relatively more elastic  All goods are elastic at some point and inelastic at other points So when we measure elasticity we measure the elasticity of a particular good at a particular price level. - Elasticity and revenueo Impact of price change on Revenue (= Price x Quantity sold) depends on elasticityo Decrease in price yields -> Less money sold per unity, but an increase in the number of sales. o ED >1 means QD change is proportionally larger than P change. o ED < 1 means QD change is proportionally smaller than P change.  If ED < 1: Price Decrease -> Revenue Decrease If ED > 1: Price Decrease -> Revenue Increase If ED < 1: Price Increase -> Revenue Increase If ED > 1: Price Increase -> Revenue Decrease - Elasticity of Supply – how responsive are producers to prices when deciding how much they are willing to supply. o Es = % change in Qs / % change in P o Determined by: Availability of inputso Time (short run vs. long run elasticity of supply) - Other types of elasticity o Income elasticity (% change in QD) /(% change in income) Positive or negative matters o Cross-price elasticity (% change in QD of X) / (% change in P of Y)  positive or negative