Professional Documents
Culture Documents
supply:
Price ceiling, Price floor, Taxes
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Elasticity
bar
Necessity vs. luxuries: emergency doctor visits vs.
overseas holidays
Definition of the market: food vs. ice cream
Time horizon: quantity demanded changes less in
a week than over a few years
(
Q
Q
)
/
[
(
Q
Q
)
/
2
]
2
1
2
1
P
r
ic
e
E
la
s
t
ic
y
o
fD
e
m
a
n
d
=
P
P
Example: If the price of an ice cream cone increases from $2.00
to $2.20 and the amount you buy falls from 10 to 8 cones, then
your elasticity of demand would be calculated as:
(8 10)
22 percent
(8 10) / 2
2.3
(2.20 2.00)
9.5 percent
(2.00 2.20) / 2
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Ranges of elasticity
In terms of absolute values
E=0, perfectly inelastic
E>1, elastic
E=1, unit elastic
E<1 inelastic
E=
, perfectly elastic
Inelastic demand
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Elastic demand
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12
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Price
$5
$4
Demand
Demand
Revenue = $200
50
Quantity
Revenue = $100
20
Quantity
15
16
Price
Price
$3
Revenue = $240
$1
0
Revenue = $100
Demand
100
Quantity 0
Demand
80
Quantity
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furniture
Income Elasticity of Demand =
Percentage Change in
Quantity Demanded
Percentage Change
in Income
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cream
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Application of elasticity
People buy greeting cards and roses throughout
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Application of elasticity
Can good news for farming be bad news for
farmers?
What happens to wheat farmers and the market
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and/or supply
Use the supply-and-demand diagram to see
how the market equilibrium changes.
25
Price of
wheat
2 ...leads $3
to a large
fall in
2
price...
Demand
0
Question
Should farmers welcome new technologies?
27
Price ceiling
A price ceiling is a legally established
29
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preferred customers
Government ration: e.g., bureaucratic discretion on
priorities; coupons
Evading the price control: black market
31
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Price floor
A price floor is a legally established minimum
33
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Taxes
Governments levy taxes to fund their
operations.
Taxes result in changes in the market
equilibrium price and quantity.
Taxes on buyers (e.g. GST) and taxes on
sellers (e.g. excise tax) are equivalent.
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Price of
ice-cream
cone
Price
buyers
pay
$3.30
Price
3.00
2.80
without
tax
Equilibrium
with tax
S
Tax ($0.50)
Price
sellers
receive
90 100
Quantity of
ice-cream cones
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elasticity of supply.
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is taxed.
A taxes on buyers or sellers of a good result in
buyers paying a higher price
Sellers receiving a lower price
The quantity of the good sold is smaller.
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References
Gans, J., King, S., Stonecash, R., Byford, M., Libich, J. &
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