qii - ss4 - lt1 reviewer
TRANSCRIPT
QIISS4LONG EXAM I REVIEWERFerdinand B. Sta. Ana Jr. (IV – Electron)
Elasticity
Elasticity (η) Responsiveness of quantity to changes
in certain factors Demand
1. Price Elasticity of Demand (PεD)2. Income Elasticity of Demand (I εD)3. Cross-price Elasticity of Demand (CP εD)
Supply1. Price Elasticity of Supply (PεS)
Degrees of Elasticity Unit elastic
Change in a certain factor is equal to change in price of g00d ↑1% Price -> =↓1% Quantity demanded (for PεD) Elasticity = 1
Elastic Quantity demanded/supplied of a good reacts substantially to
change in factor ↑1% Price -> >↓1% Quantity demanded (for PεD) 1 < Elasticity < +∞
Inelastic Quantity demanded/supplied of a good only responds slightly to
change in factor ↑1% Price -> <↓1% Quantity demanded (for PεD) 0 < Elasticity < 1
Price Elasticity of Demand (PεD)
Responsiveness of QDx to ΔPDx = Always negative so take the absolute
value
Elasticity ≠ Slope
However……There are cases when slope = elasticity
Perfectly Elastic: PεDx = ∞ m = ∞ (in math
terms, it is undefined)
Perfectly Inelastic: PεDx = 0 m = 0
Income Elasticity of Demand (I εD)
Responsiveness of Dx to ΔI = = Interpreting the Income Elasticity of
Demand: I εD < 0 (negative) – good is an inferior good I εD > 0 (positive) – good is a normal good
If > 1 – good is a superior good If between 0 and 1, good is a
necessity/relatively inelastic
Cross Price Elasticity of Demand (CPεD)
Responsiveness of Dx to ΔPy = = Interpreting the Cross Price Elasticity of
Demand: If CPεD > 0 x and y are substitute goods If CPεD < 0 x and y are complements If CPεD = 0 x and y are independent
goods
Price Elasticity of Supply (Pεs) Responsiveness of Qsx to ΔPx = = Interpretation of Price Elasticity of
Supply: If PεS = 0 supply is perfectly inelastic If 0 < PεS < 1 supply is relatively inelastic If PεS = 1 supply is unit elastic If 1 < PεS < +∞ supply is relatively
elastic If PεS = ∞ supply is perfectly elastic
Determinants of Elasticity Type of good:
Necessity – relatively inelastic (needed) Luxury – relatively elastic (not needed; luxury ≠ prestige)
Availability of substitutes ↑substitutes ↑elasticity (elastic) ↓substitutes ↓elasticity (inelastic)
Price as a percentage of income/Amount of disposable income on a good The lower the share of the price on the income, the more price-
insensitive (inelastic) the buyer is. (e.g. candies) The higher the share of the price on the income, the more price-sensitive
(elastic) the buyers is. (e.g. airfare, house and lot or automobile)
Determinants of Elasticity Time frame
Longer time frame – elastic Shorter time frame – inelastic Has something to do with the response of buyer
given a period of time. The more time the buyer has, the more time the buyer can think/look for better deals. (e.g. transportation)
Unique value Loyalty, sentimental value buyers tend to be
price-insensitive (inelastic) By virtue of branding
Tax Incidence
Tax mainly used by the government to raise
revenues (not limited to this) Affects the cost of production of goods
taxes directly affect the supply In graphical terms, causes a shift of the
supply curve to the left It can also discourage market activity. (When
a good is taxed, quantity of good sold is smaller in the new equilibrium)
The buyer and seller share the burden of tax
Who has the heavier burden? This is where elasticity comes in. Analyze
the ff. graphs:
Demand and Supply have equal elasticity
Compare and contrastElasticity: Supply > Demand
Elasticity: Supply < Demand
Remember: taxes cause a shift of the supply curve, not movement. Forgive me because the graphs I found didn’t have a new supply curve. Just imagine a line passing through the point on the demand curve (blue line) and is parallel to the supply curve (red line)
Red bracket: per unit producer tax burdenBlue bracket: per unit consumer tax burden
Compare and contrast
Burden is solely shouldered by consumers
Burden is solely shouldered by producers
Perfectly Elastic Supply Perfectly Elastic Demand
Conclusion If demand is relatively inelastic, heavier
tax burden for consumers If demand is relatively elastic, heavier
tax burden for producers
Other notes Remember that the government will profit
more from taxing inelastic goods But, inelastic goods are usually necessities,
and taxing inelastic goods will contradict the equity function of the government
So, the gov’t taxes the elastic goods that it wants to lower transactions of. Sin taxes – taxes on generally socially unwanted
goods. Taxes on imports – taxes levied on imports to
promote local products
References Samuelson, P. A. & Nordhaus, W. D.
(2004). Economics, 18th ed. USA: Mc-Graw Hill, Inc.
Mankiw, N. G. (2009). Principle of microeconomics, 5th ed. Mason, OH: South-Western Cengage Learning
Depken, C. A. (2006). Microeconomics demystified. USA: Mc-Graw Hill, Inc.
Notes from the lecture of Vladimir S. Lopez
END OF REVIEWER-fbsaj2011