perloff_0321374584_IM_Part1_C03 - Chapter 3 Applying the...

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Chapter 3 Applying the Supply-and-Demand Model ± Chapter Outline 3.1 How Shapes of Supply and Demand Curves Matter 3.2 Sensitivity of Quantity Demanded to Price Price Elasticity of Demand Elasticity Along the Demand Curve Other Demand Elasticities 3.3 Sensitivity of Quantity Supplied to Price The Elasticity of Supply Elasticity Along the Supply Curve 3.4 Long Run Versus Short Run Demand Elasticities over Time Supply Elasticities over Time 3.5 Effects of a Sales Tax Two Types of Sales Taxes Equilibrium Effects of a Specific Tax Tax Incidence of a Specific Tax Equilibrium Is the Same No Matter Who Is Taxed Ad Valorem and Specific Taxes Have Similar Effects ± Teaching Tips Chapter 3 continues work with the supply-and-demand model from Chapter 2. Some of this material, however, may be new to students rather than review. There are two main topics in the chapter: elasticities and tax effects. Although own-price elasticities are covered in principles, income and cross-price elasticities generally are not. Thus, you should budget significant class time to discuss them. The presentation on tax incidence may also require significant class time, as students are sometimes confused as to why, for example, the resulting equilibrium is independent of whether the demand curve or the supply curve shifts to show the tax. When discussing own-price elasticities, students need to understand that there are several formulas that yield an elasticity, and the choice of formula is driven mostly by the information that is given. When talking about the formula as simply a ratio of percentage changes, you might try to find a current newspaper piece that has a percentage change in prices and the percentage change in quantity that results. If you are using calculus, you may want to demonstrate that when demand curves are linear, their answers using the derivative formula in footnote 2 will be the same as those derived using Equation 3.2, but there
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18 Part 1 Teaching Aids will be differences when demand relationships are non-linear. Be sure to point out footnote 1 regarding signs. It may be the case that your students learned the elasticity formula with a (–) sign imbedded in it, making elasticities appear as positive numbers. Note that even when the sign is not imbedded in the formula, economists often do not say, “the elasticity is –2”, but rather, “the elasticity is 2” with the minus sign implicit. When discussing elasticities, two points require significant attention. The first is to get the students to make the connection between a verbal description of an elasticity, the slope of the demand curve, the elasticity formulas, and the graph of a demand curve. You can give the students information in different forms and ask them to compute an elasticity in each case. Some students are good at computing elasticities only if they are given certain information to work with, such as two prices and their associated quantities. The second area of confusion is that linear demand curves are not of constant elasticity (except when
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This note was uploaded on 04/16/2008 for the course MICROECONO ECON W3211 taught by Professor Dutta during the Spring '08 term at Columbia.

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perloff_0321374584_IM_Part1_C03 - Chapter 3 Applying the...

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