Unformatted text preview: Please sit in your assigned seats  we are taking attendance s Examination 1: Monday, September 29, bring a #2 pencil. Coverage, Chapts. 16 s No makeup exams without a valid excuse. Makeup exams allowed only within 1 week of the date of an examination (see syllabus)
s Reminders: More on Elasticity
1. Price Elasticity of Supply 2. Using Elasticity to forecast the effects of taxes on prices Price Elasticity of Supply
ES =
s Percentage change in quantity supplied Percentage change in price Measures the sensitivity of changes in quantity supplied to changes in price of a good or service s Price elasticity of supply is a positive number that can range from zero to infinity Examples:
s s A 10 percent increase in the price of steel causes a 15 percent increase in the quantity supplied The price elasticity of supply for steel is 15%/10% = 1.5 Examples:
s s Suppose the price elasticity of supply of bread is 2. A 10 percent decline in the price of bread will therefore result in a 20 percent reduction in quantity supplied because 20%/10% = 2 A perfectly inelastic supply:
Price Supply Quantity supplied A perfectly elastic supply:
Price Supply Quantity supplied Using Elasticity to Analyze the Effect of Taxes on Prices
s s Taxes can affect incentives to buy and sell goods and services An excise tax is a tax on the production or sale of a particular product such as gasoline This is the Smart Car In Western Europe where gasoline sells for $7 to $9 per gallon people drive little cars! Effect of a 10 cent per gallon gasoline tax
Price (Dollars per gallon) Initial Supply 1.00 Demand 1.00 Gasoline (millions of gallons per month) Effect of a 10 cent per gallon gasoline tax
Price (Dollars per gallon) 1.10 1.04 1.00 0.94 Demand .75 .95 1.00 Gasoline (millions of gallons per month) Supply after tax Initial Supply Effect of a 10 cent per gallon gasoline tax
Price (Dollars per gallon) 1.10 1.04 1.00 0.94 Supply after tax Initial Supply Tax paid by buyers Tax paid by sellers Total tax collected is $95,000 per month
Demand .75 .95 1.00 Gasoline (millions of gallons per month) Conclusions:
A tax on the sale of an item is unlikely to raise its equilibrium price by the full amount of the tax per unit s The tax is likely to increase the price paid by buyers and to decrease the net price received by sellers s In effect, the tax revenues paid are collected from both buyers and sellers of the product
s Cases where an excise tax is fully shifted forward to buyers
P
s s Case 1: The demand for the product is perfectly inelastic This case is extremely unlikely 1.10 1.00 Demand Supply after tax Initial supply Q Cases where an excise tax is fully shifted forward to buyers
s s Case 2: The supply of the product is perfectly elastic This is a likely case over long periods if sellers must receive at least $1 net per gallon to cover costs. If price does not rise to $1.10 some firms will go out of business P Supply after tax Initial supply Demand Q2 Q1 Q 1.10 1.00 ...
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 Fall '08
 Hymen
 Price Elasticity, Supply And Demand, tax initial supply

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