Lecture9--MOREONELASTICITY

Lecture9--MOREONELASTICITY - Please sit in your assigned...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

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. 1-6 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 ...
View Full Document

This note was uploaded on 10/13/2008 for the course EC 205 taught by Professor Hymen during the Fall '08 term at N.C. State.

Ask a homework question - tutors are online