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Week4.Elasticity.2009

# Week4.Elasticity.2009 - Week 4 Elasticity Tax Incidence and...

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Week 4 – Elasticity, Tax Incidence and Tax Burden A key characteristic of demand and supply curves! – Elasticity Elasticity = sensitivity or reponsiveness Changes in one variable as another variable changes How sensitive is the quantity demanded to changes in the price of the product? Answer is given by elasticity of demand. How sensitive is the quantity of tomatoes supplied by businesses to changes in the price of tomatoes in Ontario? Answer is given by the elasticity of supply of tomatoes in Ontario.

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Elasticity of Demand E D = dQ/dP x P/Q E D = percentage change in quantity demanded percentage change in price ….how consumers respond to a change in market price

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Elasticity of Supply E S = dQ/dP x P/Q E S = percentage change in quantity supplied percentage change in price …how producers respond to a change in market price
If demand is P = 100 – Q, what is the elasticity of demand at Q = 80? At Q = 80, P = \$20 E D = dQ/dP x P/Q = 1/(-1) x 20/80 = ¼ What does it mean to say that the elasticity of demand at this point is ¼ ? It means that if P = \$20 and the price changes by 4%, we expect that the quantity demanded will change by about 1%. (Why “about”?)

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Terminology: Demand is elastic if E D > 1 Demand is inelastic if E D < 1 Demand is unit(ary) elastic if E D = 1 Think about relation between consumers’ total expenditure on a product and the price that firms charge to customers. (It depends on the elasticity of demand). Consider dTE/dP. TE = P x Q Both are functions of P Use product rule. dTE/dP = (dP/dP x Q) + (dQ/dP x P) = Q + dQ/dP x P Multiply by Q/Q = Q(Q/Q + dQ/dP x P/Q) So dTE/dP = Q(1 – E D )
So, if E D > 1, dTE/dP < 0 And if E D < 1, dTE/dP > 0 We can see this on a graph of the demand curve as well….

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Strange, but true, fact Elasticity is different at every different point along a linear demand curve B A P Q Demand Curve C
have more elastic demands; others have less elastic demands. What affects elasticity of demand?

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Week4.Elasticity.2009 - Week 4 Elasticity Tax Incidence and...

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