Week4.Elasticity.2007

# Week4.Elasticity.2007 - Week 4 Elasticity, Tax Incidence...

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Week 4 – Elasticity, Tax Incidence and Tax Burden Note: first midterm – Friday Oct 26 at 3 p.m. 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
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

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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”?)
Terminology: Demand is elastic if E D > 1 Demand is inelastic if E D < 1 Demand is unit(ary) elastic if E D = 1

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Ripley’s Believe-it-or-not Strange, but true, fact Elasticity is different at every different point along a linear demand curve B A P Q Demand Curve C
Is a linear demand curve realistic? Thinking about different goods, some have more elastic demands; others have less elastic demands. What affects elasticity of demand? Availability of close substitutes is key

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Also amount spent on this good by the consumer
How are elasticity of demand and changes in revenue related? See it on a graph (when demand is elastic): B A P Q Demand Curve C

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When demand is inelastic B A P Q Demand Curve C
When demand is unit elastic B A P Q Demand Curve C

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When demand is elastic, a fall in price will
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## This note was uploaded on 06/13/2011 for the course ECON A04 taught by Professor Mk during the Spring '07 term at University of Toronto.

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Week4.Elasticity.2007 - Week 4 Elasticity, Tax Incidence...

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