Week4.Elasticity.2010

Week4.Elasticity.2010 - So,ifED>1,dTE/dP<0...

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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….(in  a couple of minutes)
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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
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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 Also amount spent on this good by the consumer
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How are elasticity of demand and changes in total  expenditure by consumers (i.e., the revenue of the  producer) 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
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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 raise total  expenditure When demand is elastic, a rise in price will lower total  expenditure  When demand is inelastic, a fall in price will lower  total expenditure  When demand is inelastic, a rise in price will raise total  expenditure  When demand is unit elastic, a fall or a rise in price  will have (approximately) no effect on total expenditure 
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An illustration of the use of “elasticity” Think about the tax on one particular product (not a  general tax on many products)  – e.g., gasoline, liquor, cigarettes This is called an “excise” tax Could be a “flat-rate” tax e.g., $5 per bottle of liquor,  $0.30 per litre of gasoline,  $10 per carton of cigarettes Could be an “ad-valorem” tax e.g., 10% of the price on a bottle of liquor, 25% on a  litre of gasoline, 30% on a carton of cigarettes. To keep it simple, we look only at flat-rate excise tax.
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This note was uploaded on 08/17/2011 for the course ECON A04 taught by Professor Mk during the Fall '07 term at University of Toronto.

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Week4.Elasticity.2010 - So,ifED>1,dTE/dP<0...

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