Lecture notes week 4

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Economics for Management Studies
Gordon Cleveland

Week 4 Elasticity, Tax Incidence and Tax Burden A key characteristic of demand and supply curves! Elasticity Elasticity = sensitivity or responsiveness 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. Elasticity of Demand ED = dQdP x PQ = (dQ Q) (dP P) ED= percentage change in quantity demanded percentage change in price .how consumers respond to a change in market price Elasticity of Supply E = dQdP x PQ S ES = 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 ED = dQdP x PQ = 1(-1) x 2080 = What does it mean to say that the elasticity of demand at this point is ? 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 > 1 D Demand is inelastic ifDE< 1 Demand is unit(ary) elastic iD E = 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 dTEdP. TE = P x Q Both are functions of P Use product rule. dTEdP = (dPdP x Q) + (dQdP x P) = Q + dQdP x P Multiply by QQ = Q(QQ + dQdP x PQ) So dTEdP = Q(1 E ) D So, if D > 1, dTEdP < 0 And if ED< 1, dTEdP > 0 We can see this on a graph of the demand curve as well. www.notesolution.com
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