BU472 Lecture Notes - Economic Surplus, Demand Curve, Deadweight Loss
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Week 4 – Elasticity, Tax Incidence and Tax Burden
A key characteristic of demand and supply curves! –
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.
If demand is P = 100 – Q, what is the elasticity of demand at Q = 80?
At Q = 80, P = $20
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%.
Demand is elastic if ED > 1
Demand is inelastic if ED < 1
Demand is unit(ary) elastic if ED = 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).
So, if ED > 1, dTE/dP < 0
And if ED < 1, dTE/dP > 0
We can see this on a graph of the demand
curve as well….