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ECON 208 - Notes, week of Sep 29

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Economics (Arts)
ECON 208
Lee Ohanian

Adrienne Pacini ECON 208 WEEK September 29 2009 Tax IncidenceWhen demand is less elastic than supply the incidence is significantly higher on the demanderWhen demand is more elastic than supply the incidence is significantly lower on the demander o The less elastic is demand relative to supply the greater the incidence of the tax on consumers and the less on suppliersExample the demand for gasoline is inelastic therefore the tax incidence is on the consumersExample because the inelastic demand of alcohol the government can increase taxes which become the burden of the demander rather than the supplierFor demand Change in PdT1b1b1d see WebCTThe bigger the slope of the demand curve relative to the supply curve the bigger the tax incidence on consumers see the Study Guide see Extensions in Theory 41Other Demand ElasticitiesIncome Elasticity of Demand nchange in quantity demandedchange in income yIf n is greater than zero the good is said to be normal yIf n is less than zero the good is said to be inferior yThe bigger the income elasticity of demand the bigger the shift in the demand curve for any given change in income o The bigger is income elasticity the more sensitive the demand for that good to incomeNecessities the more necessary an item is in the consumption patter of consumers the lower its income elasticity o Income elasticities for any one product also vary with the level of a consumers income o The distinction between luxuries and necessities also helps to explain differences in income elasticities between countries Cross Elasticity of Demandn change in quantity demanded of good X change in the price of good Y xyIf n is greater than zero then X and Y are substitutes xy If n is less than zero then X and Y are complements xy see Study Guide Extension Exercise 4 E1 see Extensions in Theory 42
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