Elasticity, Total Revenue and Surplus

Quick Check 1

Items that are necessities are considered to be _____________

inelastic

Quick Check 2

If TR and price go in opposite directions, the good is considered to be _______

Elastic

Quick Check 3

List the determinants of elasticity P- the proportion of income spent on the

good A- availability of close substitutes (the

more subs. The more elastic) I- the importance of a good (luxury v

necessity) D- the ability to delay the purchase (the

more time, the more elastic)

Quick Check 4

If a good has an elasticity coefficient of 0, that good is said to be ___________

Perfectly inelastic

Price Elasticity

0 1 2 3 4 5 6 7 8

0

Quantity Demanded

Pri

ce

$87654321

a

bc

de

fg

h

ElasticEd > 1

Unit ElasticEd = 1

InelasticEd < 1

D

Excise Taxes

Governments tend to tax inelastic products to ensure high revenues

Ex- liquor, gasoline and tobacco

Price Elasticity of Supply If producers are relatively responsive to price

changes, supply is elastic. If producers are relatively unresponsive to price change, supply is inelastic

Es = Percentage change in quant supplied of product x/percentage change in price of product x

Or….Es = change S/sum of S/2 / change P/sum P/2

Ex- Solve Es for an increase in price from $4-6 and increase in quantity supplied from 10 units to 14 units (use midpoint)

Check your work Es = change quant

supplied/(sum of Qs/2)/(change price/sum of P/2)

= ((14-10)/(14+10/2))/((6-4)/(6+4/2))

= (4/12)/(2/5) = .33/.40 = .83

Price Elasticity of Supply Cont’d The degree of price elasticity of

supply depends on how easily and quickly producers can shift resources between alternative uses

Market Period

A period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied

Market Period Continued

Ex- perishable items are perfectly inelastic such as beets. Farmers will sell all of their product because they will go bad

The market period for a farmer is the growing season

Short run

a period of time too short to change plant capacity but long enough to use fixed plant more or less intensively

Long Run

Time period long enough for firms to adjust plant sizes and for new firms to enter and old firms to leave an industry

Ex- in the tomato industry the farmer has time to acquire new land and buy machinery. Over time more farmers will shift to tomatoes if profitable