Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.
-
Upload
roger-russell -
Category
Documents
-
view
218 -
download
0
Transcript of Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.
![Page 1: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/1.jpg)
Qd always responds positively to the change in income.
QdO
Y
More Elastic
Less Elastic
![Page 2: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/2.jpg)
Recap
![Page 3: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/3.jpg)
D
D`
Q
P
Inelastic D D`
Elastic D D``
∆ Y in PQ space
D``
![Page 4: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/4.jpg)
Example
Income (Rs)Quantity Demanded
(units)
10000 100
12000 105
YЄd = ∆ Q ÷ ∆ Y Q Y = 5 ÷ 2000 100 10000 = 0.25
The Good is normal (the sign is positive). But its demand is income inelastic o< | Є | < 1.
Rule: If sign is positive the good is normal and if sign is negative the good is inferior.
![Page 5: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/5.jpg)
Determinants of income elasticity of demand
1. Degree of necessity of good.
2. The rate at which the desire for good is satisfied as
consumption increases
3. The level of income of consumer.
![Page 6: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/6.jpg)
Food Stuff YЄd
M i l k -0.40
E g g s -0.41
M u t t o n -0.21
B r e a d -0.25
B u t t e r -0.04
M a r g a r I n e -0.44
S u g a r -0.54
F r e s h P o t a t o e s -0.48
T e a -0.56
C h e e s e 0.19
B e e f 0.08
C a k e s & B u i s c u i t s 0.02
F r e s h G r e e n V e g e t a b l e s 0.13
F r e s h F r u i t 0.48
F r e s h J u i c e s 0.94
C o f f e e 0.23
E l a s t i c I t y F o r A l l F o o d -0.01
![Page 7: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/7.jpg)
Cross price elasticity of demand
It is defined as the percentage change in quantity demanded of good A divided by the percentage change in the price of another related good B.
![Page 8: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/8.jpg)
Example
Demand for A Price of B
100 10
140 12
PbЄda = ∆ Qa ÷ ∆ Pb
Q a Pb = 40 ÷ 2 100 10 = 2
Goods are substitutes ( sign is positive ) Demand is cross price elastic | є | > 1.
Rule: If a sign is positive the goods are substitutes and if a sign is negative the goods are complements
![Page 9: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/9.jpg)
Example 2
•A Government will wish to know how a change in A Government will wish to know how a change in
domestic prices will affect the demand for imports. domestic prices will affect the demand for imports.
•Rise in price of imports worsening the Balance of Rise in price of imports worsening the Balance of
payments payments
![Page 10: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/10.jpg)
Adjusting to oil price shocks
SHORT RUNSHORT RUN
P
A
P1
Q
P2
Q1Q2
S1
S2
B
D1
O
![Page 11: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/11.jpg)
Adjusting to oil price shocks
Long Run Long Run effect on demandeffect on demand
P
A
P1
Q
P2
S1
S2
B
D1
D2
C DL
O
![Page 12: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/12.jpg)
Adjusting to oil price shocks
P
DP1
Q
P2
S1
S2
Long Run Long Run effect on supplyeffect on supply
D1
B
S3
FE
SL
O
![Page 13: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/13.jpg)
Incidence of tax when the demand is inelastic
• Fixed TaxFixed Tax
P
BP0
Q
P1
Q0Q1
S1
S2
C TAX
D
A
D
X
D
![Page 14: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/14.jpg)
Incidence of tax when the demand is elastic
• Fixed TaxFixed Tax
P
B`P0
Q
P1
Q0Q1
S0
S1
C`
A`
O
X`
D`
D
TAX
![Page 15: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/15.jpg)
Inelastic demand
• Case 1Case 1
P
P1
Q
P2
Q1Q2
S1
S + Tax
O
D
TAX
![Page 16: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/16.jpg)
Elastic demand
• Case 2Case 2
P
P1
Q
P2
Q1Q2
S1
S + Tax
O
D
TAX
![Page 17: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/17.jpg)
Inelastic supply
• Case 3Case 3
P
P1
Q
P2
Q1Q2
SS + Tax
O
D
TAX
![Page 18: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/18.jpg)
Elastic supply
• Case 4Case 4
P
P1
Q
P2
Q1Q2
S
S + Tax
O
D
TAX
![Page 19: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/19.jpg)
Tax on smoking
• Case 1Case 1
P
P1
Q
P2
Q1Q2
S1
S + Tax
O
D
TAX
![Page 20: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/20.jpg)
Tax on environmental pollution
• Case 3Case 3
P
P1
Q
P2
Q1Q2
SS + Tax
O
D
TAX
![Page 21: Qd always responds positively to the change in income. QdQd O Y More Elastic Less Elastic.](https://reader031.fdocuments.us/reader031/viewer/2022020117/56649f4a5503460f94c6c6f4/html5/thumbnails/21.jpg)
3 Core rules of elasticity3 Core rules of elasticity
RULE # 1:
1Less than Greater thanInelasticInelastic ElasticElastic
RULE # 2:
Income elasticity+
–
Normal good
Inferior good
RULE # 3:
Cross elasticity –
Complements
+ Substitutes
SummarySummary