bush elasticity final

8/14/2019 Bush Elasticity Final

http://slidepdf.com/reader/full/bush-elasticity-final 1/21

For the next fifteen minutes,

imagine you are thisperson……..



http://pnogal32.files.wordpress.com/2008/03/_george-bush.jpg

http://www.endevil.com/images/George_Bush.jpg

http://images.google.co.uk/imgres?imgurl=http://www.topnews.in/uploads/george-bush3.jpg&imgrefurl=http://www.topnews.in/bush-set-arrive-israel-48-hour-visit-241541&h=340&w=312&sz=99&hl=en&start=37&tbnid=rCYCCheaiDwwiM:&tbnh=119&tbnw=109&prev=/images%3Fq%3Dgeorge%2Bbush%26start%3D20%26gbv%3D2%26ndsp%3D20%26hl%3Den%26sa%3DN



Mr Bush’s Problem #1

You see:- He sees:-

http://bp1.blogger.com/_YRG3_h4arbU/RzMKS2qB79I/AAAAAAAABXU/P984o63k9aQ/s400/graph+normal.JPG



Mr Bush’s Problem #2

USA Health CareSpending 2006(Public and Private)

$1.7 Trillion

16% of GDP

USA Health CareSpending 2016 Est.(Public and Private)

$2.26 Trillion

20% of GDP

$2,260,000,000,000



Effects on increased health carespending

Growth in spending on health care will determine thefuture economic policy of the US government, afinancial adviser to the government has predicted.

Spending on health care is rising in the United States:the current cost of 16% of the gross domestic product is

projected to reach 20% by 2016."In order to avoid an explosion of government debt, you

have to cut spending by a third or raise revenue by athird, or some combination thereof," Peter Orszag told aCapitol Hill briefing this week.

(Bob Roehr: “British Medical Journal” 2/2/08)



How to cut spending or raiserevenue??????????

From Smokers? X

From Drinkers? XOr…….



Answer: Tax Fast Food?



Mr Bush’s questions:

By how much would demand for fast food fall?

Depends on Price Elasticity of Demand.

How much revenue would government get from the fastfood tax?


Who would pay for the tax: the producers of fast food orthe consumers of it?




Quick Glossary

Elastic demand: when price changes there is alarger than proportionate change in demand.

E.g. a 5% rise in price causing a 10% fall indemand

Inelastic demand: when price changes, there is asmaller than proportionate change in demand.

E.g. a 5% rise in price causing a 2% fall indemand.



Graph if Fast Food has ElasticDemand

Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

•How much did consumers

spend before the tax?

•How much did consumersspend after the tax?



Graph if Fast Food has ElasticDemand #2

Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

•How much was the

government tax?

•How revenue does thegovernment get from thetax?



Graph if Fast Food has ElasticDemand #3

Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

•How of the tax is paid by

consumers?

•How much of the tax ispaid by businesses?



Graph if Fast Food has InelasticDemand (1)

Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

•How much did consumers

spend before the tax?

•How much did consumersspend after the tax?




Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

•How much was thegovernment tax?

•How revenue does thegovernment get from thetax?




Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

•How of the tax is paid byconsumers?

•How much of the tax ispaid by businesses?



Summary 1

Spending Before and After Tax:

Before Taxspending is thesame whether elastic or inelastic.

After Tax

Spending

with

Elastic

Demand

After Tax

Spendingwith

Inelastic

Demand



Summary 2

Amount of tax revenue governmentgets:

(The amount of tax charged is the same for elastic andinelastic demand.)

Tax revenue with elasticdemand.

Tax revenue withinelastic demand.



Summary 3

How much of the tax do consumers or businesses pay?

With elasticdemand.

With inelasticdemand.



CONCLUSION

An understanding of Price Elasticityof Demand is essential forunderstanding the effects of indirect

taxation.

BUT.............

Is demand for fast food elastic orinelastic?



Graph if Fast Food has ElasticDemand

Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax




Price

Quantity

D

S

P

Q

S Tax

P Tax

Q Tax

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