sayre | morris seventh edition elasticity chapter 4 4-1© 2012 mcgraw-hill ryerson limited
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SAYRE | MORRIS Seventh Edition
Elasticity
CHAPTER 4
4-1© 2012 McGraw-Hill Ryerson Limited
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Applications of Price Elasticity
Excise Tax • a sales tax imposed on a particular product
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Applications of Price Elasticity
• the more inelastic the demand for a product, the larger is the percentage of a sales (or excise) tax the consumer will pay
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Elasticity of Supply
• a measure of how much quantity supplied changes as a result of a change in price
• can be expanded to:
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s% quantity supplied
% price
s
ss
Q100
average QP 100
average P
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Elasticity of Supply
Example: When price changes from $2 to $3, the quantity supplied rises from 400 to 500.
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100 100 22.2%450 0.551 40%100
2.5
s
ss
Q100
average QP 100
average P
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Perfectly Inelastic Supply
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Income Elasticity
• the responsiveness of quantity demanded to a change in income
• can be expanded to:
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dY
% quantity demanded (Q )% income (Y)
d
dY
Q100
average QY 100
average Y
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Income Elasticity
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If coefficient
is:
Type of Good:
Demand is:
Greater than 1
Normal – Luxury good
Income elastic
Less than 1 but greater
than 0
Normal – Necessity
Income inelastic
Less than 0 Inferior goodNegative income
elasticity
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Income Elasticity
TABLE 4.9 Differences in Spending between the Richest and Poorest Groups in Canada, 1996
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Income Inelastic Income Elastic
Category
Lowest income
percentile
Highest income
percentile Category
Lowest income
percentileHighest income
percentileFood 20.1% 15.9% Furniture 2.7% 4.3%
Shelter 34.6 21.9 Clothing 4.4 7.3Public Privatetransport 2.0 1.7 transport 9.6 17.6
Household Recreation 4.9 9.1
operation 7.2 6.6 Education 1.3 2.2
Tobacco &alcohol 3.9 2.8
Source: Based on Statistics Canada, Family Expenditure in Canada, 1996, catalogue no. 62-555-XPB, released on July 28, 1998.
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Cross Elasticity
• responsiveness of the change in Qd of product A to a change in the price of product B
• can be expanded to:
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AB% quantity demanded of product A
% price of product B
Ad
Ad
AB B
B
Q100
average Q
P 100average P
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Cross Elasticity
4-12
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Margarine Butter
PriceQuantity
Demanded per Week (lb.)
PriceQuantity
Demanded per Week (lb.)
$1.50 5000 $3.00 10002.10 3200 3.00 2000
AB
1000100 67%1500 2
0.60 33%100
1.80
Ad
Ad
AB B
B
Q100
average Q
P 100average P
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Cross Elasticity
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If coefficient is:
Goods are:
Positive Substitutes
Negative Complements
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