Outline I. Market Demand II. Price Elasticity of Demand
a. b.
III.
Definition:
Definition Relationship with revenue
Income Elasticity of Demand
0
1
η
1
Income Elasticity of Demand (contd.)
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Income Elasticity of Demand (contd.)
η=%change in demand/%change in income η=
Find η when D(p)= 91 +m/2 - p/2, and p=2
Find η when D(p)= m/2p
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Motivation
Ch. 16 Equilibrium
Two fundamental principles of microeconomic analysis
Optimization Equilibrium
Optimization
Consumers Producers
=> demand function => supply function
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Outline
I. Supply Curve S(p)
Supply Curve and Elasticity Competitive Equilibrium Comparative Statics Taxation
I. II. III. IV. i. ii.
Definition:
Who pays the tax? Dead weight loss
p
The supply curve demonstrates how much the industry is willing to supply of a good at each market price p.
Slope?
q
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Supply Elasticity
Supply Elasticity
єS –Price elasticity of supply єS =%change in supply/%change in price єS =
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0p* Excess supply
pp*:
Excess demand at p=3 determines q* If one side of market perfectly elastic => determines p*
p
D(p)
p
S(p)
p*
D(p)
S(p)
q Supply perfectly inelastic
q
q*
Supply perfectly elastic 23
Demand perfectly inelastic
Demand perfectly elastic
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III: Comparative Statics
III: Comparative Statics (contd.)
Comparing equilibria that result under different sets of parameters Why do prices of some goods like apples decrease during heavy consumption, while others like beachfront cottages increase during heavy consumption?
Shift in supply
Shift in demand S(p)
S(p)
p*
p*
D(p)
D(p) q* e.g., price of input increases
q* e.g., program change increases demand
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Great Plains Labor Market
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IV. Taxation
Why might fluctuations in wages be greater in Iowa? p
Let
qS-quantity supplied qD-quantity demanded pS-price suppliers face pD-price demanders face
D’
D
q
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Example: D(p)=16-2p and S(p)=-2+p impose a $3 quantity tax on suppliers
Example: D(p)=16-2p and S(p)=-2+p impose a $3 quantity tax on suppliers 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0
pS = pD – 3 qD= 16 – 2pD qS= -2 +pS qD= qS
Demand Supply Supply
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IV: Taxation continued
Unit tax imposed on supplier
Taxation (contd)
pS= pD-t qS= qD Transactions take place at pD Supply curve shifts to the left
Is the equilibrium sensitive to who has the legal burden of paying the tax? Taxes are on transactions not on individuals
Unit tax imposed on demander
pD= pS+t qS= qD Transactions take place at pS Demand curve shifts to the left 31
IV.I. Who Pays the Tax? Example: D(p)=16-2p and S(p)=-2+p impose a $3 quantity tax on suppliers 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0
Who bears the larger share of the tax burden?
Demand New Supply Supply
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Relatively elastic supply
Perfectly Elastic supply
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The less elastic side of the market pays a higher proportion of the tax
Who bears the larger share of the tax burden?
Relatively inelastic supply
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p
Perfectly Inelastic supply
p
q
tD =pD-p* tS =p*-pS Find
tD / tS = єS /|єD |
p S pD
pS
D
q
q’
q 35
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The less elastic side of the market pays a higher proportion of the tax
tD / tS = єS /|єD |:
tD / tS = єS /|єD | tD > tS if єS >|єD | tD < tS if єS
