Own price elasticity of demand :If Demand increases

. . . S

a measure of the responsivenessIncome elasticity of demand :

Of consumers to a change in a Measure Of Consumers'

§S p

.

P,

the price of a good or service responsiveness TO Changes in Dz Dz

E D= !j?aQp"

income. a

D'

a. a.

D'

IE D= %4Q 's

t.IQ > tap tap ) t.IQE

, ,( Oas long as the law of '1. II when supply is more elastic When supply is more

inelastic

demand holds IED ( 0 inferior goodIf Supply decreases

. . .

IE , ,71 elastic

E, , =1 unit elastic

IED=O no relationshipp

.

sz s.

E,

( I inelastic IED 7 0 normal good p,

i

s,

pps

,

Percent change from x. toxz : Cross Price elasticity of Demand D D

×2 - × '• 100.1 .

( Good At Good B) '

. a measure Of QQ ' on a

X, t.AM/.LlQ t.IQ > tapconsumers

' responsiveness forwhen demand is more inelastic when demand is more elastic* The more horizontal a demand Good A when the price of B

Curve is,

themoreelasticitis s sp Changes.

* Ifa profit - Maxim 't ,IT

E¥"f

.EE#ggq2in9firmiscurrehHyxqD=yaQD(

Good A)

"

%¥¥t¥tEp±§ ( son

floor

= 1111 " pricing in an inelastic 311 11 11 11 Ceiling=

=.

' 1.41 > ( GOODB ) bindingps shore

. = region of demand, ceiling 3000 p D

. =ii. iii. ii. a they should KED )0 substitutes 489070¥ 38,0,§6%0

increase priceK If a profit - maximizing firm is KED=0 Unrelated prefloor s

postfloorscurrently pricing in an elastic

KEDCOComplements

b¥o%Moo|cs 120451, 11111 floor

region of demand,

it is Unclear 1111 ,new

'=DWL

whether they should change KASIKEDI increases,

the - aa-

nonbinding Ps = Ps -

price relationship blwthezgoods floor = is . is

* Revenue is maximized ata P soo 300 s,

price where demand is increasesunit elastic Price Floor :a government mandated a sz

HIE ,> 1<1 EPT HIE ,,I > I { PT minimum price g-

CsS B

§ D) subsidyRevenue Costs ( QHRevenueCoststprice ceiling :a government

Ernie DWL,

F WedgeProfitytproatpyofittProfitytprof.tl?Ygfittmandated maximum price

3- ¥"

'

"

'

"

'

"

¥"

IB,PIsefTI×°

Determinants of More Tax Burden : the amount by which stooyjo Q D

Elasticity of Demand Elastic if...

a tax causes prices to increase• need • less necessary ( decrease ) for consumers ( producers ) Presubsidy Post Subsidy

• availability of • more available * More inelastic side is more CS A + B A + B+F+Eclose substitutes substitutes affected by taxes subsidies PS F + G Ft G + Btc

• market definition • more narrow• time horizon • longer Externalities : an action

COST - ( B+C+D+EtF )•

percentage of •

larger TS At B+F+G At B+F+G - Dconsumer 's budget percentage

Causesa positive Negative

* D= DWLeffect On a third party Negative ExternalityOwn Price Elasticity Of e§§giadhY+ social cost = private # + external cost

supply :a measure of the Social Costs -- private quantity

&Wm}efFfiFe

••Sprivate cost

responsiveness Of producers outcome I••• competitive outcomecosts + external Costs ==TO Changes in prices = = D= private benefit - social benefit

Social Benefits - private Asean{ s=%}¥¥ benefits + external benefits

Positive

E×+emE¥.li?adYnys=priva+ecos+=sociaicos+quantity

DWL fromEs ) Oiflawof supply holds Cease Theorem : The÷

women've

{ s) I elastic competitive outcome ; = social Benefit = private benefit + external

Es =/ unit elastic Socially Efficient =

,=,

Dprivate benefitbenefitEsc

1 inelastic Outcome to an ex -

Qpcose

Determinants of MoreElasticity# supply Elastic if...

lethality Will be teach - K Transaction costs can be

• time horizon • iongertimehori .Ed Privately if trans - prohibitively high in some cases

zonslwlingoods ) action costs are low,

so the initial assignment of property•production • shorter Production regardless Of the rights is important for efficiencytime time ( across goods ) .

• perishability • less perishableInitial Property rights K The initial assignment of property

• capital • lower capital Total Surplus : Consumer surplus 't rights affects payments blw partiesrequirements requirements Producer Surplus + 1- externality