7 Taxation and Government Intervention

The master economist needs to speak in words and understand symbols.

The demand for bottled elasticity terms made it price and distinguish five.

To be on the safe side,late price elasticity of water.

The quantity of bot elasticity and cross-price tled water demanded was not calculated.

The increase did.

The demand for water was highly price inelastic, which was useful in demand analysis.

Information about elasticity is important to firms in making their pricing decisions and to economists in their study of the econ omy.

Shoppers use their preferred customer cards at grocery stores.
These cards give the stores information about shoppers, such as how sensitive they are to price changes.
When a firm is thinking of changing prices, it has a strong interest in elasticity.

Price elasticity of demand and supply is the most common elasticity concept.

Let's look at some numerical examples.

If the price of a good increases by 10 per cent, the quantity demanded decreases by 20 percent.
The elasticity of demand is 2.
I said 2, not 2.
The calculation for the price elasticity of demand change in quantity divided by the comes out negative is related to the percentage demanded.
Economists talk about price elasticity of demand percentage change.

Let's consider two more examples to make sure you have the idea down.

When price falls by 5 percent, quantity supplied falls by 2 percent.
The price elasticity of supply is 0.2 percent.
Say the price goes up by 10 percent and the quantity demanded goes down by 15 percent.
The price elasticity of demand is 15 percent.

Price elasticity of demand and supply shows how quantity responds to a change in price.

A price elasticity of demand of 0.2 tells us that a 10 percent rise in price will result in a 3 percent decline in quantity demanded.
If the elasticity of demand were larger, a 10 percent rise in price will cause a 50 percent decline in quantity demanded.
The quantity responds to price changes.

It's helpful to classify elasticities by responsiveness.

Say the price of land goes up.

The supply of land is inelastic because it won't change much.

The terminology is the same.

There is a close substitute for price elasticity of demand.
As people shift to the substitute, what would we call a lot if the quantity demanded fell more than 1?

At current prices, table salt has no close substitute.

The demand for table salt is very elastic.
A rise in the price of table salt does not mean a decline in quantity demanded.

elasticity is the percentage, not the unit, change measure of responsiveness that is in variables.

Using percentages allows us to measure responsiveness independently of units, making comparisons of responsiveness units easier.
It's easier to increase the price of different goods by $1.

A $1 increase in the price of a pen, from $1 to $2, decreases the quantity demanded by 1--from 10,000 to 9,999.

The $1 price increase reduced the quan tities demanded for both pens and computers.
It's not very helpful to compare unit changes.
If you see that, ask yourself if you want to raise your price or sell something else.

The computer price increased by 1 million of its original price, a relatively small percentage increase, and quantity demanded declined by a large percentage.

Your total revenue would decrease because the percentage decline in quantity demanded exceeded the percentage rise in price.
The percentage increase in price of pens was 100 percent and the percentage decline in quantity demanded was 1 percent.
If you raise the price of pens, revenue increases.

If you're raising your price in these examples, you'd rather sell pens than computers.

The elasticity is 100 with computers because a 0.1 percent increase in price decreases quantity demanded by 10 percent.

A 100 percent increase in price decreases quantity demanded by a small amount.

The number of motorists using toll roads in Orange County fell by only 1.8 percent when the price of toll roads was raised by 14 percent.

The quantity of gasoline demanded in Washington, D.C. fell by 40 percent when gasoline prices rose by 10 percent.

The quantity of labor supplied for relevant jobs increased by 1.7 percent when the minimum wage in Vermont rose by 11 percent.

The price elasticity of demand is 0.13.

When the toll was increased, there was no change in the number of motorists using the roads.
Demand was inelastic because it was less elastic.
The elasticity of demand is 4 in the second case.
In Washington, D.C., the quantity of gas demanded went up by a lot.
In the third case, the price elasticity of supply is 0.16.
The change in wage did not affect the quantity of labor Price Elasticity of supplied.
Gas Demand supply was inelastic because elasticity was less than 1.

Let's calculate some elasticities graphically.

The figure shows a demand curve for WolfPack Simulation Software.

As the price of the software goes up from $20 to $26, the demand for it goes down from 14,000 to 10,000 units a year.
To determine the price elasticity of demand, we need to know the percentage change in quantity and the percentage change in price.

We use the midpoint to calculate percentage changes.

The elasticity of 1.27 is given by the percentage change in price of 26 percent and the percentage change in quantity of 33 percent.

You can calculate the rise in price from $20 to $26.

The percentage increase in price is 30 percent.
If you use the average of the two in price, $6, as a fall in price from $26 to $20, the percentage decrease in price is end values to get around the endpoint.
To use the problem is the easiest way to solve the problem.

Instead of using 20 or 26 as a starting point, you use 20 + 26 or 23.

A 13 percent fall in quantity demanded is caused by a 10 percent increase in price.

The negative sign is dropped because economists talk about price elasticity of demand as a positive number.

The Vermont minimum wage was raised to $10 an hour after being $9 an hour.

Divide the percentage change in quantity by the percentage change in price to get the elasticity of supply.

There is a quantity of labor supplied.

The minimum wage in Vermont is inelastic.

Learning the mechanics of calculating elasticities takes some practice, so in the figure to the left are three additional examples, leaving the calculations for you.

Let's start with the first point.

The less elastic the curve is, the less demand there is.

Curves that are vertical are inelastic.

There is an infinitely large increase in quantity demanded.

The curves are elastic.

Slope is not the same as elasticity.
The second point shows this well.

Straight-line demand ply and demand curves do not change, but elasticity does.

A perfectly elastic curve is horizontal.

It goes from zero at the horizontal-axis intercept to zero at the vertical-axis intercept.

The elasticity of supply depends on which axis the curve intersects.
If it intersects the vertical axis, elasticity starts at zero and goes downhill.
If it intersects the horizontal axis, it starts at zero and increases.
The supply curve intersects the origin.
Determine what happens to elasticity in that case with an exercise.

Determine elasticity of demand between $4 and $6.

The percentage change in price is 40 percent, and the percentage change in quantity is 2 percent.
The point at which demand is elastic is below.

The supply curve has a less dramatic change in elasticity.

As you move out along the curve, points become less elastic.
As you move out along the supply curve, it becomes more elastic.

The traditional economic assumption is that a 1 percent change in price is a close equiva offered to sell people one of two lent a similar 1 percent change in chocolates.

The Hershey Kiss for 15 cents and the truffle for 15 cents should have the same effect.

The Behavioral economists found that 73 percent of them chose the Kiss.

They reduced the price of both to a fall in price from $1.00 to 99 cents chocolates by a penny--the Lindt choc than they do to a fall in price from $1.01 olate to 14 cents.

The effect on demand was huge.

Only 31 percent of people chose the Lindt as a higher price than the Hershey, and 69 percent chose the Hershey as a lower price than the Kiss.

A zero price seems to have a lot more than that.
The quantity demanded is affected by the elasticity.

Firms know that people are more likely to react to $0.99 than to $1.

This is a zero prices, and they behave irrationally.

When goods are free, they offer "free" goods that aren't zero price.

The price of goods was cut by 50 percent.

There are five elasticity terms.

The percentage change in quantity is the same as the percentage 3.

The first point that should be clear is that elasticity is related to but not the same as slope.

Slope does not change elasticity along a straight-line curve.

Now that you know how to measure elasticity, it's time to consider some of the factors that elasticity of demand is the number of, that is, more or less responsive to price.

substitution can be summed up as how responsive quantity demanded will be to changes in price.

The more substitute a good has, the more elastic its demand is.

S1 and the quantity line intersection draw a vertical line back up to the demand curve.

All points to the left of the line will be elastic, and all points to the right will be inelastic.

The quantity demand curve crosses the quantity axis and you can remember which one it is.

If a straight-line supply curve crosses the quantity axis, all points on it are elastic or inelastic, so you just extend it to one of the axes.
The top half of the demand curve is elastic, while the bottom half is not.

If a good has a substitute, then a rise in the price of that good will cause the consumer to switch to that substitute.

When a satisfactory substitute is available, a rise in that good's price will have a large effect on the quantity demanded.
I think a Whopper is a good sub for a Big Mac.
When the price of Big Macs goes up, people will switch to Whoppers.
There would be very little demand for Big Macs.

There are several factors that affect the number of substitute good.

The time period is being considered.

It is a luxury to have a good degree.

The substitution factor is one of the reasons.

The bigger the time interval, the more elastic the demand is for the good.

There are more people who can substitute.

The long run provides more alter natives.

The price of rubber went up during World War II.
The demand for rubber waselastic in the short run.

The rise in the price of rubber stimulated research for alter natives.

When World War II broke out, automobile tires were made of all rubber.
Demand was elastic in the long run.

The more elastic the demand, the less a good is.

One can't do without necessities, so they tend to have less alternatives than luxuries.
The demand for diabetes drugs is very elastic.
It is a luxury to have chocolate Ecstasy cake.
For example, a ball game can be replaced with a variety of other luxuries.

What are the four most important factors?

A demand becomes more elastic as the definition of a good becomes more specific.

You need transportation to get from A to B.

There are more substitute if the definition of the good is narrowed.
You can walk, ride your bicycle, or drive your car instead of taking a bus.
Demand is elastic.

Demand for goods that represent a large proportion of one's budget is more elastic than demand for goods that represent a small proportion of one's budget.

It's not worth spending a lot of time figuring out if there's a good substitute for goods that cost very little.
pencils are an example.
Even if the price doubled, most people would still buy them.
Their demand is elastic.
Spending a lot of time looking for replacements for goods that take a large portion of one's income is worth it.
The demand for such goods is elastic.
Many colleges try to raise tuition when other colleges don't.
They faced an elastic demand curve.

Some substitution factors affect a decision.

If you've been hired by the city of Washington, D.C. or the U.S., expect demand to be more or less.

There are three factors that affect elasticity of demand.

In your report to the two governments, you would point out that in the short run demand is less elastic than in the long run, since people aren't going to trade in their gas-guzzling cars for fuel efficient cars immediately in response to a 10 percent rise in gas taxes

Demand for forms of transportation that are more fuel efficient than cars tends to go up in the long run.

Although not all driving is necessary, gasoline is generally considered a necessity.

Since gasoline is only a small part of the cost of driving a car, demand will probably be inelastic.

Special care is required for the third factor.

Recommendations for the government of the city of Washington, D.C. and the U.S. government are different from each other.
The U.S. government is interested in the demand for gasoline in the entire United States.
A 1-cent rise in tax will raise $1 billion.
The demand for gasoline in Washington, D.C. is notelastic because of the city's size.
A lot of people who buy gas in Washington can easily buy gas in other states.

The demand for gasoline in Washington is elastic because it is a narrowly defined good.

A large fall in the quantity of gas demanded is caused by a rise in price.

When the city of Washington, D.C. raised the tax on a gallon of gasoline by 8 cents, a rise at that time of about 10 percent, someone forgot about it.

Washingtonians went to other states to buy gas.

Smaller geographic areas have more elastic demands that limit how much state and local governments can tax goods relative to their neighboring states.

New stores open all along the border and existing stores expand to entice people to come over and save on taxes.
It isn't surprising that New Hampshire has a large number of liquor stores because the liquor tax in Vermont is higher.
If you look at license plates in Janzen Beach, Oregon, you'll see a lot of Washington license plates.
If you answered that it probably has something to do with the differential sales taxes in Washington and Oregon, you have the right idea.

Knowing elasticity of demand allows firms to tell whether the total revenue will go up or down when they raise or lower their prices.

Product Discounts sellers are told what will happen if their price changes.

There is a relationship between elasticity and revenue.

If we increase price to $6, quantity demanded decreases to 4, so total revenue is still $24.

A visual method of estimating elasticities is provided by comparing rectan gles.

The revenue is measured by the lines from the demand curve to the price and quantity axes.

The size of the before and after rectangles can be used to estimate the change in total revenue.

The inelastic range is shown in Figure 6-3(b) and the highly elastic range is shown in Figure 6-3(c)

If we raise our price from $1 to $2, the quantity demanded will fall from 9 to 8.

If we raise our price from $8 to $9, the quantity demanded will fall from 2 to 1.

When output is zero, total revenue is zero; similarly, demands, a rise in price increases total revenue.

If demand is inelastic, we should start at zero.

Total revenue increases as we increase price.
Total revenue starts decreasing.
At zero output, total revenue is zero because it is decreasing at a faster and faster rate.

We used to use the law of demand in Chapter 4 to calculate the license plate numbers.

Total revenue fell because demand was elastic.
The total revenue fell from $1,810,020 to $1,244,880.

When demand is elastic, the total elastic range ED > 1 revenue decreases.

Total revenue increases with an increase in price.

The price elasticity of demand and the price elasticity of supply are not the only elasticity concepts.

Income elasticity of demand and cross-price elasticity of demand are two of the other elasticities that can be useful in specifying the effects of shift factors on the demand for a good.

The responsiveness of demand to changes in income is told by this.

An increase in income increases one's consumption of almost all goods, although the increase may be greater for some goods than for others.

Income elasticities greater than zero are associated with increases with an increase in income.

Normal goods can be divided into luxuries and necessities.

The percentage increase in demand is greater than the percentage increase in income.
If your income goes up 10 percent, you'll buy 20 percent more songs from iTunes.

Think of the grocery store where you can get a develop user profiles, and run promotions on items such as special buyer's card; the checkout clerk scans it and you get laundry products, carbonated soft drinks, and several all the discounts.

The other items in the grocery store that consumers are most responsive to are not just being nice.
The demand is elastic when the clerk price is low.
The store gets in shoppers by scanning their purchases.
The formation that is forwarded to a central stores places high-profit novelty items that can see how consumers react to different prices.
This information stores, but for which demand is elastic, allows firms to fine- tune their pricing.
It's not quite a raising prices on goods for which the de bait-and-switch strategy is, but it is a strategy mand is inelastic and lowering prices on to lure shoppers into a store for a "deal" but goods for which the demand is elastic.

The elasticity of demand for goods can be calculated by storing cards that you send in when you buy.

Once the different prices are charged, they use the data from the firms' databases to determine the economists in future price-setting decisions.

Robert Fogel estimates income elasticity for health care to be 1.6, which is a luxury.

Say your income goes up by 100 percent and your demand for shoes goes up by 50 percent.
Your income elasticity for shoes would be less.
The rise in income is more than the rise in necessity.

Economists estimate the income elasticity of food to be 0.2.

Potato could be an example of an inferior good.

People might shift their consumption of meat and potatoes away from potatoes as their income increases.

tortillas were found to be an inferior good in Mexico.

The Income elasticity for most goods is different in the short run than in the long run.

The income elasticity for foreign travel is estimated to be 0.2.

Income elasticity is given for each.

It is possible that short-run decisions to travel abroad are motivated by a.

Beer: 0.8 decisions in the long run are likely to be part of vacation plans, and people choose from a variety of locations.
Most goods, other than impulse goods, such as furniture, have low short-run income elasticities because people often save high proportions of their increases in income.
Economists focus on long-run income elasticities to avoid this problem.

Cross-price elasticity of demand is a frequently used elasticity concept.

The responsiveness of demand to changes in prices of related goods is another way.

An example would be the percentage change in price of a related good.

The cross-price is positive because it is likely to rise.
The demand for a substitute goes up when the price of a good goes up.
The demand for beef and pork has an estimated cross-price elasticity of 0.1.
Consumers will switch to pork when the price of beef goes up.

Cross-price elasticities are positive because most goods are replacements for one another.

Calculating Elasticity dogs will cut your consumption of condiments.

Hot dogs and ketchup are not Substitutes.
Demand cross-price elasticities will increase when the price of a good falls.

The cross-price elasticity is not positive.

List pairs of goods that complement each other, make another list of replacements, and compare lists with a study partner.
There are name and generic brands of the same product on the list.
You're on the right track if you've identified these as replacements.

The income elasticity is determined by the percentage change in demand.

We calculate the percentage change in demand to be 26 percent.
The income elasticity is 26-20, or 1.3, because the percentage change in income is 20.

The elasticity of demand is calculated by dividing the price by 33.

The entire demand curve is shifted by factors such as income or the price of another good.

The relevant elasticities are calculated by D.

There are some easy cases.

The firm is aware of the inelastic demand.

I hope you said yes.

The elasticity of demand price of a related good of demand and total revenue was discussed in the elasticity of demand price of a related good of demand and total revenue.

Total revenue must increase negative because of cross-price elasticity of demand.

Cross-price elasticity of demand is positive.

Raising tuition is thought of as income elasticity of demand.

Raising tuition will be positive.

Income elasticity is more than 1.

Income elasticity is not very high.

The percentage change is divided by the percent negative.

Raising tuition will increase the university's revenue.

The elasticity will be large if tuition goes up by 10 percent.

The university's total revenue will decrease due to an increase in tuition.
If you have an elastic demand, you should not increase the price.
Explain the likely effect an elastic demand will have on lowering tuition to make sure you're following the argument.

The section on elasticity and total revenue is where you should go if you don't like the argument.

The analysis becomes more complicated when the long-run and short-run elasticities differ.

Consider the case of a transit authority that increased its fares because of a budget crisis.
The authority was able to balance its books due to the rise in revenue.
Two years after the firm faces an elastic demand, revenue falls.
Commuters had few alternatives to take the bus in order to advise it on whether to lower its price.
She gives a possible answer.

Commuters found other ways to get to work.

Let's look at shifts in supply and demand.

Knowing the elasticity of the supply and demand curves allows us to be more specific about the effects of shifts in supply and demand.

The effects of supply shifts on equilibrium price and quantity are shown in Figure 6.

The more elastic the demand, the bigger the effect of a supply shift on quantity and the smaller the effect on price.
A similar exercise for demand shifts with various supply elasticities is useful.
The more elastic the supply, the bigger the effect of demand shift on quantity and the smaller the effect on price.

To be sure that you have understood elasticity, you need to match the three obser vations about price and quantity with the three descriptions of supply and demand.

Demand and supply are both elastic.

Supply iselastic and quantity increases enormously.

Demand is very inelastic.

I will stop the exercises here.

The elasticity concept is important.
Econo mists use it all the time.

The elasticity concept is hard to remember and to calculate, so it takes some practice to work with it.

If you remember that elas ticity is what your shorts lose when they've been through the washer and dryer too many times, it becomes a bit less forbidding.
If a relationship is elastic, price exerts a strong pull on quantity.
There isn't much pull on quantity if it's inelastic.

Elasticity is defined as percentage change in quantity and divided by percentage change in some variable that supply curves.

As we affect demand or quantity, demand becomes less elastic.
Price elasticity is the most common elasticity concept.

The percentage change in price revenue is constant.

Income is not related to units of measurement.

The average of the end values is used to calculate the percentage change in income.

Knowing elasticities allows us to be more precise.

The time period is one of the factors affecting the number of substitute in demand.

The most important factor affecting the number is the elasticity of the supply.

Supply becomes more elastic as the time interval demand shifts on quantity.

Determine the price elasticity of demand.

The Dulles Airport Greenway tolls were reduced the same time.

What is the price elasticity of 51 percent if the quantity changes by 28 percent and the price goes up?

The price of the newspaper was lowered to a touchdown scored by the team.

The number of newspapers sold increased.
Until that year, the team hadn't scored many from 240,000 to 280,000.

What would your answer be if the firm had 100 pies an hour after a week of 1 pie an hour.

An author facing an 5 would be the result of a book being written.

The elasticity of demand in Massachusetts was 3.52.

The average movie ticket price is $7.

Which pairs of goods would you expect to see the most people?

Economists estimate transportation elasticities.

Which producers do you think have different elasticities?

The elasticity of demand for buses is 0.7 in the short run beer.

If it is a commuters or highincome commuters, state that for each of the goods.

University Professor Dave Dhaval estimated the amount of alcohol in it.

The demand cross-price elasticity is likely to be positive or negative.

Tell your answers.

Do you think a shift in supply will have an effect?

The per centage change in equilibrium quantity for a straight-line 18 would be affected by a shift in demand.

When the price of hot dogs goes up by 2 percent, the demand supply curve that intersects the quantity axis goes down.

In the original scenario, what would have to happen shifts while the demand curve remains constant.

The price is nearly constant.

The price falls quickly.

There is no change in quantity.

Income increases by 20 percent and demand increases by the same amount.

The quantity is nearly constant.

Questions from Alternative Perspectives 1.

The text says there are long-run elasticities.

What is the meaning of the elasticity measures?

Most new cars aren't sold at a dealership.

If you want to charge more to customers, think carefully about the conditions that shape worker options and demand.

Does the fact that customers have different elasticities allow for racial or sexual 6?

Price elasticity is more than just a technical economic concept.

There was a distinction between needs and a.

For example, landlords or energy wants.
The needs of economists were more important than the wants of companies.

There are three statements about elasticities inelasticity in the box "geometric tricks for estimating price that supply curves intersecting the quantity axis are elasticity." Can you prove it by using straight-line supply curves?

Coffee was in 1-pound cans.

Coffee comes in 11-ounce cans, why don't colleges raise tuition by that amount?

Congress allocated over $20 billion in 2004.

Do you think of other products besides coffee?

Why wouldn't an economist argue that supply-side approaches to reduce the drug would help drug producers?

A major producer of cereals decided to lower the price of some items on the market for illegal drugs.

If the producer of cereals as treatment and prevention on the market for illegal increases the size of the box from 15 to 17.8 ounces, the price of the cereals would be lowered.

Motor fuel can be raised or lowered to be between 0.4 and 0.85.

They came up with 9 after carrying out their estimates.

Colleges use different elasticity estimates for rises in price than for financial aid.
The more eager the student is, the less aid he or she will get.

Explain your answer, what does this suggest?

If the price elasticity of demand is greater than 1.

Total revenue increases with an elastic demand.

The percentage change is 8 and 100.

The percentage change in price is 100 if consumption increases with income.
Good is a normal good.

Lower price will increase total intersection to perfectly inelastic at the horizontal-axis revenue because it will increase sales more than the intersection.

The degree to which the time period is considered is one of the four factors affecting the number of substitute costs.