SAYRE | MORRIS Seventh Edition Elasticity CHAPTER 4 4-1© 2012 McGraw-Hill Ryerson Limited.

SAYRE | MORRIS Seventh Edition

Elasticity

CHAPTER 4

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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

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

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

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.

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

Cross Elasticity

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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

Cross Elasticity

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If coefficient is:

Goods are:

Positive Substitutes

Negative Complements

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