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QII - SS4 - LT1 reviewer


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QII - SS4 - LT1 reviewer

  1. 1. QIISS4Long Exam I Reviewer<br />Ferdinand B. Sta. Ana Jr. (IV – Electron)<br />
  2. 2. Elasticity<br />
  3. 3. Elasticity (η)<br />Responsiveness of quantity to changes in certain factors<br />Demand<br />Price Elasticity of Demand (PεD)<br />Income Elasticity of Demand (IεD)<br />Cross-price Elasticity of Demand (CPεD)<br />Supply<br />Price Elasticity of Supply (PεS)<br />
  4. 4. Degrees of Elasticity<br />Unit elastic<br />Change in a certain factor is equal to change in price of g00d<br />↑1% Price -> =↓1% Quantity demanded (for PεD)<br />Elasticity = 1<br />Elastic<br />Quantity demanded/supplied of a good reacts substantially to change in factor<br />↑1% Price -> >↓1% Quantity demanded (for PεD)<br />1 < Elasticity < +∞<br />Inelastic<br />Quantity demanded/supplied of a good only responds slightly to change in factor<br />↑1% Price -> <↓1% Quantity demanded (for PεD)<br />0 < Elasticity < 1<br />
  5. 5. Price Elasticity of Demand (PεD)<br />Responsiveness of QDx to ΔPDx<br />= %Δ𝑄𝐷𝑥%Δ𝑃𝐷𝑥= 𝑄𝐷𝑥𝑓𝑖𝑛𝑎𝑙 − 𝑄𝐷𝑥𝑖𝑛𝑖𝑡𝑖𝑎𝑙𝑄𝐷𝑥𝑖𝑛𝑖𝑡𝑖𝑎𝑙+ 𝑄𝐷𝑥𝑓𝑖𝑛𝑎𝑙2𝑃𝑥𝑓𝑖𝑛𝑎𝑙 − 𝑃𝑥𝑖𝑛𝑖𝑡𝑖𝑎𝑙𝑃𝑥𝑖𝑛𝑖𝑡𝑖𝑎𝑙+ 𝑃𝑥𝑓𝑖𝑛𝑎𝑙2=Δ𝑄𝐷𝑥Δ𝑃𝑥Σ𝑃𝑥Σ𝑄𝐷𝑥<br />Always negative so take the absolute value<br /> <br />
  6. 6.
  7. 7. Elasticity ≠ Slope<br />
  8. 8. However……There are cases when slope = elasticity<br />Perfectly Elastic:<br />PεDx= ∞<br />m = ∞ (in math terms, it is undefined)<br />Perfectly Inelastic:<br />PεDx = 0<br />m = 0<br />
  9. 9. Income Elasticity of Demand (I εD)<br />Responsiveness of Dxto ΔI<br />= %Δ𝐷𝑥%Δ𝐼 = Δ𝐷𝑥Δ𝐼Σ𝐼Σ𝐷𝑥<br />Interpreting the Income Elasticity of Demand:<br />IεD < 0 (negative) – good is an inferior good<br />IεD > 0 (positive) – good is a normal good<br />If > 1 – good is a superior good<br />If between 0 and 1, good is a necessity/relatively inelastic<br /> <br />
  10. 10. Cross Price Elasticity of Demand (CPεD)<br />Responsiveness of Dx to ΔPy<br />= %Δ𝐷𝑥%Δ𝑃𝑦 = Δ𝐷𝑥Δ𝑃𝑦Σ𝑃𝑦Σ𝐷𝑥<br />Interpreting the Cross Price Elasticity of Demand:<br />If CPεD > 0  x and y are substitute goods<br />If CPεD< 0  x and y are complements<br />If CPεD= 0  x and y are independent goods<br /> <br />
  11. 11. Price Elasticity of Supply (Pεs)<br />Responsiveness of Qsx to ΔPx<br />= %Δ𝑄𝑆𝑥%Δ𝑃𝑥 = Δ𝑄𝑆𝑥Δ𝑃𝑥Σ𝑃𝑥Σ𝑄𝑆𝑥<br />Interpretation of Price Elasticity of Supply:<br />If PεS = 0  supply is perfectly inelastic<br />If 0 < PεS < 1  supply is relatively inelastic<br />If PεS = 1  supply is unit elastic<br />If 1 < PεS < +∞  supply is relatively elastic<br />If PεS = ∞  supply is perfectly elastic<br /> <br />
  12. 12. Determinants of Elasticity <br />Type of good:<br />Necessity – relatively inelastic (needed)<br />Luxury – relatively elastic (not needed; luxury ≠ prestige)<br />Availability of substitutes<br />↑substitutes  ↑elasticity (elastic)<br />↓substitutes  ↓elasticity (inelastic)<br />Price as a percentage of income/Amount of disposable income on a good<br />The lower the share of the price on the income, the more price-insensitive (inelastic) the buyer is. (e.g. candies)<br />The higher the share of the price on the income, the more price-sensitive (elastic) the buyers is. (e.g. airfare, house and lot or automobile)<br />
  13. 13. Determinants of Elasticity<br />Time frame<br />Longer time frame – elastic<br />Shorter time frame – inelastic<br />Has something to do with the response of buyer given a period of time. The more time the buyer has, the more time the buyer can think/look for better deals. (e.g. transportation)<br />Unique value<br />Loyalty, sentimental value  buyers tend to be price-insensitive (inelastic)<br />By virtue of branding<br />
  14. 14. Tax Incidence<br />
  15. 15. Tax<br />mainly used by the government to raise revenues (not limited to this)<br />Affects the cost of production of goods  taxes directly affect the supply <br />In graphical terms, causes a shift of the supply curve to the left<br />It can also discourage market activity. (When a good is taxed, quantity of good sold is smaller in the new equilibrium)<br />The buyer and seller share the burden of tax<br />
  16. 16. Who has the heavier burden?<br />This is where elasticity comes in. Analyze the ff. graphs:<br />Demand and Supply have equal elasticity<br />
  17. 17. Compare and contrast<br />Elasticity: Supply > Demand<br />Elasticity: Supply < Demand<br />Remember: taxes cause a shift of the supply curve, not movement. Forgive me because the graphs I found didn’t have a new supply curve. Just imagine a line passing through the point on the demand curve (blue line) and is parallel to the supply curve (red line)<br />Red bracket: per unit producer tax burden<br />Blue bracket: per unit consumer tax burden<br />
  18. 18. Compare and contrast<br />Burden is solely shouldered by consumers<br />Burden is solely shouldered by producers<br />Perfectly Elastic Supply<br />Perfectly Elastic Demand<br />
  19. 19. Conclusion<br />If demand is relatively inelastic, heavier tax burden for consumers<br />If demand is relatively elastic, heavier tax burden for producers<br />
  20. 20. Other notes<br />Remember that the government will profit more from taxing inelastic goods<br />But, inelastic goods are usually necessities, and taxing inelastic goods will contradict the equity function of the government<br />So, the gov’t taxes the elastic goods that it wants to lower transactions of.<br />Sin taxes – taxes on generally socially unwanted goods.<br />Taxes on imports – taxes levied on imports to promote local products<br />
  21. 21. References<br />Samuelson, P. A. & Nordhaus, W. D. (2004). Economics, 18th ed. USA: Mc-Graw Hill, Inc.<br />Mankiw, N. G. (2009). Principle of microeconomics, 5th ed. Mason, OH: South-Western Cengage Learning<br />Depken, C. A. (2006). Microeconomicsdemystified. USA: Mc-Graw Hill, Inc.<br />Notes from the lecture of Vladimir S. Lopez<br />
  22. 22. End of Reviewer<br />-fbsaj2011<br />