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Microeconomics lecture 4.pptxfffffffffffffffffffffffgf
- 1. Microeconomics Lecture 4 Translated fromPolish to English - www.onlinedoctranslator.com
- 2. Methods of calculatingelasticity Factorial/ratio/ interpretive Spot/point arc
- 3. Ratio method /interpretive toshow how the percentage change of income influences the percentage change of demand Y Q Eyd % %
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- 6. Mixed/cross elasticity • Dependson the prices of other goods: complementary and substitutes • X, Y - Where: : E dx (py) – mixed elasticity of demand, Δdx/dx- change of demand of good (service) x compared to initial demand of that good, Δ py/py – change of price of good (service) y compared to initial price of that good.
- 7. Cross elasticity ofsubstitutes • X –apples • Y – pears PY down Dx – down PY – up DY - up
- 8. Cross elasticity ofcomplementary goods • X - fuel • Y – car • PX up • Dy – down • Px down • Dy up
- 9. Types of demand Substitutiondemand, concerns substitutes Exy>0; growth of the price of one good causes an increase of demand on second good Independent demand,Exy=0; change in the price of one good does not cause changes in the demand for the second good Complementary demand, applies to complementary goods, Exy<0;an increase in the price of one good causes a decrease of demand for the second good
- 10. For substitute goods-cross elasticity of demand is positive (an increase in the price of coffee stimulates demand for tea). For complementary goods cross elasticity of demand is negative (an increase in the price of gasoline reduces the demand for cars with big engine).
- 11. The use ofelasticity One of the most practical applications of price elasticity of demand is its relationship to the total revenue of producers/sellers. A seller who knows the price elasticity of demand for his good can make better decisions because he knows what will happen if he raises or lowers the price of his good.
- 12. The impact ofprice elasticity of demand on producer revenues Revenue (R) = P* Q R = 1 * 6 = 6 R = 2 * 6 = 12 R = 2 * 7 = 14
- 13. The impact ofprice elasticity of demand on producer revenues
- 14. The impact ofprice elasticity of demand on producer revenues If absolute value of elasticity of demand is greater than 1, then it is price sensitive. This is a situation where demand is elastic and when the price increases, total revenue decreases (consumers will buy much less). When the price falls, total revenue will increase (people will buy more). R = P * Q P => R ↗ ↘ R = P * Q ↘ ↗ ↘↘ P Q ↘ ↗↗
- 15. The impact ofprice elasticity of demand on producer revenues If absolute value of elasticity of demand is< 1, this is inelastic demand. If the price increases, total revenue will increase (people buy slightly less despite the price increase), if the price decreases, total revenue will decrease (people buy slightly more despite the price drop). R = P * Q P => R ↗ ↗ R = P * Q ↗ ↗↗ ↘
- 16. The impact ofprice elasticity of demand on producer revenues If demand is uniformly elastic E = 1, then revenue does not change R = P * Q P => R ↗ constant R constant= P * Q ↗ ↘
- 17. The impact ofprice elasticity of demand on producer revenues If demand is perfectly elastic E=∞ R = P * Q P constant P↗ => Q = 0 P↗ => R =0 R = 0 = P * Q ↗ Q = 0
- 18. The impact ofprice elasticity of demand on producer revenues If demand is perfectly inelastic E=0 R = P * Q Q constant P => R ↗↗↗ ↗↗↗ R = P * Q ↗↗↗ ↗↗↗ constant
- 19. Tax burden • theway in which the tax burden is shared between the consumer and the producer/seller • The distribution of the tax burden depends on the relative price elasticity of supply and demand. • When supply is more elastic than demand, consumers take over most of the tax burden. • When demand is more elastic than supply, producers absorb most of the tax costs. • The greater the inelasticity of supply and demand, the greater the tax revenue.
- 20. • VAT –value added tax • 8- 23%
- 21. Tax burden • Grossprice –With taking into account taxes • Net price – without taxes
- 22. Tax burden - Ifthe elasticity of demand is rigid: - the entire burden of the tax imposed/increased will be borne by the buyer, - quantity supplied or the net price of the good does not change.
- 23. Tax burden If theelasticity of supply is rigid: - imposing/increasing the tax will not cause a change in the gross price of the good, - however, its net price will fall in the amount corresponding to the amount of tax imposed/increased, - in such a case, the entire tax burden will be borne by the seller.
- 24. Tax burden If thedemand for a good would be perfectly flexible: - imposing/increasing tax with the gross price unchanged => demand reduction and net price decrease, - Lack of the possibility of passing the tax on to the buyer.
- 25. Tax burden If thesupply of good would be infinitely flexible: -imposing/increasing the tax would result in a reduction in this supply while the gross price increases, until the equilibrium price determined by the willingness of buyers to pay a higher price is reached.
- 26. Tax burden - theless flexible supply and demand are, the smaller is the impact of the tax on a given type of economic activity because imposing/increasing the tax does not cause major changes in the allocation of resources, - the greater the elasticity, the greater the impact of taxes on the allocation of resources
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