Own price elasticity of demand measures how responsive consumers are to changes in the price of a good. Income elasticity of demand measures responsiveness to changes in consumer income. Supply elasticity measures producer responsiveness to price changes. More inelastic sides of demand and supply curves are more affected by taxes and subsidies. Externalities occur when an action imposes positive or negative effects on a third party not involved in the primary transaction.

1. Own price elasticity of demand :
If Demand increases . . .
S
a measure of the responsiveness
Income 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.IQ
E , ,
( Oas long as the law of
'
1. II when supply is more elastic When supply is more
inelastic
demand holds
IED ( 0 inferior good
If
Supply decreases . . .
IE , ,
71 elastic
E , ,
=1 unit elastic
IED=O no relationship
p
.
sz s
.
E
,
( I
inelastic
IED 7 0 normal good p ,
i
s
,
pp
s
,
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 > tap
consumers
'
responsiveness for
when 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 s
p Changes
.
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-
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floor
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s ,
price where demand is
increases
unit elastic Price Floor :a government mandated a
sz
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Revenue Costs ( QH
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government
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B,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+E
close 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
-
D
consumer 's
budget percentage
Causesa positive Negative
* D= DWL
effect On a third party Negative Externality
Own 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 outcome
costs + 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 from
Es ) Oiflawof supply holds
Cease Theorem : The
÷
women
've
{ s
) I
elastic competitive outcome ; =
social Benefit =
private benefit + external
Es =/ unit elastic Socially Efficient =
,
=
,
Dprivate benefit
benefit
Esc1
inelastic Outcome to an ex -
Qpcose
Determinants of More
Elasticity# 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 perishable
Initial Property rights K The initial assignment of property
•
capital
•
lower capital Total Surplus :
Consumer surplus 't
rights affects payments blw parties
requirements requirements
Producer Surplus + 1-
externality