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7 -- Part 1: 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.

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