...multiplied by quantity (TR = P . Q). Consider the following demand curves. If we raised the price, would total revenue increase or decrease? Price INELASTIC (like the letter I) Demand Quantity Price ELASTIC (like the letter E) Demand Quantity By “eyeballing” the graphs, it appears that in the first instance, increasing price would raise revenue. In the second graph, a price increase would probably decrease total revenue. This is because the demand curve in the first graph represents a relatively price-insensitive demand, and this demand curve is consequently relatively inelastic. In the second graph, the curve represents a relatively price-sensitive demand, and this demand curve is consequently relatively elastic. This is summarized in the following table: Price Change | Elasticity | Change in Total Revenue | Price Increase | Inelastic | Total Revenue Increases | Price Increase | Elastic | Total Revenue Decreases | Price Decrease | Inelastic | Total Revenue Decreases | Price Decrease | Elastic | Total Revenue Increases | Thus, elasticity has to do with price sensitivity. An elastic demand indicates extreme price sensitivity. An inelastic demand suggests that consumers are not particularly sensitive to price. Definition of elasticity (): = (% change in Q) / (% change in p) = (Q / Q) / (p / p) If is less than 1, then inelastic; if is greater than 1, then elastic; and if = 1 then unitary...
Words: 2064 - Pages: 9
...chapter four Elasticity of Demand and Supply ANSWERS TO END-OF-CHAPTER QUESTIONS 4-1 What is the formula for measuring price elasticity of demand? What does it mean (in terms of relative price and quantity change) if the price elasticity coefficient is less than 1? Equal to 1? Greater than 1? Price elasticity of demand is found by dividing the percentage change in quantity demanded by the percentage change in price. Over a range of prices, we use the midpoint formula: Ed = [(change in Q)/(sum of Q’s/2)] divided by [(change in P)/(sum of P’s/2)] If the price elasticity coefficient is less than 1, this means that the percentage change in quantity is relatively smaller than the change in price – consumers are relatively unresponsive to price changes. A coefficient of 1 means that the percentage changes are equal – a 10 percent price decrease will cause a 10 percent increase in quantity demanded. A coefficient greater than one means that consumers are relatively responsive to price changes – the quantity response is greater than the price change (in percentage terms). 4-2 Graph the accompanying demand data, and then use the price elasticity formula (midpoints approach) for Ed to determine price elasticity of demand for each of the four possible $1 price changes. What can you conclude about the relationship between the slope of a curve and its elasticity? | | | |Product ...
Words: 1355 - Pages: 6
...Tax Incidence and Elasticity of Demand & Supply In Canada and other free societies, the government provides social services in order to protect the freedoms of its citizens and to uphold the well-being of society as a whole. The government funds these services through revenue acquired by taxing three economic bases: income, wealth and consumption. This report will focus on consumption tax, also referred to as sales tax. Three popular commodities that are subject to sales tax in Canada are gasoline, cigarettes and automobiles. Interestingly, both the consumers and the producers of these items may bear some or all of the sales tax burden. How is this possible? By analyzing the elasticity of demand and supply for automobiles, gasoline and cigarettes, the answer becomes clear. To begin, automobiles are a commodity worth investigating in regards to tax incidence. The automobile is an asset that most Canadians will consider investing in, as nearly everyone requires a means of transportation. Like any other product or service sold, where the tax burden on automobiles falls depends on the commodity’s elasticity of supply and demand. The demand on automobiles is quite elastic in regards to price. In general, the automobile industry in Canada bears an elasticity of demand of about -4. This elasticity of demand is a result of the fact that consumers have a choice when it comes to deciding upon a means of transportation. If one does not like the pricing on a particular make or model...
Words: 1737 - Pages: 7
...Cigarette Tax in Ireland After reading both articles from The Irish Times written by Eugene Regan and Chris Macey on the issue, should cigarettes be taxed so highly by the government with over 80% of the price of cigarettes is from the taxes that the government set. This issue has caused a lot of discussion amongst us Economists. The argument is whether or not you think cigarettes are price inelastic or price elastic. If you think cigarettes are price inelastic which means that the change in price of cigarettes is disproportionate to the demand for cigarettes then you believe in Mr. Regan opinion. The price elastic view is taken up by Mr. Macey where he believes that the demand for cigarettes is very much dependent on the price. Both articles but forward two very good arguments with very clear reasons why they think the government should try and stop this high growth of criminal activity in the area of smuggling cigarettes into the country. As we found out from the articles that there is a very high percentage of contraband cigarettes in existents in Ireland today due to the very high price set by our government. Over a quarter of all cigarettes smoked in Ireland are illegal. Irish criminal gangs our making huge profits by selling smuggled cigarettes into the Irish black market (worth over €526 million to these criminal gangs) and the government need to do something about. Both articles try to solve this problem with very different views. Reading both articles I do think...
Words: 1719 - Pages: 7
...1. NORMATIVE ECONOMICS—REPUBLICANS VERSUS DEMOCRATS Visit both the Republicans’ www.rnc.org and the Democrats’ www.democrats.org Web sites. Both parties address Healthcare and both address Energy policy, for example. (Democrats under “Issues”, Republicans under “Our Party”.) Compare and contrast their views on two such issues. Generally speaking, how much of the disagreement is based on normative economics compared to positive economics? Give an example of loaded terminology from each site. Answer: The republican energy policy focuses on less regulation and puts the responsibility of energy independence on American business. The belief is corporations will spend more on drilling, alternate fuels and research and development and do so in a responsible manner. In the process more jobs will be created and energy costs to the consumer will lower. The democrats focus on a balanced approach with environmental protection driving future development. They propose taking subsidies from “bad” oil companies and using the money to incentivize companies to develop new technologies and pursue existing sources in an environmentally sound way. Both parties view energy with a normative economic viewpoint. But this is clearly evident with the republican view of “ less regulation should encourage investment, lower prices, and create jobs here at home”. Now we come to healthcare and the current stalemate in Congress. The democrats believe “ accessible, affordable, high quality healthcare...
Words: 1303 - Pages: 6
...have on the price elasticity of demand for dormitory space? What impact might this in turn have on room rates? Answer: The effect of the price elasticity of demand would be more inelastic for adding the rule in the university. The room rates impact would increase as students oppose to follow the rules while they are in that University. 7. You are chairperson of a state tax commission responsible for establishing a program to raise new revenue through exercise taxes. Why would elasticity of demand be important to you in determining the products on which the taxes should be levied? Answer: If I were the chairperson of a state tax commission responsible, I would select the products that were price inelastic, because the tax increase will increase the tax revenue. Elasticity of demand would be very important to me considering that “the higher tax on a product that has an elastic demand will bring in less tax revenue.” (Econ pg. 86) In this case, goods and services such as cigarette, liquor and phone service are the helpful to excise taxes because these are the products that have not decrease in demand when an excise tax is levied. 9. Because of a legal settlement over state health care claims, in 1999 the U.S tobacco companies had to raise the average price of a pack of cigarettes from $1.95 to $2.45. The decline price of a pack of cigarettes sales was estimated at 8 percent. What does this imply for the elasticity of demand for cigarettes? Explain. Answer: For the estimated...
Words: 452 - Pages: 2
...utility someone gets from consuming an additional unit of a good. Marginal Utility Formula = ∆ Total Utility ∆ Quantity Law of Diminishing Marginal Utility- As someone consumes more of a good marginal utility will eventually decline (as consume more the increase in utility will be smaller each time) ExsMarginal Benefit (MB)- Maximum price a consumer is willing to pay for an additional unit of a product. The dollar value of a consumer’s utility of consuming an additional unit: So it f______ as consumption increases 1 II. The individual: Demand curve & consumer choice Marginal Benefit reexamined What does it really mean if a consumer is willing to pay up to (at most) $10 for an additional unit of the product. Marginal Utility per $ spent: MU Good A Price of good A Interpret: MU A P A Ex: Buying one more burrito (from 1 to 2) gives you an ↑ in utility of 10 & costs $5 2 A. Deriving a demand curve for slices of pizza for Carlos Slices 0 1 2 3 4 5 6 7 8 9 10 Total Utility 0 200 390 570 740 900 1030 1130 1200 1240 MU if P MU X 200 P=$2 MU if P P=$1 MU if P P=$0.50 10 Cheeseburgers That cost $0.50 Total Utility 130 240 340 430 505 555 580 595 605 610 Slices 1 2 3 4 5 6 7 8 9 10 MU 130 MU P Carlos’ wife gives him $5 every day for lunch and any money he does not spend on lunch is stolen by his coworker Grat. 3 If Carlos is a utility maximizer & pizza costs $2 how much does he buy? Pizza bought CheeseB...
Words: 3431 - Pages: 14
...Chapter Summary This chapter explored the numbers behind the laws of demand and supply. The law of demand tells us that an increase in price decreases the quantity demanded, ceteris paribus. If we know the price elasticity of demand for a particular product, we can determine just how much less of it will be purchased at the higher price. Similarly, if we know the price elasticity of supply for a product, we can determine just how much more of it will be supplied at a higher price. Here are the main points of the chapter: • The price elasticity of demand—defined as the percentage change in quantity demanded divided by the percentage change in price—measures the responsiveness of consumers to changes in price. • Demand is relatively elastic if there are good substitutes. • If demand is elastic, the relationship between price and total revenue is negative. If demand is inelastic, the relationship between price and total revenue is positive. • The price elasticity of supply—defined as the percentage change in quantity supplied divided by the percentage change in price—measures the responsiveness of producers to changes in price. • If we know the elasticities of demand and supply, we can predict the percentage change in price resulting from a change in demand or supply. Applying the Concepts After reading this chapter, you should be able to answer these four key questions: 1. How does the price elasticity of demand vary over time? 2. How does an increase in price affect total expenditures...
Words: 6227 - Pages: 25
...a) The information in Attachment 1 suggests that a decrease in demand for iron ore by Chinese steelmakers. Because attachment 1 mentions that price decrease which result in a decrease in demand for iron ore by Chinese. As shown in diagram 1 below, the price of steel dose down from P1 to P2, thus the quantity supplied of steel decrease from Q1 to Q2, which means there are less demand for iron ore. And the article also shows that an increase in the price of iron ore. Price increases leads to a decrease in quantity demanded of iron ore. And price goes up lead to a movement along the demand to the left. This also makes a decrease in demand for iron ore by Chinese. Therefore, demand for iron ore by Chinese makers decrease. . [pic] b) As the demand for iron ore by Chinese decrease, the demand curve shift to the left. The new equilibrium price lie on the demand curve D2(graph above) which is lower than original equilibrium price on demand curve D1. The decrease in demand will also cause a decrease in quantity demand traded from Q1 to Q2. The Baltic dry index is based on the equilibrium price. Therefore, the Baltic dry index will decrease. c) There are going doubts about what the Baltic Dry is actually signalling because the index change will caused by demand change or supply change or both of them change. For example, the index increase will be caused by the demand increase or the supply decrease or demand increase more obviously than supply decrease. Question 2 ...
Words: 1413 - Pages: 6
...Price Elasticity of Demand and discuss its relevance for Business and Government Price elasticity of demand According to the law of demand: the lower the price the more product is bought. But consumer response to changes in price can vary significantly from product to product. Economists measure the response (sensitivity) of consumers to changes in product prices, using the concept of price elasticity.The gist of the concept of price elasticity is:• if small changes in price leading to significant changes in the quantity bought products, demand for such products are commonly called elastic;• if a substantial change in price leads to only a small change in the amount of purchases, In these cases the demand is inelastic.The extent price elasticity or inelasticity of demand is measured by economists with Ed coefficient calculated by the following formula: The same formula can be written as: Proceeding from the formula, the demand is elastic, if the percentage change in price leads to a greater percentage change in the amount of products that is asked. For example, if a price reduction of 2% causes an increase in demand of 4%, demand is elastic. When demand is elastic, the elasticity is greater than unity. If the percentage change in price is accompanied by a relatively smaller change in the number of products that is asked, then demand is inelastic. If the price reduction of 3% resulting in a growing number of products Asked by just 1%, demand is inelastic. The coefficient...
Words: 1809 - Pages: 8
...Effects of Taxation on Cigarette Smoking In economics the demand elasticity refers to the sensitivity of the quantity demand for a product to the changes in price. This relationship correlates to the basic law of demand which states that if the price of a product or good increase, then the consumer demand would fall and decrease because of the change. However not all products follow this fundamental theory. In fact products that are considered addictive substances, such as tobacco and cigarettes can be the exception to this basic law because we must take into account not just the pricing but other factors such as time, usage, limitations, and restrictions. Imposing higher taxes on cigarettes will have a mix effect as to who the price increase affects. As noted in the Chaloupka article, “The effects of prices and tobacco”, paying higher taxes on cigarettes as well as placing stronger controls as to who is able to purchase them will lead to a reduction in the consumption of cigarette smoking. The article is supported by studies done in the early eighties and late ninnies, confirming the reduction is towards both adults and youths alike. However price sensitivity is significant in its responsiveness between youths and young adults than compared to adults; up to three times more sensitive. Some reasons as to why this may be, is due to the strict regulations and laws set by states and local governments that enforce and control the purchase of tobacco products to the consumer...
Words: 893 - Pages: 4
...wants. As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, so, with your money, you must make certain choices. You'll probably spend part of your money on rent, electricity, and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans. Economists, interested in the choices you make, inquire into why, for instance, you might chose to spend your money on a new DVD player instead of a replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by $2 per pack. The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints. We can say then that economics, often referred to as the “dismal science,” is a study of certain aspects of society. Adam Smith (1723 - 1790), the “father of modern economics” and author of the famous book An Inquiry into the Nature and Causes of the Wealth of Nations, spawned the discipline of economics by trying to understand why some nations prospered while others lagged behind in poverty. Others after him also explored how a nation's allocation of resources affects its wealth. To study these things, economics makes the assumption that human beings will aim to fulfill their self-interests. It also assumes that individuals are rational in their efforts to fulfill their unlimited wants and needs. Economics is thus a social...
Words: 4747 - Pages: 19
...of demand? What determines it? What is elastic and inelastic demand? The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD), (Moffat, M., para1 economic, about.com) is: PEoD = (% Change in Quantity Demanded)/ (% Change in Price) * If PEoD > 1 then Demand is Price Elastic (Demand is sensitive to price changes) * If PEoD = 1 then Demand is Unit Elastic * If PEoD < 1 then Demand is Price Inelastic (Demand is not sensitive to price changes) The price of a laptop increases by 20% and there is a 40% drop in the quantity demanded. =40/20 =2 The price of a pack of cigarettes increases by 10% and there is a 5% drop in the quantity demanded =10/5 =2 Why is elasticity an important concept for a business? If you use elasticity of demand information to predict the potential impact of a price fluctuation on the total sales revenue, the price elasticity of demand is a way of looking at the sensitivity of price related to product demand. Demand elasticity is an economic concept also known as price elasticity. Price elesticy can be a confusing at times but its main reason is to help the company gain the maximum profit possible. If you utilize the versatility of interest information to foresee the potential effect of a value changes on your aggregate deals income. As a company, you need to understand price and demand elasticity...
Words: 1110 - Pages: 5
...CH2 1. Suppose the demand curve for a product is given by Q = 300 – 2P + 4I, where I is average income measured in thousands of dollars. The supply curve is Q = 3P – 50. a. If I = 25, find the market clearing price and quantity for the product. Given I = 25, the demand curve becomes Q = 300 ( 2P + 4(25), or Q = 400 ( 2P. Setting demand equal to supply we can solve for P and then Q: 400 ( 2P = 3P ( 50 P = 90 Q = 220. b. If I = 50, find the market clearing price and quantity for the product. Given I = 50, the demand curve becomes Q = 300 ( 2P + 4(50), or Q = 500 ( 2P. Setting demand equal to supply we can solve for P and then Q: 500 ( 2P = 3P ( 50 P = 110 Q = 280. c. Draw a graph to illustrate your answers. It is easier to draw the demand and supply curves if you first solve for the inverse demand and supply functions, i.e., solve the functions for P. Demand in part (a) is P = 200 ( 0.5Q and supply is P = 16.67 + 0.333Q. These are shown on the graph as Da and S. Equilibrium price and quantity are found at the intersection of these demand and supply curves. When the income level increases in part (b), the demand curve shifts up and to the right. Inverse demand is P = 250 ( 0.5Q and is labeled Db. The intersection of the new demand curve and original supply curve is the new equilibrium point. 2. Consider a competitive market for which the quantities demanded and supplied...
Words: 1275 - Pages: 6
...Answers to selected “Problems and Applications” Questions in Mankiw Chapter 1: 4) If you spend $100 now instead of saving it for a year and earning 5 percent interest, you are giving up the opportunity to spend $105 a year from now. The idea that money has a time value is the basis for the field of finance, the subfield of economics that has to do with prices of financial instruments like stocks and bonds. 5) The fact that you've already sunk $5 million isn't relevant to your decision anymore, since that money is gone. What matters now is the chance to earn profits at the margin. If you spend another $1 million and can generate sales of $3 million, you'll earn $2 million in marginal profit, so you should do so. You are right to think that the project has lost a total of $3 million ($6 million in costs and only $3 million in revenue) and you shouldn't have started it. That's true, but if you don't spend the additional $1 million, you won't have any sales and your losses will be $5 million. not the total profit, but the profit you can earn at the margin. So what matters is In fact, you'd pay up to $3 million to complete development; any more than that, and you won't be increasing profit at the margin. Chapter 2: 4) a. Figure 1 shows a production possibilities frontier between guns and butter. It is bowed out because when most of the economy’s resources are being used to produce butter, the frontier is steep and when most...
Words: 6456 - Pages: 26
