Chapter 5
Market Outcomes and Tax
Incidence
Pre-class music: “Father Christmas” by The Kinks. (See Tip #173.)
This song is a good example of the deadweight loss of gift giving, because the kids in
the song prefer cash to gifts for Christmas. After playing this song for students, you
could open up a discussion by asking them to think about the gifts they’ve received in
the past year.
• Ask students to estimate the market value of those gifts.
• Then ask whether they would have preferred the gifts or the cash value.
• If for some, cash is preferable, why not just give people cash?
, Previously
Different elasticity measures:
• Price elasticity of demand
• Income elasticity of demand
• Cross-price elasticity of demand
• Price elasticity of supply
Adding elasticity to our demand-supply models provides
additional insight.
Lecture tip:
Review the above points, which were covered by the previous chapter, if needed.
Determinants of price elasticity of demand include:
• availability of substitutes
• share of budget
• necessities or luxuries
• broad or narrow definition of market
• time and adjustment process.
It’s a good idea to also remind students of the relationship between price elasticity
and total revenue. When demand is elastic, total revenue increases as price
decreases; when demand is inelastic, total revenue increases as price increases.
• Income elasticity and normal and inferior goods
• Cross-price elasticity and substitute and complementary goods
• Determinants of price elasticity of supply: flexibility of producers and time
• The effects of a demand (supply) shift on price and quantity depend on the
,elasticity of supply (demand), both in the short run and long run.
, Dutch Auction
Before we begin some new material, we are going to
auction off this bundle of goods.
• We will hold a Dutch auction.
• Note that prices start high and fall.
• The first one to bid at the current price wins and pays
that price.
Classroom demonstration: Dutch Auctions
This demonstration can be found in the Interactive Instructor’s Guide (see Tip #202).
• Bring a small bundle of goods to class. (Make sure to keep the receipt!) These
goods could include milk and donut holes, soda and Pop-Tarts, soda and chips, a
coffee mug with your school logo, and so on. Once you have decided on what good
to auction, enter it in the PowerPoint slide.
• Start by listing a high price, and then list smaller and smaller prices until someone
says “Yes!”
• That person is the winner and must pay the price. There is only one bidder. Then,
show the receipt to the student and class.
• Although the concepts that this demonstration covers are yet to be defined, the
demonstration can show that both you and the student may have gained from the
exchange. They may have paid more than you paid but less than what they would
be willing to pay.
Market Outcomes and Tax
Incidence
Pre-class music: “Father Christmas” by The Kinks. (See Tip #173.)
This song is a good example of the deadweight loss of gift giving, because the kids in
the song prefer cash to gifts for Christmas. After playing this song for students, you
could open up a discussion by asking them to think about the gifts they’ve received in
the past year.
• Ask students to estimate the market value of those gifts.
• Then ask whether they would have preferred the gifts or the cash value.
• If for some, cash is preferable, why not just give people cash?
, Previously
Different elasticity measures:
• Price elasticity of demand
• Income elasticity of demand
• Cross-price elasticity of demand
• Price elasticity of supply
Adding elasticity to our demand-supply models provides
additional insight.
Lecture tip:
Review the above points, which were covered by the previous chapter, if needed.
Determinants of price elasticity of demand include:
• availability of substitutes
• share of budget
• necessities or luxuries
• broad or narrow definition of market
• time and adjustment process.
It’s a good idea to also remind students of the relationship between price elasticity
and total revenue. When demand is elastic, total revenue increases as price
decreases; when demand is inelastic, total revenue increases as price increases.
• Income elasticity and normal and inferior goods
• Cross-price elasticity and substitute and complementary goods
• Determinants of price elasticity of supply: flexibility of producers and time
• The effects of a demand (supply) shift on price and quantity depend on the
,elasticity of supply (demand), both in the short run and long run.
, Dutch Auction
Before we begin some new material, we are going to
auction off this bundle of goods.
• We will hold a Dutch auction.
• Note that prices start high and fall.
• The first one to bid at the current price wins and pays
that price.
Classroom demonstration: Dutch Auctions
This demonstration can be found in the Interactive Instructor’s Guide (see Tip #202).
• Bring a small bundle of goods to class. (Make sure to keep the receipt!) These
goods could include milk and donut holes, soda and Pop-Tarts, soda and chips, a
coffee mug with your school logo, and so on. Once you have decided on what good
to auction, enter it in the PowerPoint slide.
• Start by listing a high price, and then list smaller and smaller prices until someone
says “Yes!”
• That person is the winner and must pay the price. There is only one bidder. Then,
show the receipt to the student and class.
• Although the concepts that this demonstration covers are yet to be defined, the
demonstration can show that both you and the student may have gained from the
exchange. They may have paid more than you paid but less than what they would
be willing to pay.
