WEEK 1
CHAPTER 5 - ELASTICITY AND ITS APPLICANTS
If two demand/supply curves run through a common point -> flatter = more elastic
More elastic:
– More substitutes
– Long run (more time)
– Specific brands (less elastic = categories of product)
– Luxuries
– Large part of budget devoted to a product (the poorer you are, the more you care about
the price)
Inelastic -> price and revenue move together
Elasticity of supply: - the more responsive the quantity supplied is to a change in price, the
more elastic the supply curve
– If increased production requires higher per-unit costs -> supply will be less elastic
– e.g. supply of raw materials is often inelastic because hard to increase supply
without increasing costs
– If increased production doesn’t increase per-unit costs much -> supply will be more
elastic
– Supply elastic -> when industry can be expanded without causing a big increase in the
demand for that industry’s input
– Local supply more elastic than global
– Long run supply more elastic than short
So more elastic supply:
– Easy to increase production at constant unit cost
– Small share of market for inputs
– Local supply
– Long run
CHAPTER 6 - TAXES AND SUBSIDIES
Commodity taxes = taxes on goods
Tax on suppliers
The difference between price paid by sellers and received by buyers is the tax
Tax on buyers
, Demand more elastic than supply -> buyers pay less of the tax than sellers
– Buyers have lots of substitutes so with more tax they would change
More inelastic demand = less deadweight loss from tax
Tax revenue the same for inelastic and elastic demand
CHAPTER 8 - PRICE CEILINGS AND FLOORS
Price ceilings cause shortages because the quantity demanded exceeds the quantity supplied,
reduction in quality because sellers want to increase profit
– But help avoid creation of monopolies and help people to buy good they wouldn’t
otherwise afford
CHAPTER 5 - ELASTICITY AND ITS APPLICANTS
If two demand/supply curves run through a common point -> flatter = more elastic
More elastic:
– More substitutes
– Long run (more time)
– Specific brands (less elastic = categories of product)
– Luxuries
– Large part of budget devoted to a product (the poorer you are, the more you care about
the price)
Inelastic -> price and revenue move together
Elasticity of supply: - the more responsive the quantity supplied is to a change in price, the
more elastic the supply curve
– If increased production requires higher per-unit costs -> supply will be less elastic
– e.g. supply of raw materials is often inelastic because hard to increase supply
without increasing costs
– If increased production doesn’t increase per-unit costs much -> supply will be more
elastic
– Supply elastic -> when industry can be expanded without causing a big increase in the
demand for that industry’s input
– Local supply more elastic than global
– Long run supply more elastic than short
So more elastic supply:
– Easy to increase production at constant unit cost
– Small share of market for inputs
– Local supply
– Long run
CHAPTER 6 - TAXES AND SUBSIDIES
Commodity taxes = taxes on goods
Tax on suppliers
The difference between price paid by sellers and received by buyers is the tax
Tax on buyers
, Demand more elastic than supply -> buyers pay less of the tax than sellers
– Buyers have lots of substitutes so with more tax they would change
More inelastic demand = less deadweight loss from tax
Tax revenue the same for inelastic and elastic demand
CHAPTER 8 - PRICE CEILINGS AND FLOORS
Price ceilings cause shortages because the quantity demanded exceeds the quantity supplied,
reduction in quality because sellers want to increase profit
– But help avoid creation of monopolies and help people to buy good they wouldn’t
otherwise afford
