ECO101 Lecture 02

• Strategy:
  • 3:1 ratio between Extra work hours : Lecture hours
  • Before LEC
    • Do textbook and quiz
    • Attempt lecture pdf
  • Before TUT
    • Office hours to do lec notes revision
    • Attempt TUT pdf
  • After TUT
    • Attempt problems pdf
    • Media quiz
• ECO101 - Week 02 Elasticity.pdf
• Inelastic means less sensitivity to change:
  • Reasons:
    • Need
      • If you need something, it doesn't matter about the price
      • Ex: Gas, medicine
      • You need it either way, the fuck does the price have to do with it
    • Time
      • Lag between noticing the price difference and action
    • No substitutes
      • If there is no alternative continue with the current product
  • Related to slope:
    • Compute $\eta$ in q2a
      • Simple substitution and algebra
      • This results in a unit elastic demand curve.
      • This means $10\mathrm{\%}$ increase in price means $10\mathrm{\%}$ decrease in $Q_d$
    • Compute $\eta$ in q2b
      • $\eta =\frac{\frac{6-10}{8}}{\frac{7-5}{6}}$
      • $\eta =1.5$ so we are elastic
      • Compared to before we get a $10\mathrm{\%}$ increase in price and get a $15\mathrm{\%}$ decrease in $Q_d$
      • Explain why the person gets more elastic when price goes up
        • When price goes up, we are quicker to buy less quantity, if the price is already higher.
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  • A firms revenue is $R=P\cdot Q$,
  • Expenditure is $E=P\cdot Q$
  • Low elasticity, and a price increase means more profit, as quantity doesn't fall off quick when increasing price.
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  • Measuring how price sensitive sellers are.
  • Need
    • If they need to sell something, they can't be price sensitive
    • Ex: Farmer, either sells it right now, or it rots.
  • Time
    • If they don't have the time to sell things, or produce more to capitalize on the increase or decrease in price.
  • ${\eta }_{xx}^s=1.5$
  • Again $10\mathrm{\%}$ inc price, means $15\mathrm{\%}$ inc supplied $Q^S$
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  • When demand is flat, a leftward shift in supply, means a large change in $Q^S$ and small change in price
    • When demand is flat price changes are small
  • If demand is steep and inelastic, the shift in supply means a larger change in $Q^S$ and a bigger change in price.
  • When shifting the supply curve, focus on elasticity of demand
• Cross-price elasticity: Substitutes or complements
• What's the change in $Q^d$ when we change the price of a related good
• Don't measure Equilibrium of demand between point A and C
• If elasticity is negative, then its complements
• If elasticity is positive, then it's substitutes
• Cross-price elasticity tells us about if it's a complement or substitute
• Also about strength
• If ${\eta }_{xy}^D=100$
  • then this is very strong substitutes
• If ${\eta }_{xy}^D=0.1$
  • These are weak substitutes
• Income elasticity: Inferior, Necessity or Luxury
  • If ${\eta }_{xm}^D<0$
    • Then these are inferior goods
  • If $0<{\eta }_{xm}^D<1$
    • These are necessities
  • If ${\eta }_{xm}^D>1$
    • These are luxury goods
  • Table 4-6
• Per unit taxes and Per unit subsidies
  • Per-unit:
    • The amount you pay, depends on the number of unit purchased
  • Ex:
    • Gas tax
  • A per unit tax will shift the supply curve
  • When the seller remits the price, then it shifts the supply curve.
  • When the buyer remits the price, then it shifts the demand curve down.
  • This depends on who is responsible for giving the money to the government.
  • There is always a difference between the price you pay and the amount the seller gets:
    • $Gap:P^D=+P^S+t$
    • $D=12-2(P^2+2)$
    • $D=8-2P^S$
    • Demand curve based on seller's price
    • $S=2P^S$
    • $P^S=2$
    • $P^D=4$
    • $Q=4$
    • Gov revenue $TAX=t\cdot Q_1$
    • Elasticity affects revenues
    • Governments tax things that are inelastic, because it doesn't affect much in the industry.
      • Alcoholics would still buy alcohol no matter the price
    • Incidence
      • Burden of tax here is 50/50
      • Buyers pay more just the same as sellers recieve less
  • Figure 4-9
  • Inelastic side of the market pays most of the tax
  • You snooze you lose
  • When supply is inelastic compared to demand, they supply pays most the tax
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  • Per unit subsidy
    • The amount you recieve depends on the number of units you purchase
  • Gap $P^D=P^S-s$
  • The price you pay is lower than the price recieved by firms.
  • When supply and demand are inelastic, the subsidy is cheap
  • Explain how elasticity affects incidence
  • In subsidy, the inelastic side of the market gets the most money
  • You snooze you win

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