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Price Elasticity of Demand Quantity Demanded 1 4 10 18 More Fun With Elasticities E>1 Elastic E<1 Inelastic Demand Schedule for Dry-Cleaned Shirts Price per shirt Total Revenue $4.00 3.00 2.00 1.00 E=1 E, I, or U? Midpoint Formula Average QD Average price =Ed Inelastic demand What price and revenue implications could the following have? o Farmers: inelastic demand; productivity/technology improvement Unity Excise tax: extra tax on a particular good A $.50 per unit excise tax on 100,000 units sold brings in _____ in revenue Raising the excise tax to $1.00 decreases quantity demanded to 35,000, thus decreasing the government’s revenue to _____________. Demand at this range for this product is ________________ (elastic or inelastic) The government should tax items that have _______________ demand. Cross Elasticity of Demand Positive=substitutes Negative=complements 0 or near 0=independent (unrelated) We pay attention to minus signs with cross elasticity. With price elasticity of demand, the coefficient would always be negative due to the inverse relationship between price and quantity demanded, but we ignore the minus sign. In this case, we will get some positive answers and some negative. % change in QD of X % change in price of Y A 5% increase in the price of guns results in a 15% decrease in the quantity demanded for bullets. ______ Cross elasticity coefficient Complement or Substitute? A 4% decrease in the price of Coke results in an 8% decrease in the quantity demanded for Pepsi. ______ Cross elasticity coefficient Complement or Substitute? Income Elasticity of Demand % change in quantity demanded % change in price Positive=superior (normal) Negative=inferior A 4% increase in the population’s income results in a 2% increase in quantity demanded for new cars _____ Income elasticity coefficient Superior or Inferior? A 10% increase in the population’s income results in a 5% decrease in quantity demanded for plastic jewelry _____ Income elasticity coefficient Price Elasticity of Supply Superior or Inferior? % change price % change QS Supply is: Elastic if > 1 Inelastic if < 1 Measures responsiveness of producers to price changes. If they are responsive, supply is elastic. If they are responsive to price changes, supply is inelastic. Market period—period immediately following a market price change when time is too short for producer to respond with a quantity supplied change. Short run—period of time too short to change plant capacity, but long enough to used fixed plant more or less intensively. Long run—time period long enough for producer to adjust plant capacity or for new firms to enter/leave the industry All of these time periods depend on the product and circumstances surrounding the producer.