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Economics:
Principles and Applications, 2e
by Robert E. Hall &
Marc Lieberman
Chapter 4:
Working with Supply and
Demand
Government Intervention
in Markets
•Price Ceilings
•Price Floors
•Taxes
Government Intervention
in Markets
Price Ceiling
A government-imposed maximum
price in a market.
Government Intervention
in Markets
When quantity supplied and quantity
demanded differ, the short side of the
market--whichever of the two
quantities is smaller--will prevail.
Government Intervention
in Markets
A price ceiling creates a shortage,
and increases the time and trouble
required to buy the good. While the
price decreases, the opportunity cost
may rise.
Government Intervention
in Markets
Price Floor
A government-imposed minimum
price in a market.
Government Intervention
in Markets
A price floor creates an excess supply of a
good. In order to maintain the price floor, the
government must prevent the excess supply
from driving down the market price. In
practice, the government often accomplishes
this goal by purchasing the excess supply
itself.
Government Intervention
in Markets
Excise Tax
A tax on a specific good or
service.
Government Intervention
in Markets
An excise tax shifts the market supply
curve upward by the amount of the tax.
For each quantity supplied, the new,
higher supply curve tells us firms’ gross
price, and the original, lower supply
curve tells us the net price.
Price Elasticity of
Demand
•Calculating Price Elasticity of Demand
•Elasticity and Straight-Line Demand
Curves
•Categorizing Goods by Elasticity
•Elasticity and Total Expenditure
•Determinants of Elasticity
•Using Price Elasticity of Demand
Price Elasticity of
Demand
Price Elasticity of Demand
The sensitivity of quantity demanded
to price; the percentage change in
quantity demanded caused by a 1
percent change in price.
Price Elasticity of
Demand
Elasticity of demand varies along a
straight-line demand curve. More
specifically, demand becomes more
elastic as we move upward and
leftward.
Price Elasticity of
Demand
Inelastic Demand
A price elasticity of demand
between 0 and -1.
Price Elasticity of
Demand
Perfectly Inelastic Demand
A price elasticity of demand
equal to 0.
Price Elasticity of
Demand
Elastic Demand
A price elasticity of demand
less than -1.
Price Elasticity of
Demand
Perfectly (Infinitely) Elastic
Demand
A price elasticity of demand
approaching minus infinity.
Price Elasticity of
Demand
Unitary Elastic Demand
A price elasticity of demand
equal to -1.
Price Elasticity of
Demand
Where demand is price inelastic, total
expenditure moves in the same direction
as price. Where demand is elastic, total
spending moves in the opposite direction
from price. Finally, where demand is
unitary elastic, total expenditure remains
the same as price changes.
Price Elasticity of
Demand
The more narrowly we define a good, the
easier it is to find substitutes, and the
more elastic is the demand for the good.
The more broadly we define a good, the
harder it is to find substitutes and the less
elastic is the demand for the good.
Price Elasticity of
Demand
Short-run Elasticity
An elasticity measured just a
short time after a price
change.
Price Elasticity of
Demand
Long-run Elasticity
An elasticity measured a year
or more after a price change
Price Elasticity of
Demand
The more elastic the demand
curve, the more of an excise tax is
paid by sellers. The more
inelastic the demand curve, the
more of the tax is paid by buyers.
Other Demand
Elasticities
•Income Elasticity of Demand
•Cross-Price Elasticity of
Demand
Income Elasticity of
Demand
Income Elasticity of Demand
The percentage change
demanded caused by a 1percent change in income.
Income Elasticity of
Demand
Economic Luxury
A good with an income
elasticity of demand greater
than 1.
Income Elasticity of
Demand
Cross-Price Elasticity of Demand
The percentage change in the the
quantity demanded of one good
caused by a 1-percent change in
the price of another good.