Pearson Microeconomics Ch. 3

The shapes of these curves are determined by how much a shock affects the equilibrium price and quantity

the % change in a variable
in response to
a given % in another variable

(A single point on demand curve) The % change in Qd in response to a given % change in the Pd.

ALSO:
(δQ/δP)*(P/Q)

if linear:
Q = a-b(p)
Ed = -b (P/Q)

Y-AXIS intercept: perfectly ELASTIC
UPPER LEFT: Elastic
MIDDLE: Unitary
LOWER RIGHT: Inelastic
X-AXIS intercept: perfectly INELASTIC

if Ed = -∞ : perfectly Elastic
if Ed < -1 : relatively Elastic
if 0 < Ed < -1 : relatively INElastic
if Ed = 0 : perfectly INElastic

Ed = -∞ : perfectly Elastic
Small increase in price leads to ∞ drop in quantity
Apparent in PERFECT COMPETITION (identical goods)

Ed = 0 : perfectly INElastic
Quantity demanded is NOT affected by Price
Ex. necessity goods (Housing, Food, Medicine)

if relatively Elastic curve:
As Price INCREASES, Revenue DECREASES
if relatively INElastic curve:
As Price INCREASES, Revenue INCREASES too

% change in Qd in response to % change in income.

δQ .... Y
---- x ----
δY ..... Q

Ey < 0 : Inferior good (FOREVER 21)
Ey > 0 : Normal good
0 < Ey < 1 : Necessity
Ey > 1 : LUXURY

% change in Quantity of item A
in response to
% change in PRICE of item B

δQa Pb
---- x ----
δPb Qa

XED < 0 : Complementary goods
XED = 0 : Non-related goods
XED > 0 : Substitute goods

(A single point on supply curve) The % change in Qs in response to a given % change in the Ps.

ALSO:
δQs . Ps
---- x ----
δPs . Qs

Percentage tax
every $ consumer spends, gov't keeps fraction

i.e. sales tax

a set amount of tax charged per unit of the product sold

ex. cigarettes

The share of a tax ultimately paid by consumers and sellers.

tax incidence on consumers FORMULA :
η . . . . . . . . . . change in PRICE
----------- = ----------------------
η - ε . . . . . . . .change in TAX

tax incidence on producer FORMULA:
just subtract ^^^ from 1.

Perfectly Elastic Supply (η = ∞ )
CONSUMERS bear all tax incidence

Perfectly INElastic Supply (η = 0)
PRODUCERS bear all tax incidence

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