Professional Documents
Culture Documents
Elasticity
*Which good is
less elastic?
1. Olive oil
2. Vegetable oil (including olive oil + other
vegie oil.)
3. Cooking oil (including vegie oil and other
kinds of cooking oil.)
Cigarette elasticity
A research report on cigarette consumption
(1971-2000) in Taiwan claimed that the price
elasticity coefficients for domestic and
imported cigarettes were 0.644 and 0.822
respectively. Why?
Elasticities
%change in quantity demanded
=
%change in own price
While last-minute
Broadway show tickets
are so cheap?
2015 Pearson Education, Ltd.
Elasticities versus revenue/spending (*)
If the price of olive oil goes down due to lower
exchange rate of Euros against NTD, will we
spend more or less on olive oil?
1. More
2. Less
3. Not sure
Elasticities versus revenue/spending
Spending=pricequantity consumed %
Spending = =
%
If (Similarly for increase in price)
the dominating force?(greater relative change)
if elastic; (ex: 20% price drop causes 30% quantity
jump)
if inelastic; (ex: 20% price drop causes 4% quantity
increase)
Elasticities versus revenue/spending
If demand for gasoline is inelastic, during
the price hike of gasoline, we spend
_________ on gasoline
1. More
2. Less
3. Not sure
Fare for THSR
THSR raised its price in 2013. If its revenue
increases by 8% afterwards, its demand is
considered
1. elastic.
2. unitary elastic.
3. inelastic.
4. neither elastic nor inelastic.
Cigarette tax for long-term care
expenses?
Tax revenue from cigarette tax?
Annual consumption 1.8 billion packs, average
price is $80, = . .
$20 increase is 25% in price,
Reduction in consumption will be 20%=25x0.8
after tax consumption will be 1.8 0.8 =
1.44 billion packs, contributing 28.8 billion NT.
Can so much revenue be collected?
Cross-Price Elasticity
Cross-Price Elasticities
How sensitively does the quantity
demanded of good A respond to the good
Bs price changes? (along with a change in
quantity demanded for good B in a reverse
way)
< 0: complements
causing (along with )
(Goods always consumed together, moving in the
same direction)
~0: unrelated
Cross-Price Elasticity
Which pair of commodities are closer substitutes?
1. A. 2. B. 3. C. 4. D. 5. E
0: normal goods
> 1: luxury goods (getting bigger share when
income goes up)
< 1: necessity goods (getting smaller share
when income goes up)
Tax incidence and elasticity
If supply is perfectly
inelastic, tax
(subsidy) incidence is
fully borne (enjoyed)
by sellers.
Tax incidence and elasticity
+ Tax incidence
depends on relative
+ elasticity of S/D. The
(demand) side that is
relatively more
elastic bears less tax
burden.