7/30/2019 Elasticity, Surplus, And Taxation part-1

1/8

Get Access to Over 1,100,000 More Essays. Upgrade Your Account Now

AP Notes AP Microeconomics Elasticity, Surplus, and Taxation

Elasticity, Surplus, and TaxationElasticity, Surplus, and Taxation

4 of 8

Production and Costs5 of 8

Perfect Competition and Profit6 of 8

Monopoly, Mopolistic

Competition...

Sections:

This section covers the following topics:

Elasticity

Income elasticity of demand

Cross-price elasticity of demand

Producer and consumer surplus

Taxation and deadweight loss

Section Summary

Elasticity describes how sensitive something is to changes in price. The

elasticity of supply or demand is the percentage change in supply or demand

over the percentage change in price. If supply or demand is inelastic, that ratio

is between 1 and 0. The ratio is exactly 1 in the unit elastic case and is greater

than 1 if supply or demand is elastic.

If demand for a good is inelastic at the current price, businesses should raise

their prices (and vice-versa). The income elasticity of demand shows how

demand will react when the average consumers income changes. The cross-

price elasticity of demand relates the price of one good to the demand for

another. When the price of a substitute (Ford and Toyota are substitutes)

rises, demand rises, but when the price of a complement (milk and cookies

are complements) rises, demand falls.

19 pages Jan 2000

6 pages Dec 2010

1621 pages Apr 2012

45 pages Jul 2010

26 pages Dec 2010

Related essays

Taxation In Japan... Second, the effect on economic stability, Japan

with its high elasticity on...

The Surpluses...deadweight loss since nobody gains anything,

even government. FIGURE 9...

-Macro-And-Micro-Economics-Various-

Authors.Pdf

...Market System and the Circular Flow 3. Demand,Supply, and Market Equilibrium 4...

Fdi Instruments Advantages And

Disadvantages...intervention. The range of factors and variables,

their foreign direct...

Bathroom Fixtures...GDP" redirects here. For other uses, see GDP

(disambiguation). [pic] [pic] CIA World...

You do not have any saved papers at

this time.

3 of 8

Elasticity, Surplus, and

Taxation

Search 1 100 000 EssaysSearch 1 100 000 Essays

UpgradeUpgrade | Hi samivai

Essays Book Notes Citation Generator More

http://www.studymode.com/my-activity.phphttp://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/features.phphttp://www.studymode.com/citation-generator/http://www.studymode.com/book-notes/http://www.studymode.com/essays/http://www.studymode.com/my-activity.phphttp://www.studymode.com/join.php?join_type=upgradehttp://www.studymode.com/my-activity.phphttp://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/http://www.studymode.com/essays/Bathroom-Fixtures-506589.htmlhttp://www.studymode.com/essays/Fdi-Instruments-Advantages-And-Disadvantages-352874.htmlhttp://www.studymode.com/course-notes/Macro-And-Micro-Economics-Various-Authors-Pdf-986245.htmlhttp://www.studymode.com/essays/The-Surpluses-514401.htmlhttp://www.studymode.com/essays/Taxation-Japan-23176.htmlhttp://www.studymode.com/ap-microeconomics/monopoly-competition-oligopoly/http://www.studymode.com/ap-microeconomics/perfect-competition/http://www.studymode.com/ap-microeconomics/production-costs/http://www.studymode.com/ap-microeconomics/supply-demand/http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/http://www.studymode.com/ap-microeconomics/http://www.studymode.com/ap-notes/https://www.studymode.com/join.php?join_type=upgrade

7/30/2019 Elasticity, Surplus, And Taxation part-1

2/8

Surplus is the benefit that someone gains by producing or consuming a good

minus its cost, and is divided into producer surplus and consumer surplus.

If the market is not at equilibrium, total surplus is reduced and a deadweight

loss is created.

Taxation also creates a deadweight loss. Whoever is more inelastic (suppliers or

demanders) bears a greater portion of the burden of taxation.

People also have a tendency to engage in unproductive rent-seeking

activities, such as lobbying, in which they try to transfer surplus to

themselves.

Elasticity of Supply and Demand

Overview

Elasticity is used to measure how sensitive customers are to a change

in price. If they are very sensitive, price is said to be elastic. If changes in

price dont really change demand, price is inelastic. Price elasticity of

supply or demand at a certain price is measured by the following

equation:

Elasticity of [Supply or Demand] = % change in Quantity (Supplied or

Demanded)

% change in Price

Note: If you are trying to calculate the elasticity of supply, the put the % change

in quantity supplied in the top of the fraction. The same is true with demand.

We just used the [supplied or demanded] notation to simplify things.

Interpreting Elasticity

By convention, elasticity is always a positive number. If you plug in values and

7/30/2019 Elasticity, Surplus, And Taxation part-1

3/8

get a negative answer, just make it positive. This table explains the meaning of

each elasticity value:

Elasticity Value: Classification: Description:

Less than 1 Inelastic % change in price > % change in supply

or demand

Equal to 1 Unit elastic % change in price = % change in supply

or demand

Greater than 1 elastic % change in price < % change in demand

7/30/2019 Elasticity, Surplus, And Taxation part-1

4/8

Graphs of Elasticity

Lets take some time to look at graphs of elasticity.

These seem complicated at first, but youll get there.

What should you know?

Elasticity of Demand

Look at the left graph on the bottom of the page. Notice how half of the curve is

elastic and the other is inelastic.

Demand is unit elastic right in the middle. To locate the point ofunit elasticity,

locate the two places demand intercepts an axis. Draw a line up from halfway

between those two points (like I did in the picture). Unit elasticity is right on thatpoint.

Elasticity of Supply

For supply, you just need to find where the curve hits the axis.

If supply intersects the price axis, the entire curve is elastic but gets smaller as

you move farther out.

If supply intersects the supply axis, the entire curve is inelastic but gets larger

as you move.

If supply intersects the origin, the entire curve is unit elastic.

7/30/2019 Elasticity, Surplus, And Taxation part-1

5/8

Perfect Elasticity

Look at the graphs above and to the right.

Perfect elasticity any change in price causes an infinite change in quantity

Perfect inelasticity any change in price causes no change in quantity

Finding Elasticity at a Point

How would you find the elasticity at point P1? This is a demand curve, so the

equation we need is

Elasticity of Demand = % change in

Demand

% change in Price

Unfortunantl theres a roblem. If ou

7/30/2019 Elasticity, Surplus, And Taxation part-1

6/8

,

start from price = $7, the % change in price

from $7 to $6 will be different from the % change had you gone from $5 to $6.

This is dealt with by adding two points on either side of the target point and

dividing by the middle value. You then multiply by 100 to convert to a

percentage.

To calcualte the elasticity at P1, percent change in demand = (5-3)/4 100 =

50% and percent change in price = (7-5)/6 100 = 33.3%. Percent change in

demand / percent change in price = 50/33.3 = 1.5, so demand is elastic at point

P1.

Elasticity of Demand Effect of Price Increase

7/30/2019 Elasticity, Surplus, And Taxation part-1

7/8

ast c owers tota revenue

Unit Elastic No change

Inelastic Raises total revenue

The following graphs illustrate each of these situations. Price shifts from onepoint to another, shown by the red arrow. The area labeled with a G

represents revenue gained, while the area with an L is revenue lost. Notice

how these graphs relate to the table above.

Price Discrimination

In an ideal world, you could charge people who dont really care about price

more than consumers who are price sensitive. Some businesses actually do

this, using a technique called price discrimination. The airline business is a

great example. They want to charge high rates to business travelers who are

using company money and dont care, but cant afford to make tickets too

expensive for regular people. The answer? Find things that distinguish business

people from ordinary consumers. Business trips rarely last over a weekend, so

airlines give you a discount if you fly in Friday and leave Sunday. Using this

strategy, the company can cater to both groups of consumers and maximize

revenue.

http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#

7/30/2019 Elasticity, Surplus, And Taxation part-1

8/8

Ready for more?

UpgradeUpgrade

Products

Essays

AP Notes

Book Notes

Citation Generator

Company

About

Blog

Help

Jobs

Contact

Follow

Facebook

Twitter

Google+

RSS

2013 StudyMode.com Legal Site Map Advertise

Go to Page 12345 Previous | Next

>

Cite this document

MLA CHICAGO

(2012, May). Elasticity, Surplus, and Taxation. StudyMode.com. Retrieved , , from

http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/

APA

http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/http://www.studymode.com/ap-microeconomics/production-costs/http://www.studymode.com/ap-microeconomics/supply-demand/http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/ap-microeconomics/elasticity-surplus-taxation/#http://www.studymode.com/advertise-with-us.phphttp://www.studymode.com/sitemap.htmlhttp://www.studymode.com/legal.phphttp://www.studymode.com/rss.xmlhttps://plus.google.com/117643624287678523816/postshttp://www.twitter.com/studymodehttp://www.facebook.com/StudyModehttp://www.studymode.com/support.phphttp://www.studymode.com/careers.phphttp://www.studymode.com/help.phphttp://www.studymode.com/education-blog/http://www.studymode.com/about.phphttp://www.studymode.com/citation-generator/http://www.studymode.com/book-notes/http://www.studymode.com/ap-notes/http://www.studymode.com/essays/http://www.studymode.com/join.php?join_type=upgrade