Elasticity, Total Revenue and Surplus

Quick Check 1  Items that are necessities are considered to be _____________  inelastic

Quick Check 2  If TR and price go in opposite directions, the good is considered to be _______  Elastic

Quick Check 3  List the determinants of elasticity  P- the proportion of income spent on the good  A- availability of close substitutes (the more subs. The more elastic)  I- the importance of a good (luxury v necessity)  D- the ability to delay the purchase (the more time, the more elastic)

Quick Check 4  If a good has an elasticity coefficient of 0, that good is said to be ___________  Perfectly inelastic

Price Elasticity Quantity Demanded Price $ a b c d e f g h Elastic E d > 1 Unit Elastic E d = 1 Inelastic E d < 1 D

Excise Taxes  Governments tend to tax inelastic products to ensure high revenues  Ex- liquor, gasoline and tobacco

Price Elasticity of Supply  If producers are relatively responsive to price changes, supply is elastic. If producers are relatively unresponsive to price change, supply is inelastic  Es = Percentage change in quant supplied of product x/percentage change in price of product x  Or….Es = change S/sum of S/2 / change P/sum P/2  Ex- Solve Es for an increase in price from $4-6 and increase in quantity supplied from 10 units to 14 units (use midpoint)

Check your work  Es = change quant supplied/(sum of Qs/2)/(change price/sum of P/2)  = ((14-10)/(14+10/2))/((6- 4)/(6+4/2))  = (4/12)/(2/5)  =.33/.40  =.83

Price Elasticity of Supply Cont’d  The degree of price elasticity of supply depends on how easily and quickly producers can shift resources between alternative uses

Market Period  A period that occurs when the time immediately after a change in market price is too short for producers to respond with a change in quantity supplied

Market Period Continued  Ex- perishable items are perfectly inelastic such as beets. Farmers will sell all of their product because they will go bad  The market period for a farmer is the growing season

Short run  a period of time too short to change plant capacity but long enough to use fixed plant more or less intensively

Long Run  Time period long enough for firms to adjust plant sizes and for new firms to enter and old firms to leave an industry  Ex- in the tomato industry the farmer has time to acquire new land and buy machinery. Over time more farmers will shift to tomatoes if profitable