Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Demand Elasticity The Price Elasticity of Demand for a Good is a measure of the sensitivity or responsiveness of demand for a good to a change in its price. More precisely: 1

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Demand Elasticity 2

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Demand Elasticity 3

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Demand Elasticity 0 4

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Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Importance of Elasticity Suppose the Government raises the indirect tax on this commodity. How do we show this? X0 p p* X* S D 6

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Importance of Elasticity What is the Tax Revenue... ? X0 p p* X* S D STST 7

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Importance of Elasticity What is the Tax Revenue? What is the Tax Burden? X0 p p* X* S D STST A B 8

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Importance of Elasticity What is the Tax Burden? How would the shares of the tax burden change with a different price elasticity of demand for the good? X0 p p* X* S D STST A B S STST 0 p 9

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Importance of Elasticity What is the Tax Burden? How would the shares of the tax burden change with a different price elasticity of demand for the good? X0 p p* X* S D STST A B S STST 0 p D 10

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Importance of Elasticity How would the shares of the tax burden change with a different price elasticity of demand for the good? Why is this? X0 p p* X* S D STST A B S STST 0 p D A B 11

Robin Naylor, Department of Economics, Warwick Introduction Lecture 3 Now read B&B 4 th Ed., pp and, on the incidence of a tax, pp