1. Elastic and Inelastic Demand (a)
Price elasticity of demand shows how responsive consumers are to price changes.
elastic demand means % change in quantity demanded is more than % change in price
inelastic demand means % change in quantity demanded is less than % change in price
unit-elastic demand means % change in quantity demand equals % change in price
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2. Elastic and Inelastic Demand (b) Figure 3.1 Page 61
Elastic Demand Curve
for Ice Cream Cones
Inelastic Demand Curve
for Ice cream Cones
2.40
2.40
20%
20%
2.00
2.00 D1
1.60
1.60 D2
50%
Price ($ per cone)
1.20
Price ($ per cone)
1.20
10%
0.80
0.80
0.40
0.40
500
1000
500
1000
Quantity Demanded
(cones per winter month)
Quantity Demanded
(cones per summer month)
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3. Perfectly Elastic and Perfectly Inelastic Demand (a)
Perfectly elastic demand means a constant price and a horizontal demand curve.
Perfectly inelastic demand means a constant quantity demanded and a vertical demand curve.
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4. Perfectly Elastic and Perfectly Inelastic Demand (b) Figure 3
Perfectly Elastic and Perfectly Inelastic Demand (b) Figure 3.2 Page 62
Perfectly Elastic
Demand Curve
for Soybeans
Perfectly Inelastic
Demand Curve
for Insulin D4
1.60 D3
Price ($ per tonnes)
Price ($ per tonnes)
1000
Quantity Demanded
(tonnes)
Quantity Demanded
(litres)
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5. Total Revenue and the Price Elasticity of Demand (a)
A price change causes total revenue to change in the opposite direction when demand is elastic.
A price change causes total revenue to change in the same direction when demand is inelastic.
A price change does not affect total revenue when demand is unit-elastic.
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6. Revenue Changes with Elastic Demand Figure 3.3 Page 63
Demand Curve for DVDs 5 4 A 3
Price ($ to rent a DVD) D 2 B C 1
500
1000
1500
Quantity Demanded (DVDs rented each day) As price increases – total revenue decreases
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7. Revenue Changes with Inelastic Demand Figure 3.4 Page 64
Demand Curve for Amusement Park Rides 5 4 3
Price ($ per ride) E 2 D 1 F G
2000
4000
6000
8000
10 000
Quantity Demanded (riders each day) As price increases – total revenue increases
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8. Total Revenue and the Price Elasticity of Demand (b) Figure 3
Total Revenue and the Price Elasticity of Demand (b) Figure 3.5 Page 64
Demand Elasticity and Changes in Total Revenue
Elastic Demand
Inelastic Demand
Unit-Elastic Demand
Price
Change up
down
Change in
Total Revenue
down up
unchanged
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9. Determinants of the Price Elasticity of Demand
There are four determinants:
portion of consumer incomes (products with smaller portions more inelastic)
access to substitutes (products with more substitutes more elastic)
necessities versus luxuries (more inelastic for necessities and more elastic for luxuries)
time (more elastic with the passage of time)
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10. Calculating Price Elasticity of Demand
A numerical value for price elasticity of demand (ed) is found by taking the ratio of the changes in quantity demanded and in price, each divided by its average value.
In mathematical terms:
ed = ΔQd ÷ average Qd
Δprice ÷ average price
The sign will be negative (-) proving the law of demand. Inverse relationship between Quantity demanded and Price
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11. Elasticity and a Linear Demand Curve (a)
A linear demand curve has a different price elasticity (ed) at every point.
At high prices, the change in quantity demanded ( is relatively large relative to average quantity demanded ,giving a large ed. Elastic
At low prices, the change in quantity demanded is relatively small relative to average quantity demanded, giving a small ed. Inelastic
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12. Income Elasticity
Income elasticity (ei) is the responsiveness of a product’s quantity demanded to changes in consumer income.
In mathematical terms:
ei = ΔQd ÷ average Qd
ΔI ÷ average I
Positive sign (+)shows a direct relationship, thus the product is a normal product.
Negative sign (-) shows an inverse relationship, thus the product is an inferior product.
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13. Cross-Price Elasticity
Cross-price elasticity (ei) is the responsiveness of the quantity demanded of one product (x) to a change in price of another (y). In mathematical terms:
exy = ΔQdx ÷ average Qdx
ΔPy ÷ average Py
Positive sign indicates substitute product. (direct relationship) Negative sign indicates complementary product (inverse relationship) ex. price CD players goes up demand of CDs goes down
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14. Elastic and Inelastic Supply
Price elasticity of supply measures the responsiveness of quantity supplied to price changes.
Elastic supply means % change in quantity supplied is more than % change in price.
Inelastic supply means % change in quantity supplied is less than % change in price.
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15. Elastic and Inelastic Supply Figure 3.7, Page 70
Elastic Supply Curve
for Tomatoes
Inelastic Supply Curve
For Tomatoes 4 4 S2 S1 3 3
50%
50%
Price ($ per kilogram)
Price ($ per kilogram) 2 2
100%
20% 1 1
200000
Quantity Supplied
(kilograms per year)
Quantity Supplied
(kilograms per year)
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16. Perfectly Elastic and Perfectly Inelastic Supply
Perfectly elastic supply means a constant price and a horizontal supply curve.
Perfectly inelastic supply means a constant quantity supplied and a vertical supply curve.
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17. Time and the Price Elasticity of Supply (a)
Price elasticity of supply changes over three production periods:
Supply is perfectly inelastic in the immediate run.
Supply is either elastic or inelastic in the short run.
Supply is perfectly elastic for a constant-cost industry and very elastic for an increasing-cost industry in the long run.
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18. Time and the Price Elasticity of Supply (b) Figure 3
Time and the Price Elasticity of Supply (b) Figure 3.8, Page 71 (continued in part (e))
Immediate-Run
Supply Elasticity
for Strawberries
Short-Run
Supply Elasticity
For Strawberries S2
2.50 S1
2.00
Price ($ per kilogram)
Price ($ per kilograms) 9 11
Quantity Supplied
(kilograms per month)
Quantity Supplied
(millions of kilograms per year)
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19. Time and the Price Elasticity of Supply (c)
If strawberries are produced in a constant-cost industry:
A higher price of strawberries raises production but not resource prices.
As new businesses enter the industry in the long run due to a higher price of strawberries, this price is gradually pushed back down to its original level.
Therefore the long-run supply curve for a constant-cost industry is perfectly elastic.
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20. Time and the Price Elasticity of Supply (d)
If strawberries are produced in a increasing-cost industry:
A higher price of strawberries raises production and also resource prices.
As new businesses enter the industry in the long run due to a higher price of strawberries, this price is gradually pushed back down to its lowest possible level, but this level is higher than it was originally.
Therefore the long-run supply curve for an increasing-cost industry is very elastic.
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21. Time and the Price Elasticity of Supply (e) Figure 3
Time and the Price Elasticity of Supply (e) Figure 3.8, Page 71 (continued from part (b))
Long-Run Supply Elasticity S4
Constant-
cost Industry
2.00 S3
Increasing-
cost Industry
Price ($ per kilograms)
Quantity Supplied
(millions of kilograms per decade)
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22. Calculating Price Elasticity of Supply
A numerical value for price elasticity of supply (es) is found by taking the ratio of the changes in quantity supplied and in price, each divided by its average value.
In mathematical terms:
es = ΔQs ÷ average Qs
Δprice ÷ average price
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23. Excise Taxes (a)
An excise tax is a tax on a particular product expressed as a dollar amount per unit of quantity.
Such a tax creates a new supply curve (S1) seen by consumers. It is vertically above the initial supply curve (S0) seen by producers.
The reason for this difference is that the price as seen by consumers is now higher than that seen by producers.
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24. Excise Taxes (b)
The after-tax price for consumers is found where S1 crosses the demand curve. The after-tax equilibrium price for producers is the corresponding price on S0.
The total tax paid by consumers is found by multiplying their tax-induced price rise by after-tax quantity.
Similarly, the total tax paid by producers is found by multiplying their corresponding price drop by after-tax quantity.
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25. The Impact of an Excise Tax Figure 3.9, page 74
(millions of tonnes)
Quantity
Supplied
Demanded
(D)
(S0) S0 D
Market Demand and Supply
Curves For Strawberries
Price
($ per tonne)
3.00
2.50
2.00
1.50
1.00
0.50
3.50 1 3 5 7 9 11 13 15
Quantity (millions of kg per year)
Price ($ per kg)
The Impact of an Excise Tax
4.00 c S1 b $1 a d A B
(S1) 5 7 9 11 13 13 11 9 7 5 9 7 5 3 1
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26. The Effect of Elasticity
For a given supply curve, the more elastic the demand curve the greater the proportion of an excise tax paid by producers. Quantity demanded will decrease by a greater percentage than the price increase.
For a given demand curve, the more elastic the supply curve the greater the proportion of an excise tax paid by consumers. Quantity supplied will decrease by a greater percentage than price increase.
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27. Excise Taxes and Demand Elasticity Figure 3.10, page 75
Elastic Demand S1
Inelastic Demand S1 S0 D c b $1 b $1 S0 D c a d A B A B d a
2.75
2.25
2.00
2.00
Price ($ per kg)
Price ($ per kg)
1.75
1.25 6 9 8 9
Quantity (millions of kg per year)
Quantity (millions of kg per year)
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28. Excise Taxes and Supply Elasticity Figure 3.11, page 76
Elastic Supply
Inelastic Supply S1 a S0 D S0 D S1 a b $1
2.75 d A B
2.25
2.00 c
2.00
Price ($ per kg)
1.75
Price ($ per kg)
1.25 6 9 8 9
Quantity (millions of kg per year)
Quantity (millions of kg per year)
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29. Price Controls
A price floor is a minimum price set above the equilibrium price.
It results in a surplus in the market.
A price ceiling is a maximum price set below the equilibrium price.
It results in a shortage in the market.
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30. Agricultural Price Supports
Price supports for agricultural goods are an example of a price floor.
They help overcome unstable agricultural prices.
Farmers win from these supports.
Consumers and taxpayers lose from these supports.
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31. Reasons for Price Supports Figure 3.12, page 78
Market Demand and Supply
Curves for Wheat
Market Demand and Supply
Schedules for Wheat S1 S0
140 b
Price
($ per tonne)
Quantity
Demanded
Quantity
Supplied
120
100 a
(D)
(S0)
(S1) 80
(millions of tonnes)
Price ($ per tonne) 60 D
$140
120
100 80 60 10 11 12 13 14 14 13 12 11 10 12 11 10 9 8 40 20 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Quantity (millions of tonnes per year)
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32. Effects of Price Supports Figure 3.14, page 79
Market Demand and Supply Curves
for Milk
Market Demand and Supply
Schedules for Milk
surplus S
1.30
Price
($ per litre)
Quantity
Demanded
(D)
Quantity
Supplied
(S)
1.10
(millions of litres)
Price ($ per litre)
.90
$1.30 59 62
A price floor
creates
a surplus. D
.70
1.10 60 60
0.90 61 58 58 60 61 62
Quantity
(millions of litres per year) 59
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33. Rent Controls Rent controls are an example of a price ceiling.
They keep down prices of controlled rental accommodation.
Some (especially middle-class) tenants win from these controls.
Other (especially poorer) tenants lose from these controls.
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34. Effects of Rent Controls Figure 3.15, page 80
Market Demand and Supply
Curves for Units
Market Demand and Supply
Schedules for Units S
Price
($ rent per month)
Quantity
Demanded
(D)
Quantity
Supplied
(S)
700
A price ceiling
creates
a shortage.
500
(units rented per month)
Price ($ per unit)
300
$700
1700
2500
shortage
500
2000
2000 D
300
2300
1500
1500
2000
2300
2500
Quantity
(units rented per month)
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35. Prophet of Capitalism’s Doom
According to Karl Marx’s theory of exploitation:
a product’s price is based on the amount of labour that goes into producing it
capitalists cut costs by minimizing workers’ wages and by maximizing the length of the workday
capitalists keep any surplus value, which is the excess of their revenues over their costs
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36. Marx’s Theory of Exploitation Figure A, Page 87
Creation of Surplus Value
(when producing 2 shirts or 1 suit)
Creation of Surplus Value 80
Daily Wage
Value produced ($ per day) 20 40 60
$50 Wage
$50
$10
$20
$80 2 5
$30 Wage
$30
$10
$40
$80 4 3
W = 50
M = 10
SV = 10
SV = 40
W = 10
W = 30
Daily Wage
Materials and
machine wear
and tear (M)
Surplus Value (SV)
Total Value
Exploitation Rate
(SV/W)
$50
$30
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37. For the Public Good (OLC)
Besides intervening in private markets, Canadian governments have an independent role.
Government programs include payments to adults with children, retirement funds for the elderly, unemployment insurance, welfare, higher education subsidies, free health care and schooling, and subsidized public housing.
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38. For the Public Good (OLC) Federal Spending
The main federal spending programs are:
transfer payments to seniors (the Seniors Benefit)
tax credits to low-income parents (the Child Tax Credit)
transfer payments to the unemployed (Employment Insurance)
pensions (the Quebec and Canada Pension Plans)
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39. For the Public Good (OLC) Provincial and Territorial Spending
The responsibilities of provincial and territorial governments include:
health care
subsidies for post-secondary education
welfare services
The federal government pays a portion of these costs through the Canada Health and Social Transfer (CHST).
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40. For the Public Good (OLC) Government Expenditures Figure A
Federal (2009)
($ billions)
Provincial (2009)
($ billions)
Local (2009)
($ billions)
Goods and services
Transfers to
Persons
Businesses
Nonresidents
Provinces and local
Debt charges
63.9
87.9
4.5
4.8
65.1
26.1
253.1
Goods and services
Transfers to
Persons
Businesses
Governments
Debt charges
214.1
43.1
11.1
52.5
28.3
349.2
Goods and services
Transfers to
Persons
Businesses
Provinces
Debt Charges
109.1
4.0
2.2
0.1
3.5
118.9
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41. For the Public Good (OLC) Taxation (a)
Canadian governments use five main types of taxation:
Personal income taxes are levied by both federal and provincial governments, and are based on four marginal federal tax rates (15%, 22%, 26%, and 29%).
Sales taxes are levied by both federal and provincial governments, and are charged as a percentage of price on a wide range of products.
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42. For the Public Good (OLC) Taxation (b)
Excise taxes are levied by both federal and provincial governments, and are usually charged as a dollar amount per unit of quantity on particular products.
Property taxes are charged by local governments on buildings and land.
Corporate income taxes are paid by corporations to both federal and provincial governments as a percentage of annual profits.
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43. Gross Domestic Product
For the Public Good (OLC) Tax Revenues for All Levels of Government (2009) Figure B
Percent of
Gross Domestic Product
11.5
8.7
3.2
2.5
4.6
30.5
Percent of
Total Taxes
37.6
28.4
10.5
8.2
15.0
100.0
Personal income taxes
Sales and excise taxes
Property taxes
Corporate income taxes
Miscellaneous taxes
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44. For the Public Good (OLC) Taxes and the Canadian Economy Figure C
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45. For the Public Good (OLC) Debates over Government’s Role (a)
Taxes have increased significantly as a proportion of the total Canadian economy over the past few decades.
Critics argue that taxes and some spending programs reduce productive activity.
Critics also contend that many government programs are inequitable, and hampered by administrative problems.
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46. For the Public Good (OLC) Debates Over Government’s Role (b)
Supporters of government admit that public spending and taxation are not as effective as they could be. But they argue that these problems need to be seen in perspective, given that private markets are also subject to a variety of flaws.
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47. Understanding Economics 6th edition by Mark Lovewell
Chapter 3
The End
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