Lecture 4 - Friday, December 29, 2017

Wednesday, January 3, 2018 7:03 PM

Notes from Questions to discuss

1. Slope is not Elasticity

For A demand curve as shown, its slope = , while its

elasticity equates the percentage of change of quantity as
in response to a percentage change in price
Elasticity =

2. For the following demand curve, the price elasticity can be

measure as shown:

3. Price discrimination: selling a product with price X in a place,

and selling the same product with price Y in another place
4. "product a is elastic to product b" means product a is elastic
compared to product b
5. In question 5, ice cream is elastic to chocolate ice cream
because 'ice cream' is like a general demand, but 'chocolate ice
cream' is a specific demand
6. *Marketers tend to make customers inelastic through making
services and offers* The term "inelastic customer" in market is
"loyal customer"
7. Forecasting is fetching the history of response of a product and
using it to predict in the future using Statistics
8. A feasibility study may expire within hours or days.
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Income Elasticity of Demand

It is a measure of response of percentage change in Demand as a
result of a percentage change in Income

I ---> D
Independent variable ---> Dependent variable

IED =

Negative
Positive %Income --> %Demand
%Income --> %Demand "Relatively poor product
"Relatively a good (Inferior product)
product"

IED

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 product"

IED

IED>1 IED<1
i.e. % QD>% I i.e. % QD<% I
"Luxury Good" "Necessary Good"
With a relatively small percent With a relatively high percent
change in people's income, the change in people's income, the
percent change in people's percent change of people's
demand is relatively higher. demand is relatively lower.

Example
Consider a percentage decrease in people's income, people
will normally save their money for necessary goods and
will abandon (or decrease in) purchasing luxury goods.
That means the impact (measure of response) on the
luxury goods is relatively high, while the impact on
necessary goods is relatively low, i.e. IED of luxury
goods>1, while IED of necessary goods<1

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Cross Elasticity of Demand

Cross Elasticity issues the percentage change in Price of
product X, and its effect (response) on Demand on product
Y
It is a measure of response of a percentage change in
Demand on product "Y" as a result of a change in
percentage in price of product "X"

Unit price x ---> Demand on product y

Px ---> Dy
Independent variable ---> Dependent variable

CED =

CED

Negative
Positive
%Price x --> %Demand on y
%Price x --> %Demand on y
"Complementary Goods"
"Substitute"
i.e. Gas %price , %Demand on Cars

Zero
"2 perfectly independent products"

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Price Elasticity of Supply
It is a measure of response of the percentage of change of
quantity supplied as a result of a percentage change in a
product price

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product price

Unit price ---> Supplied product

P ---> Qs
Independent variable ---> Dependent variable

PES = . It is always Positive

"An increase in a product price motivates suppliers to supply
more quantities, that's why PES is always positive"

Cases of PES
1. PES>1 "Elastic supply"

Elastic supply curve

tends to be horizontal

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2. PES<1 "Inelastic Supply"

Inelastic supply curve

tends to be vertical

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3. PES=1 "Unit Elastic supply"

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4. PES=zero "Perfectly Inelastic Supply"

PES = ,

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 PES = ,

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5. PES= "Perfectly Elastic Supply"

PES = , (Compared to change of price)

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Keep in mind
1. In Markets, Unit Elasticity is very much undesirable, as it
doesn't help in decision making, i.e. is it elastic or not?
2. Consider the presence of perfectly inelastic supply, and
perfectly inelastic demand of a product. How will that be
drawn?

They are non

They are intersecting,
aligned hence there is no
market

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Elasticity and Total Revenue
Total Revenue = Unit price*Quantity Demanded
So it is affected by 2 factors (Price & QD)

Examples
% P (10%) ---> % QD (50%)
TR is affected by the bigger factor, i.e. 50% in this case
Therefore, TR decreases

% P (10%) ---> % QD (50%)

TR is affected by the bigger factor, i.e. 50% in this case
Therefore TR increases

% P (40%) ---> % QD (30%)

TR is affected by the bigger factor, i.e. 40% in this case
Therefore TR increases
Ex: Cigarettes Tax, increase price, and the total
revenues will increase also
Conclusion
For Elastic Demand products, i.e. PED>1 ( QD>% P), the
total revenue will be affected in the direction of change
of quantity demanded

For Inelastic Demand Products, i.e, PED<1 (% QD<% P),

the total revenues will be affected in the direction of
change of Price
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Keep in mind
1. There are 2 types of taxes:
a. Direct taxes, subtracted from salaries
b. Indirect taxes, taxes on products
2. A country performance can be estimated from its
taxation, i.e. An advanced country applies more of the
direct taxes, and a weak country applies more of the
indirect taxes.
3. In case of Inelastic demand product, no competitors, it is
illogical to decrease the price in order to bring more
customers in order to increase Revenues
% P (20%) ---> % QD (18%)
Therefore the total Revenues
4. In Business, the ultimate goal is to achieve maximum
profit by:
a. Maximizing Revenues

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 a. Maximizing Revenues
b. Minimizing Expenses
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Elasticity & Tax Burden
What is the relation between Elasticity and imposing Taxes?
When imposing tax on a certain product, it affects both the
producer and the demander (customer), but who will be
more affected of imposing tax?
The relatively more inelastic curve will bear the bigger ratio
of the tax

Consider a market, where an equilibrium point is achieved

between supply and demand, it has been discussed
previously that imposing tax will shift the supply curve to the
left

Case#1
3. After imposing the taxes, the product price became
40 LE instead of 20 LE

2. After imposing taxes, the supply curve has shifted

to its left making a new equilibrium point at E2

1. The original equilibrium point is at E1, where 20 LE

was the price paid by customers and received by
suppliers.

4. The tax wedge is determined by the difference between

the new price at E2, and the corresponding price on the
original supply curve (E2'), which is 25 LE in that case.
5. At this point it can be seen that the price paid is 40 LE
(from the new equilibrium point on the demand
curve), and the price received by suppliers is only 15 LE
(from the original supply curve)
6. The variance from the original price shows who
(demander or supplier) bears more of the ratio of the
tax, which is the demander, as they are more inelastic
in that case.
*Remember that inelastic curve tends to be vertical*

Tax Wage
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Case#2

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New price after imposing tax = 40 LE
Tax Wedge = E2-E2'= 40-10=30
The supplier will bear the bigger ratio of the tax as supply
curve is relatively more inelastic
Government Revenues = 30*2000=60000 LE

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