lecture6h

Principles of Microeconomics

Chapter 4: Elasticities of Demand and Supply

• Discusses the measures of elasticity in various economic contexts.

Total Revenue, Price Changes, and Price Elasticity of Demand

• Price elasticity of demand influences total revenue and spending.

• Definitions:

  • Elastic Demand: Responsive to price changes.

  • Unit Elastic Demand: Total revenue remains the same as price changes.

  • Inelastic Demand: Less responsive to price changes.

• Effects of Price Changes on Total Revenue:

  • Price Rise:

    • Elastic: Total revenue rises.

    • Inelastic: Total revenue falls.

  • Price Cut:

    • Elastic: Total revenue rises.

    • Inelastic: Total revenue falls.

• Price Elasticity of Demand Formula:[ PE_D = \frac{% \text{ change in quantity demanded}}{% \text{ change in price}} ]

Effects of Price Changes on Expenditure

• Various cases demonstrating how quantity and price changes affect total expenditure.

Elasticity and Price Reductions

• If demand is elastic, increased sales can lead to overall revenue growth.

• If demand is inelastic, revenue may decline as new sales do not compensate for existing sales losses.

Total Revenue for Rugby Tickets

• A table showing the relationship between ticket price, quantity demanded, price elasticity, and total spending demonstrates the impact of different pricing strategies on consumer behavior.

Elasticity and DART Fares

• Transit options impact elasticity:

  • Elastic demand: fare increase leads to significantly reduced demand and revenue loss.

  • Inelastic demand: fare increases result in minimal changes in demand and increased revenue.

Own-Price Elasticity of Demand - Summary

• Own-price elasticity of demand can be negative, zero, or undefined and indicates consumer sensitivity to price changes:

  • Elastic Demand: (PE_D < -1)

  • Inelastic Demand: (-1 < PE_D < 0)

  • Unit Elastic Demand: (PE_D = -1)

Own-Price Elasticity of Supply - Overview

• Own-price elasticity of supply measures producer sensitivity to price changes:

  • Elastic Supply: (PE_S > 1)

  • Inelastic Supply: (0 < PE_S < 1)

  • Unit Elastic Supply: (PE_S = 1)

Tax Incidence

• Examines how tax burdens are shared between buyers and sellers based on elasticity:

  • Tax types: Specific taxes (fixed amount per unit sold) and ad valorem taxes (percentage-based).

  • Both buyers and sellers are generally affected by taxes unless elasticity is zero or infinity.

Who Bears the Burden of Taxes?

• Burden is shared based on elasticity:

  • Less elastic curves bear more tax burden.

    • If supply is less elastic, sellers carry more burden.

    • If demand is less elastic, buyers carry more burden.

Tax Incidence Examples

• Graphical representation of how tax incidence varies between elastic and inelastic demand and supply conditions.

Tax Incidence Exam-Type Question

• Example question regarding tax burden distribution when demand is elastic and supply is inelastic.

Application – Uber Surge Pricing

• Surge pricing is applied during high demand, often criticized for being exploitative in crisis situations.

• Research utilizes Uber's pricing changes to estimate demand curves and calculate economic metrics.

Uber Demand Curve Estimation

• Researchers analyze pricing data to derive estimates of price elasticity and consumer surplus, with significant findings on economic benefits generated by Uber's pricing strategies.

Implications of High Consumer Surplus

• A high consumer surplus may suggest that Uber's pricing is below what consumers are willing to pay, raising regulatory concerns in some countries.

Expectations from This Lecture

• Objectives include understanding the link between elasticity and total revenue, tax incidence, and the demand identification through Uber's surge pricing.