Econ100 tutorial three rob pryce
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3. ECON100 Tutorial Three Rob Pryce. Question 1. Determinants of PED. Mankiw and Taylor, p.95-96. Availability of close substitutes. Necessities or luxuries. Definition of the market. Proportion of income. Time horizon. Question 1. Importance of Determinant Depends on the good/service.

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ECON100 Tutorial Three Rob Pryce

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Econ100 tutorial three rob pryce

3

ECON100Tutorial ThreeRob Pryce


Question 1

Question 1

Determinants of PED

Mankiw and Taylor, p.95-96

Availability of close substitutes

Necessities or luxuries

Definition of the market

Proportion of income

Time horizon


Question 11

Question 1

Importance of Determinant

Depends on the good/service


Question 2

Question 2

%∆Qj

%∆Pi

Cross-Price Elasticity of Demand:

In words, how much demand for j changes for a change in price of i.


Question 21

Question 2

Substitute:Increase in Pi leads to increase in Qj

XPED > 0

Complement:Increase in Pi leads to decrease in Qj

XPED < 0


Question 3

Question 3

Determinants of PES

Mankiw and Taylor, p.105

Main determinant is TIME HORIZON

Often short-run capacity constraints

Eg. Sea-front housing


Question 4

Question 4

Examples of perfectly inelastic price elasticity of supply

Tickets for football stadium


Question 5

Question 5

Midpoint method:

∆Q∆P

QavPav


Question 5a workings

Question 5a: Workings

(50,000 – 40,000)1.50 – 1.00

(50,000 + 40,000)/2(1.5 + 1) / 2

10,0000.5

=

45,0001.25

= 0.222 / 0.4

= 0.555


Question 5b

Question 5b

Mankiw and Taylor, p.97


Question 5c

Question 5c

Total Revenue = Price x Quantity

Price = £1, Quantity = 50,000

Total Revenue = £50,000

Price = £1.50, Quantity = 40,000

Total Revenue = £60,000


Question 6

Question 6

Inelastic

Elastic


Question 7

Question 7

Income elasticity of demand using midpoint method

Midpoint method:

∆Q∆Inc

QavIncav


Question 7a

Question 7a

(Answer = 2.2)

= (10/25) / (10,000/55,000)

= (0.4) / (0.18181818)

= 2.2


Question 7b

Question 7b

(Answer = 4.2)

= (10/13) / (10,000/55,000)

= 0.77 / 0.18181

= 4.23


Question 8a

Question 8a


Econ100 tutorial three rob pryce

GUIDE TO PREVIOUS SLIDE

  • Supply curve shifts left, sellers are only really receiving P-300

  • Look at what they would have supplied when P=200

    • This will be Qs when P=500 with tax

    • And so on

  • Market price is now 700 – this is price buyers pay

  • Sellers receive 700 but pay 300 tax

    • So really they receive 400

  • Quantity supplied and demanded has fallen from 50 to 40

  • This is the more common type of taxation

  • eg. VAT, alcohol duty, tobacco duty


  • Question 8b

    Question 8b


    Econ100 tutorial three rob pryce

    GUIDE TO PREVIOUS SLIDE

    • Demand curve shifts left, buyers have to effectively pay 300 more

    • Look at what they would have demanded when P=500

      • This will be Qd when P=200 with tax

      • And so on

  • Market price is now 400 – this is price sellers receive

  • Buyers pay 400 to sellers but also pay 300 tax

    • So really they pay 700

  • Quantity supplied and demanded has fallen from 50 to 40

  • This method of taxation is less commonly used, but are sometimes

  • eg. National Insurance (demand for labour)

  • eg. Goods bought abroad (Jeans in America)


  • Question 8d

    Question 8d

    St

    S0

    T

    T


    Econ100 tutorial three rob pryce

    GUIDE TO PREVIOUS SLIDE

    • Supply curve shifts left exactly to offset the tax increase (T=300)

    • Pre-tax equilibrium (E0):

      • P0 = 500, Q0 = 50

  • Post-tax equilibrium (Et):

    • Pt = 700, Qt = 40

  • Buyers were paying 500, now they pay 700

    • So they are paying 200 more under the tax

  • Sellers were receiving 500, now they receive 400

    • 700 – T

  • So they are paying 100 of the tax

  • We can check because 200 + 100 = 300 = T


  • Question 8d1

    Question 8d

    St

    S0

    T

    T


    Econ100 tutorial three rob pryce

    Blue shaded bit on previous slide is tax revenue paid by buyers

    Pink shaded bit on previous slide is tax revenue paid by sellers

    Grey shaded bit on previous slide is ‘dead-weight loss’ – look this up if interested


    Econ100 tutorial three rob pryce

    Questions?

    Office hour: Wednesday 12:30, Charles Carter C floor

    OR

    Email me!


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