ECON100 Tutorial Three Rob Pryce

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# ECON100 Tutorial Three Rob Pryce - PowerPoint PPT Presentation

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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### ECON100Tutorial ThreeRob 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

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 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

Determinants of PES

Mankiw and Taylor, p.105

Main determinant is TIME HORIZON

Often short-run capacity constraints

Eg. Sea-front housing

Question 4

Examples of perfectly inelastic price elasticity of supply

Question 5

Midpoint method:

∆Q ∆P

QavPav

Question 5a: Workings

(50,000 – 40,000) 1.50 – 1.00

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

10,000 0.5

=

45,000 1.25

= 0.222 / 0.4

= 0.555

Question 5b

Mankiw and Taylor, p.97

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

Inelastic

Elastic

Question 7

Income elasticity of demand using midpoint method

Midpoint method:

∆Q ∆Inc

QavIncav

Question 7a

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

= (0.4) / (0.18181818)

= 2.2

Question 7b

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

= 0.77 / 0.18181

= 4.23

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

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)

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

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

Questions?

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