# ECON100 Tutorial Three Rob Pryce - PowerPoint PPT Presentation

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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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## 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

Tickets for football stadium

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

10,0000.5

=

45,0001.25

= 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

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

### Question 8a

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

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

St

S0

T

T

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 8d

St

S0

T

T

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

Questions?

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