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Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman

Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman. Chapter 4: Working with Supply and Demand. Government Intervention in Markets. Price Ceilings. Price Floors. Taxes. Government Intervention in Markets. Price Ceiling

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Economics: Principles and Applications, 2e by Robert E. Hall & Marc Lieberman

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  1. Economics: Principles and Applications, 2eby Robert E. Hall & Marc Lieberman

  2. Chapter 4:Working with Supply and Demand

  3. Government Intervention in Markets • Price Ceilings • Price Floors • Taxes

  4. Government Intervention in Markets Price Ceiling A government-imposed maximum price in a market.

  5. Government Intervention in Markets When quantity supplied and quantity demanded differ, the short side of the market--whichever of the two quantities is smaller--will prevail.

  6. Government Intervention in Markets A price ceiling creates a shortage, and increases the time and trouble required to buy the good. While the price decreases, the opportunity cost may rise.

  7. Government Intervention in Markets Price Floor A government-imposed minimum price in a market.

  8. Government Intervention in Markets A price floor creates an excess supply of a good. In order to maintain the price floor, the government must prevent the excess supply from driving down the market price. In practice, the government often accomplishes this goal by purchasing the excess supply itself.

  9. Government Intervention in Markets Excise Tax A tax on a specific good or service.

  10. Government Intervention in Markets An excise tax shifts the market supply curve upward by the amount of the tax. For each quantity supplied, the new, higher supply curve tells us firms’ gross price, and the original, lower supply curve tells us the net price.

  11. Price Elasticity of Demand • Calculating Price Elasticity of Demand • Elasticity and Straight-Line Demand Curves • Categorizing Goods by Elasticity • Elasticity and Total Expenditure • Determinants of Elasticity • Using Price Elasticity of Demand

  12. Price Elasticity of Demand Price Elasticity of Demand The sensitivity of quantity demanded to price; the percentage change in quantity demanded caused by a 1 percent change in price.

  13. Price Elasticity of Demand Elasticity of demand varies along a straight-line demand curve. More specifically, demand becomes more elastic as we move upward and leftward.

  14. Price Elasticity of Demand Inelastic Demand A price elasticity of demand between 0 and -1.

  15. Price Elasticity of Demand Perfectly Inelastic Demand A price elasticity of demand equal to 0.

  16. Price Elasticity of Demand Elastic Demand A price elasticity of demand less than -1.

  17. Price Elasticity of Demand Perfectly (Infinitely) Elastic Demand A price elasticity of demand approaching minus infinity.

  18. Price Elasticity of Demand Unitary Elastic Demand A price elasticity of demand equal to -1.

  19. Price Elasticity of Demand Where demand is price inelastic, total expenditure moves in the same direction as price. Where demand is elastic, total spending moves in the opposite direction from price. Finally, where demand is unitary elastic, total expenditure remains the same as price changes.

  20. Price Elasticity of Demand The more narrowly we define a good, the easier it is to find substitutes, and the more elastic is the demand for the good. The more broadly we define a good, the harder it is to find substitutes and the less elastic is the demand for the good.

  21. Price Elasticity of Demand Short-run Elasticity An elasticity measured just a short time after a price change.

  22. Price Elasticity of Demand Long-run Elasticity An elasticity measured a year or more after a price change

  23. Price Elasticity of Demand The more elastic the demand curve, the more of an excise tax is paid by sellers. The more inelastic the demand curve, the more of the tax is paid by buyers.

  24. Other Demand Elasticities • Income Elasticity of Demand • Cross-Price Elasticity of Demand

  25. Income Elasticity of Demand Income Elasticity of Demand The percentage change demanded caused by a 1-percent change in income.

  26. Income Elasticity of Demand Economic Luxury A good with an income elasticity of demand greater than 1.

  27. Income Elasticity of Demand Cross-Price Elasticity of Demand The percentage change in the the quantity demanded of one good caused by a 1-percent change in the price of another good.

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