elasticity principles of microeconomics boris nikolaev
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Elasticity Principles of Microeconomics Boris Nikolaev. $39,500,000,000. The highest profit ever made by a company in a year. GDP of Bulgaria (7.6 million people) 2x GDP of Cyprus (lose to 1 million) 5 x GDP of Zimbabwe (12.5 million people). It turns out…. [ source ]. - PowerPoint PPT PresentationTRANSCRIPT
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ElasticityPrinciples of Microeconomics
Boris Nikolaev
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$39,500,000,000• The highest profit ever made by a company in a year.
• GDP of Bulgaria (7.6 million people)
• 2x GDP of Cyprus (lose to 1 million)
• 5 x GDP of Zimbabwe (12.5 million people)
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It turns out…• 2008 $40,610,000,000.• 2009 45,220,000,000.• What about 98?• 1955? (as far as data goes).
[source]
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Who gets what from a liter of oil in the G7?
[ source ]
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$175,189,824
• Lobbying in 2009.• Oil companies one of the largest spenders in
Washington.• Surprised?• Taxes paid by 5 corporate giants [right here]
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What allows …
… oil companies to make such high profits?… governments to tax so heavily oil (and raise
huge revenues)?…and, why oil?
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Elasticity
P*
Q*
S
D
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What is elasticity?
Since price and demand are negatively related, the elasticity of demand will be ____________.
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Elasticity of Demand
• When Ed > -1 demand is “inelastic”o The relative change in quantity demanded is less than the relative change in price.
• When Ed < -1 demand is “elastic”o The relative change in quantity demanded is greater than the relative change in price.
• When Ed = -1 demand is “unit elastic”o The relative change in quantity demanded is the same as the relative change in price.
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Elastic Demand
Demand is very responsive to changes in price
Ed < -1
The relative change in quantity demanded is more than the relative change in price.
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Inelastic Demand
Demand is not very responsive to changes in price
Ed > -1
The relative change in quantity demanded is less than the relative change in price.
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Inelastic Demand
Q*
P*
D
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Elastic Demand
P*
Q*
D
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Perfectly Inelastic Demand
Q*
D
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Perfectly Elastic Demand
P* D
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Estimated Price Elasticities of Demand for Various Goods
• http://www.mackinac.org/1247
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Algebraic Examples
1. You run a 10% off sale. If Ed = -2, how much more do you expect to sell?
2. You have an overstock and need to sell 30% of your inventories. If Ed = -0.6, how much should you lower price?
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Elasticity and Total Revenue
• When demand is elastic, a decrease in price will increase total revenue.
• When demand is inelastic, a decrease in price will decrease total revenue.
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Why farmers don’t always like good weather?
P*
Q*
D
S
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The market for drugs
P*
Q*
D
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Should we legalize drugs?
Milton Friedman on drugs [watch here]Ron Paul [watch here]
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Determinants of Elasticity
• Availability of substitutes.
• Fraction of income absorbed.
• Passage of time.
• What kind of a good it is.
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Substitutes and Complements
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Normal and Inferior Goods
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Tax Incidence (e.g per unit tax)
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Algebraic example P = 10+Q P= 100-Qunit tax = $10
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Who pays the tax?
Elastic D, Inelastic S Inelastic D, Elastic S
Note: The tax moves toward inelasticity
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Determinants of welfare loss1. Elasticity
2. Taxes