# Elasticities - Key Phrases/Concepts - Price elasticity of demand - Price elasticity of supply - Income elasticity of demand - Cross-price elasticity of demand - Tax incidence ## Price Elasticity of Demand $ \epsilon_X = \frac{\%\Delta Q_X}{\%\Delta P_X} $ - Probably a negative value. - Categories - Elastic = $|\epsilon_X| > 1$ - Inelastic = $|\epsilon_X| < 1$, increasing the price results in larger total revenue - Unitary = $|\epsilon_X| = 1$ - Factors affecting elasticity - Goods with more substitutes are more elastic. - In general, the higher the price, the more elastic. - In general, the longer the time frame, the more elastic, as we have time to adjust and to find substitutes. - Demand curve - Perfectly inelastic = vertical line; Perfectly elastic = horizontal line - As we move along the demand curve, the elasticity changes as well. ## Other Elasticities $ \frac{\%\Delta y}{\%\Delta x} $ in which $x$ and $y$ can be anything to measure other elasticities. $ \frac{\%\Delta Q}{\%\Delta I} $ - The Income Elasticities - Normal goods = Positive income elasticity - Inferior goods = Negative income elasticity $ \frac{\%\Delta Q_x}{\%\Delta P_y} $ - The cross-price elasticities - Complement goods = Negative cross-price elasticity - Substitute goods = Positive cross-price elasticity ## Price Elasticity of Supply $ \frac{\%\Delta Q_X}{\%\Delta P_X} $ in which $Q_X$ is the quantity supplied. - Supply curve - Perfectly elastic = vertical line - Perfectly inelastic = horizontal line - More elasticity = More rapidly change in production ## An Application: The Incidence of Taxation - Per-Unit Taxes - Tax is a pain imposed on the participants of a relationship - The person who is the most in love, who is the most in love, i.e. who has the most inelastic demand, will do most of the travelling. - Such one will share most of the burden - Calculate the burden - Supposed imposed on the buyers - Demand curve shifts down (shifts left) - Price goes down, hence some of the burden is imposed on sellers - Or, go another way around, supposed imposed on the sellers > [!tip] Which side of the market is more inelastic? That side will bear most of > the burden. But again, elasticity changes in different time frame. ## Conclusion - Legalization of drugs? - If the demand is really inelastic, cutting the supply will not decrease the drugs traded a lot, but will increase the price by a lot. - If that's the case, the revenue of the drug dealers actually increases a lot! - Solution: cut the supply SIGNIFICANTLY