ECON100 Tutorial Three Rob Pryce

1. 3 ECON100Tutorial ThreeRob Pryce

2. 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

3. Question 1 Importance of Determinant Depends on the good/service

4. Question 2 %∆Qj %∆Pi Cross-Price Elasticity of Demand: In words, how much demand for j changes for a change in price of i.

5. Question 2 Substitute: Increase in Pi leads to increase in Qj XPED > 0 Complement: Increase in Pi leads to decrease in Qj XPED < 0

6. Question 3 Determinants of PES Mankiw and Taylor, p.105 Main determinant is TIME HORIZON Often short-run capacity constraints Eg. Sea-front housing

7. Question 4 Examples of perfectly inelastic price elasticity of supply Tickets for football stadium

8. Question 5 Midpoint method: ∆Q ∆P QavPav

9. 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

10. Question 5b Mankiw and Taylor, p.97

11. 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

12. Question 6 Inelastic Elastic

13. Question 7 Income elasticity of demand using midpoint method Midpoint method: ∆Q ∆Inc QavIncav

14. Question 7a (Answer = 2.2) = (10/25) / (10,000/55,000) = (0.4) / (0.18181818) = 2.2

15. Question 7b (Answer = 4.2) = (10/13) / (10,000/55,000) = 0.77 / 0.18181 = 4.23

16. Question 8a

17. 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

18. Question 8b

19. 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)

20. Question 8d St S0 T T

21. 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

22. Question 8d St S0 T T

23. 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

24. Questions? Office hour: Wednesday 12:30, Charles Carter C floor OR Email me!