Elasticity

Activity

The Economic Education Group of the Federal Reserve Bank of St. Louis: Scott A. Wolla's "Higher Gasoline Prices: Temporary or Time to Buy a Hybrid?"

• Read this pamphlet and attempt the questions before viewing the answers. The answers are provided to you as a self-check.

OpenStax College: "Principles of Microeconomics, Chapter 5: Introduction to Elasticity"

• Read this chapter to learn about the concept of elasticity.

Massachusetts Institute of Technology: John Gruber's "Lecture 3: Elasticity"

• Watch this lecture, focusing on both how elasticity is calculated as well as its potential implications for health care. Consider if you agree or disagree with the possible social and health implications of changing the overall elasticity of demand for national health systems.

Khan Academy: "Price Elasticity of Demand"

• Watch this video about price elasticity of demand.

Khan Academy: "More on Elasticity of Demand"

• Watch this video about elasticity of demand.

Khan Academy: "Constant Unit Elasticity"

• Watch this video about constant unit elasticity.

Khan Academy: "Total Revenue and Elasticity"

• Watch this video about total revenue and elasticity.

Khan Academy: "More on Total Revenue and Elasticity"

• Watch this video for more about total revenue and elasticity.

Khan Academy: "Cross Elasticity of Demand"

• Watch this video about cross elasticity of demand.

Khan Academy: "Elasticity of Supply"

• Watch this video about elasticity of supply.

Khan Academy: "Elasticity and Strange Percent Changes"

• Watch this video about elasticity and strange percent changes.

Wolfram Demonstrations Project: "Tax Incidence"

• To use this simulation, you must download and install the Mathematica Viewer from the Wolfram Demonstrations Project. Although this software is free, it is a sizable download. This activity is therefore optional.

This guided simulation is meant to show you how a tax is shared between the producer and the buyer. The buyer pays their share of the tax as part of the transaction, and the seller sells less and receives less revenue. This lost revenue is one way that producers "pay" their share of the tax.

Once you have downloaded the software package to your desktop, open the demonstration and read all the instructions. Set the sliders so that the elasticities of both supply and demand equal 1.50 and the tax is 0.75. In this case, the tax incidence is shared equally between the producer and the buyer. In addition to each having 50% of the tax burden, they also share equally in the deadweight loss.

Now increase the slope of the demand curve (making demand less elastic). What happens to tax incidence? Whose share increases? Record the results in your notes, then decrease the slope of the demand curve. What happens to deadweight loss, and how is the tax incidence shared?

Finally, set demand at is max elasticity and supply at its minimum elasticity. What do you observe? Record the result and then set the sliders to the opposite: demand elasticity at a minimum and elastisticity of supply at a maximum.

In which markets would the producers or sellers be the most vocal about a tax increase? Under what circumstances would buyers be more vocal about a tax increase? Record your thoughts in your notes. (Hint: It has a lot to do with whether the market is for a necessity good or a luxury good.)