Your Suggestions. Board/slides. Too fast/too slow. Book does not have enough examples.

Transcription

1 Your Suggestions Sale robles and eales in lecture. Donload recitation robles before recitation. Colete eercises in recitations. Reorganize eb site. Have oer oint slides available earlier. Overvie class at te beginning.

2 Your Suggestions Board/slides. Too fast/too slo. Book does not ave enoug eales.

3 Market Deand Fro individual to arket deand. Price elasticity of deand. Incoe elasticity of deand. An eale: te Laffer curve.

4 Fro Individual to Market deand i Individual s deand function for good : (, ) 2 i i = i, X Aggregate deand (arket deand) function for good : ( ) = ( ), 2,, 2,..., n i 2 i,, n i=

5 Market Deand: Eale Consider 2 consuers of CDs: i =,2 Eac consuer as te deand function: i = i Consuers ave different incoes: = $00 2 = $200

6 Market Deand: Eale Individual deand functions: = $ 00 2 = $ 200 Market deand: X = $ for $00 X = 200 $ for $ 00 $ 200

7 Inverse Market Deand: Eale Market deand: = $ 300 for $ 00 X 2 X = 200 $ for $ 00 $ 200 Inverse deand: = $ 50 X / 2 for $ 00 = $ 200 X $ 00 $ 200 for

8 Market Deand Curve Individual deand curves: Market deand curve: i X

9 Aggregation Q:Is te su of our deands (aggregate deand) for a good alays equal to te deand of one individual ose incoe is given by te su of our incoes? In oter ords is aggregate deand equal to te deand of soe reresentative consuer o as incoe equal to te su of all individual incoes?

10 Aggregation A: No, for to reasons:. Individuals ave different references 2. Even if individuals ad te sae references, soe goods are necessary goods, and oters are luury goods.

11 Aggregation: Eale it a Necessary Good 2 consuers it sae references = 2 Equal incoe distribution: X = = Unequal incoe distribution: 20 $44 $00 $56 X = =

12 Elasticity Looking for a easure of o resonsive individual and aggregate deands are to canges in rice and incoe. Tis easure is iortant to deterine effects of taes on rices.

13 One Candidate One candidate easure of o resonsive deand is to rice canges is te sloe of te deand function (at a given oint): X ( ) 2, 2 n,,,...,

14 Proble it Sloe of Deand Function X G =00 X Eale: ere reresents gallons of gasoline and is te rice of one gallon. Cange units and easure gasoline in quarts (/4 of gallon). Let reresent quarts of gasoline. Deand is: X Q X Q = 400 4

15 Elasticity Instead of using sloe, use rice elasticity of deand : Advantage: indeendent of units ( ) = 2, 2,...,,, X X n ε ε ε

16 Eale Cont d Deand for gasoline: X G =00 Elasticity: ε = XG = 00 Deand for gasoline: Elasticity: ε = 4 XQ = X Q = = 00

17 Proerties of Elasticity Elasticity canges it deand: ε = ε = ε = ε = X

18 Proerties of Elasticity A deand function is elastic if: ε > A deand function is inelastic if: ε < A deand function is unit elastic if: ε =

19 Eale: Cobb-Douglas Deand function: = c Sloe: = c 2 Elasticity: = c 2 = 2 c

20 Incoe Elasticity of Deand Describes o resonsive deand is to canges in individual or aggregate incoe. Defined siilarly to rice elasticity: ( ) = 2,, η

21 Incoe Elasticity of Deand Noral goods: Inferior goods: Luury goods: ( ) 0,, 2 > ( ) 0,, 2 < ( ),, 2 >

22 Te Laffer Curve Ho do governent ta revenue cange en te ta rate canges?

23 Te Laffer Curve t = 0 If : zero revenues. If t = : zero revenues. Tere eists a ta rate tat aiizes revenues. Ta R. * t 0 * t t

24 Te Laffer Curve Consider a oulation of identical orkers Eac orker earns an ourly age * Eac orker as to ay a ta t on is/er age Tus a orker s net ourly age is: = ( t) *

25 Te Laffer Curve A orker decides o any ours to ork according to te folloing labor suly function: = Ta revenue: a = ) ( t) * a T = t

26 Te Laffer Curve Ta revenue: T = t Ho do revenues cange it te ta rate: T t = + t t

27 Te Laffer Curve Ho do revenues cange it te ta rate: T t = + t t Coute: a (( t) ) = = a(( t) ) a t t

28 Te Laffer Curve Coare it = a(( t) ) a t = a(( t) ) a ( t) so tat t = ( t)

29 Te Laffer Curve We kno tat: Ten: t = ( t) T t = + t t = t ( t)

30 Te Laffer Curve We ant ta revenues to decrease it te ta rate: T t = t ( t) < 0 Tis occurs en: < t ( t)

31 Te Laffer Curve Tis occurs en: < t ( t) Rearrange: > ( t) t

32 Te Laffer Curve Condition: Coute elasticity of labor suly: ( ) t t > ( ) a a t t t a ) ) (( ) ) (( = = a

33 Te Laffer Curve Tus e ave tat ta revenues increase en governent reduces ta rate if: a ( t) > Elasticity of labor suly estiated to be at ost 0.2 Ta rate on labor incoe is at ost 0.5 t

34 Te Laffer Curve Elasticity of labor suly estiated to be at ost 0.2 Ta rate on labor incoe is at ost 0.5 Plug into our condition and ceck tat it is not verified: a > ( t) t 0.2 > =