![]() When you hear the phrases “elasticity of demand” or “elasticity of supply,” they refer to the elasticity with respect to price. The question can be framed in terms of the elasticity of tax collections with respect to spending on tax enforcement that is, what is the percentage change in tax collections derived from a percentage change in spending on tax enforcement? With all of the elasticity concepts that have just been described, some of which are listed in Table 1, the possibility of confusion arises. For example, imagine that you are studying whether the Internal Revenue Service should spend more money on auditing tax returns. The elasticity concept does not even need to relate to a typical supply or demand curve at all. The evidence on the supply curve of financial capital is controversial but, at least in the short run, the elasticity of savings with respect to the interest rate appears fairly inelastic. However, if the supply curve for financial capital is highly inelastic, then a percentage increase in the return to savings will cause only a small increase in the quantity of savings. Such a policy will increase the quantity if the supply curve for financial capital is elastic, because then a given percentage increase in the return to savings will cause a higher percentage increase in the quantity of savings. Sometimes laws are proposed that seek to increase the quantity of savings by offering tax breaks so that the return on savings is higher. The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income, as follows: Elasticity can, in principle, be measured for any determinant of supply and demand, not just the price. Similarly, quantity supplied (Qs) depends on the cost of production, changes in weather (and natural conditions), new technologies, and government policies. Recall that quantity demanded (Qd) depends on income, tastes and preferences, population, expectations about future prices, and the prices of related goods. The basic idea of elasticity-how a percentage change in one variable causes a percentage change in another variable-does not just apply to the responsiveness of supply and demand to changes in the price of a product. S’more ingredients: negative or positive cross-price elasticities of demand? ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |