Price elasticity of demand

Unitary elastic demand $e_{x,p_x} = -1$
Elastic demand $e_{x,p_x} < -1$
inelastic demand $e_{x,p_x} > -1$

For each $p_x-x$ curve, there will be an elastic and inelastic portions, corresponding to the above conditions.

Income elasticity of demand

Measures the proportionate change in quantity demanded of $x$ due to proportionate change in income. Given by,

e_{x,I} = \frac{\Delta x/x}{\Delta I/I} \approx\frac{dx}{dI}\cdot \frac{I}{x}

Usually positive for normal goods. For inferior goods, it is usually negative.

Cross-price elasticity of demand

Measures the proportionate change in the demand for $x$ when there is a proportionate change in the price of $y$ .

e_{x,p_y} = \frac{\Delta x/x}{\Delta p_y/p_y}\approx\frac{dx}{dp_y}\cdot\frac{p_y}{x}

If $x$ and $y$ are substitutes, then $e_{x,p_y}$ is positive. Because if $p_y$ increases, people will buy more of $x$ . Exactly opposite for complements.

Market demand

Consider $n$ individuals and demand curves for a particular good $x$ . The market demand is the sum of demand for all the individuals.

D(x) = \sum_id_i(x)

Taxes

Direct and indirect

Direct tax burden cannot be transferred to another tax payer (income tax), while indirect tax burden can be (GST).

The tax burden is transferred, in the case of GST, from the retailer to the consumer.

The flow of tax burden:

Producer → Distributor → Retailer → Consumer

Developed countries depend mostly on direct taxes, whereas developing and underdeveloped countries depend on indirect taxes for revenues.

This is because higher income in developed countries offers higher income taxes. In India the administrative resources is not strong enough to arrest tax evation.

Sharon Kartika. Last modified: January 04, 2024.