...Tax Incidence and Elasticity of Demand & Supply In Canada and other free societies, the government provides social services in order to protect the freedoms of its citizens and to uphold the well-being of society as a whole. The government funds these services through revenue acquired by taxing three economic bases: income, wealth and consumption. This report will focus on consumption tax, also referred to as sales tax. Three popular commodities that are subject to sales tax in Canada are gasoline, cigarettes and automobiles. Interestingly, both the consumers and the producers of these items may bear some or all of the sales tax burden. How is this possible? By analyzing the elasticity of demand and supply for automobiles, gasoline and cigarettes, the answer becomes clear. To begin, automobiles are a commodity worth investigating in regards to tax incidence. The automobile is an asset that most Canadians will consider investing in, as nearly everyone requires a means of transportation. Like any other product or service sold, where the tax burden on automobiles falls depends on the commodity’s elasticity of supply and demand. The demand on automobiles is quite elastic in regards to price. In general, the automobile industry in Canada bears an elasticity of demand of about -4. This elasticity of demand is a result of the fact that consumers have a choice when it comes to deciding upon a means of transportation. If one does not like the pricing on a particular make or model...
Words: 1737 - Pages: 7
...concepts of price elasticity of demand and elasticity of supply to explore and explain the large fluctuations in the retail price of gasoline over the last 3 years. Use price elasticity concepts to explore the accompanying closure of many gasoline retailers. Also, discuss the impact of cross-elasticity of demand. According to various literatures petroleum is the single largest source of energy used in the United States. It is said that the USA uses two times more petroleum than either coal or natural gas and four times more than nuclear power or renewable energy sources. However, before petroleum can be used it is sent to a refinery where it is physically, thermally, and chemically separated into fractions and then converted into finished products such as the gasoline that is purchases at the pumps. Fluctuations in the average gasoline prices has been caused for concerns, this paper will attempt to look at this through the economic concepts of price elasticity of demand and supply to explain the fluctuation in gasoline retail prices in the USA over the past three years. Price elasticity of demand measures the degree to which unit sales of a product or service are affected by change in price. The demand for a product is said to be in-elastic if a change in price has little effect on the number of units sold. On the other hand demand is said to be elastic if a small change in price has a substantial effect on the number of unit sold. The price elasticity of supply is...
Words: 1484 - Pages: 6
...Keller Graduate School Business Economics 26 July 2014 Project I The price of gasoline fluctuates due to the price of crude oil. Gasoline is made from crude oil (found in the earth). Gasoline prices have been on the rise due to increasing crude oil prices. West Texas Intermediate (U.S) and Brent Crude (World) are two of the most important crude oil market suppliers (Dent & Sakurai, 2014). These organizations crude oil price is mandated by the Organization of Petroleum Exporting Countries (OPEC). Private business owner for gasoline stations seeks a higher maximum profit per gallon when prices increase. But, when the price of gasoline increases it affects the economy. Consumers are hit with a tight budget on their finances to sacrifice a gallon of gas. As, prices increase gasoline stations become competitive; usually prices are slightly close. Driving within my city, I notice that station prices are higher or lower, and as I research the topic gasoline it gives me a clearer understanding. It’s noticeable that the same amount of vehicles is at each station. From personal opinion, I believe it depends on the location (which side of the highway) and brand name. I’m a consumer that is more concerned with price; therefore if the station on the other side of the highway is offering a lower price, I’ll go the extras to get that price. Grocery stores have made it convenient for consumers to save at the pump, by turning one’s grocery bill into...
Words: 2251 - Pages: 10
...Estimating the Elasticity of Demand for Gasoline Professor Pushan Dutt The graph below shows the evolution of the price of oil (adjusted for inflation) since 1957. Note a couple of sharp jumps and collapses in the price of oil. 1. 2. 3. 1973: : 2.75 % of global production was withheld; Prices in nominal terms jumped from $3.5 a barrel to $10 a barrel 1979: 5.68 % of global production withheld; Prices in nominal terms jumped from $15 to $32 a barrel. 2007: Oil prices increase from $60 to reach a peak of $128, followed by a rapid collapse Why do we observe such sharp swings in oil prices? The answer lies in the elasticity of demand and supply. For this exercise we will focus on the demand side and estimate the price elasticity of demand for oil. We will focus on the US and use time-series data to estimate this demand function. Here are the somewhat modest goals of the assignment: 1. To convince you that demand functions and elasticities are measurable, rather than purely abstract concepts. 2. To provide practice in manipulating and interpreting demand functions particularly constant-elasticity demand functions 3. To motivate your study of linear regression in UDJ by providing an example of an application. I will lead you through the steps without explaining the statistical methods of regression. Such methods are not part of this course but you will see them in detail in your UDJ core course. © INSEAD Step 1: Write a Model The first, and perhaps...
Words: 1390 - Pages: 6
...books Sell books Help Sign out SubmitClose Home HomeBooks STUDY Textbook SolutionsQ&ATutors NEW CAREER CENTER CareersInternships CollegesScholarships home / study / business / economics / questions and answers / the demand in japan for gasoline is inelastic and ... Question The demand in Japan for gasoline is inelastic and therefore not very sensitive to market prices. Given that, describe the effect of each of the following on the quantity demanded or the demand for gasoline in Japan. Indicate whether the effect of each is an upward or downward movement along a given demand curve or instead involves an outward or inward shift in the demand curve for gasoline. Explain your answers. a. A sharp increase in the average price of gasoline in Japan.b. A sharp rise in the price of automobiles in Japan.c. A fall in the price of public transportation in Japan.d. A fall in the price of electic powered cars in Japan. Comment Comments Expert Answer Suresh Reddy Suresh Reddy answered this 1 hour later Was this answer helpful? 1 0 2,447 answers Suresh Reddy 2,447 answers Top Subjects: Operations Management, Finance, Computer Science Solution : The price elasticity of demand is defined as the percentage change in quantity demanded divided by...
Words: 1507 - Pages: 7
...Page 3 Consumer Response to Changes in gas prices Page 3 Price Elasticity Page 4 Suppliers Response to Price Changes Page 4 Equilibrium Prices under low price elasticity Page 5 What Causes Gas Prices to Increase Page 6 Opportunity Cost Page 7 Conclusion Page 7 Introduction Prices are set by demand and supply. When supply falls, prices rise quickly. The demand for oil continues to hit a record high. Countries like China and India are consuming it more frequently as they industrialize, but cars and power factories. However, the supply of gasoline has been restricted by certain requirements forcing oil refiners to manufacture different gasoline for an assortment of purposes. The price of gasoline reflects producers’ costs and consumer’s willingness to pay. Gasoline prices tend to rise if the cost to produce and supply such commodity rises, or if people decide to buy less gas at the current price (when supply is greater than demand). The price of gasoline will stop rising or falling when a price is reached at which quantity demanded is equal to quantity supplied by producers, otherwise known as equilibrium. Consumer Response to changes in the price of gas 3 The rising price of gas will affect consumer spending rather than significantly impacting the amount of gasoline being purchased. The major aspect of the consumer life affected by the spike in gasoline prices is the change made to their expenditures across...
Words: 1184 - Pages: 5
...The Effects of Petroleum Prices on the Economy Crude oil prices have taken a dive in the last month, causing the gasoline prices to plummet. Consumers are more than ecstatic to see the prices fall, but this current trend in prices will undeniably be short term. For most of us the prices of petroleum is only apparent at the gasoline pump, but there are multiple products affected such as diesel and heating oil. The intent of this paper is to focus more on gasoline prices, supply and demand of gasoline, and elasticity demand of gasoline, externalities, regulations, and taxes that have put into place regarding gasoline. Also, explaining the underlying origin of such a histrionic change will give a better perspective to all consumers. Let’s start by explaining what OPEC is and their involvement in the petroleum market. Organization of Petroleum Exporting Countries (OPEC), is an intergovernmental organization consisting of Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, United Arab Emirates, Algeria, Nigeria, and Angola ( Brief History, 2015). OPEC was established in 1960 with five original countries and has since added numerous more. The initial and current objective of the OPEC is to maintain prices that are both consistent and protected for the producers of petroleum. OPEC intends to supply the consuming nations with petroleum while gaining a just return on capital to those investing in the industry ( Brief History, 2015). How have changes...
Words: 1240 - Pages: 5
...my educational perspective. His rationale for this business venture is that American consumers have officially accepted the insanely high gasoline prices and what he doesn’t earn in gas sales, he will compensate with convenience item sales. Willing to do anything to assist my family and also not quite sure if it is a smart investment, I told Aly I would do my research and relay my findings. In order to effectively help ALy, there are certain relevant economic principles that must be assessed and determined. The issues to be addressed when starting a business, such as a gas station, are: demand determinants, supply determinants, costs of production, pricing, and normal or economic profit or loss. Demand Determinants Before any business can begin, regardless of the type of business, the potential business owners and investors must first determine if the demand for the products and/or services the business is providing is high or low. As gas consumers, certain factors are assessed in determining their reactivity to gas prices. Gas consumers must ask themselves: What factors would make them more or less susceptible to price changes in the gasoline industry? Has he/sheresponded differently to price changes in gasoline during certain periods in their life? Why is it that gas price changes at certain stations seem to affect them more than gas price changes in the industry as a whole? In consideration to these questions, the determinants may be a number of things. The most important...
Words: 3782 - Pages: 16
...my educational perspective. His rationale for this business venture is that American consumers have officially accepted the insanely high gasoline prices and what he doesn’t earn in gas sales, he will compensate with convenience item sales. Willing to do anything to assist my family and also not quite sure if it is a smart investment, I told Aly I would do my research and relay my findings. In order to effectively help ALy, there are certain relevant economic principles that must be assessed and determined. The issues to be addressed when starting a business, such as a gas station, are: demand determinants, supply determinants, costs of production, pricing, and normal or economic profit or loss. Demand Determinants Before any business can begin, regardless of the type of business, the potential business owners and investors must first determine if the demand for the products and/or services the business is providing is high or low. As gas consumers, certain factors are assessed in determining their reactivity to gas prices. Gas consumers must ask themselves: What factors would make them more or less susceptible to price changes in the gasoline industry? Has he/sheresponded differently to price changes in gasoline during certain periods in their life? Why is it that gas price changes at certain stations seem to affect them more than gas price changes in the industry as a whole? In consideration to these questions, the determinants may be a number of things. The most important...
Words: 3783 - Pages: 16
...Few studies have estimated gasoline demand in Canada. Most of these studies have either failed to recognise ali the ways in which consumers can react to gasoline priče changes ог have implemented рге-1973 data which did not provide good estimates of priče elasticities (Dewees et al, 1975; Dahl ,1978; Shalaby and Waghmare, 1980). Some models attempt to estimate the components of gasoline demand using aggre-gated data (Gallini 1983; Dahl 1982). The problem with these models is that they do not identify the relationship between the household decisions on vehicle holdings and on usage. These two decisions are likely to be dependent; the use of a vehicle depends on its type and the type of vehicle chosen depends on its expected use. Since these decisions are made within the household, household data should be used for estimating the various components of gasoline demand. This paper provides an estimate of household gasoline demand in Canada by applying a detailed model to pooled time-series (1969-1988) and cross-sectional provincial data. The model recognises three major behavioural changes that households can make in response to gasoline priče changes: drive fewer miles, purchase fewer cars, and buy more fuel-efficient vehicles. In the model, fuel есопоту is treated in considerable detail. The two components of the fuel есопоту of new cars sold—the technical fuel efficiency of various classes of cars and the distribution of new car sales according to their interior volume...
Words: 6621 - Pages: 27
...Questions and Answers from Lesson I-7: Elasticity Practice Questions and Answers from Lesson I-7: Elasticity The following questions practice these skills: Use the midpoint method for calculating percent change. Compute price elasticity of demand. Identify elastic and inelastic demand according to the price elasticity of demand. For elastic demand, apply the negative relation between price and revenue. For inelastic demand, apply the positive relation between price and revenue. Remember demand is more elastic when there are more substitutes or closer substitutes. Compute the price elasticity of supply. Compute cross-price elasticities of demand. Relate cross-price elasticities of demand to gross substitutes and gross complements. Identify elastic and inelastic portions of a linear demand curve. Compute income elasticity of demand. Question: Amazon.com, the online bookseller, wants to increase its total revenue. One strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount. Group A (sales per week) 1.55 million 1.65 million Group B (sales per week) 1.50 million 1.70 million Volume of sales before the 10% discount Volume of sales after the 10% discount a. Using the midpoint method, calculate the price elasticities of demand for group A and group B. b. Explain...
Words: 4184 - Pages: 17
...How Crude Oil Prices Affect Gas Prices Crude oil prices make up 71% of the price of gasoline. The rest of what you pay at the pump depends on refinery and distribution costs, corporate profits, and Federal taxes. Usually, these costs remain stable, so that the daily change in the price of gasoline accurately reflects oil price fluctuations. (Source: EIA, FAQ, December 6, 2013) It usually takes about six weeks for oil price changes to work their way through the distribution system to the gas pump. Oil prices are a little more volatile than gas prices. This means oil prices might rise higher, and fall farther, than gas prices. Historical Oil and Gas Prices: Oil and gas prices have been especially volatile since the 2008 financial crash. Here's a look at their peaks and valleys, and what caused the price swings. * 2014 - Prices remained around $100/barrel. That's because the U.S. has plenty of shale oil. 2013 - Oil rose swiftly to $118.90/barrel on February 8, sending gas prices to $3.85 by February 25. Prices had started rising earlier than normal thanks to Iran's threatening war games near the Straits of Hormuz. What Causes High Oil Prices?: Like most of the things you buy, oil prices are affected by supply and demand. More demand, like the summer driving season, drives higher prices. There is usually less demand in the winter, since only the Northeast U.S. uses heating oil. However, oil prices are also affected by oil price futures, which are traded on the commodities...
Words: 2488 - Pages: 10
...barrels) of gasoline were consumed2 in the United States, a daily average of about 368.51 million gallons (or 8.77 million barrels). This was about 6% less than the record high of about 142.35 billion gallons (or 3.39 billion barrels) consumed in 2007. 1There are 42 U.S. gallons in a barrel. The world’s demand for oil increased sharply for several years, peaking at 86 million barrels per day in 2007. However, the global economic slowdown in recent years reversed this trend and demand fell for two consecutive years to just 85 million barrels per day in 2009, or 1 million barrels per day less than at its peak before rebounding in 2010. The Energy Information Administration expects growth to accelerate over the next two years reaching 88.8 million barrels per day in 2012 and nearly 89.7 million barrels per day in 2013. The EIA projects consumption in the Organization for Economic Cooperation and Development (OECD) countries to be nearly flat in 2012 and 2013. Growth is concentrated in the non-OECD countries, including China, Brazil, and the Middle East with world gains of about 0.8 million barrels per day expected in 2012 and another 0.9 million barrels per day in 2013. Price Elasticity of Demand for Gasoline A meta-analysis by Molly Espey, published in Energy Journal. Espey examined 101 different studies and found that in the short-run (defined as 1 year or less), the average price-elasticity of demand for gasoline is -0.26. That is, a 10% hike in the price of gasoline lowers...
Words: 1675 - Pages: 7
...Chapter 7: Elasticity 1 What you will learn in this chapter 1. Define and measure elasticity of demand and elasticity of supply. 2. Determine the relationship between demand elasticity and total revenue. 3. Understand the factors that determine elasticity of demand and elasticity of supply. Punchline • Imagine that some event drives up the price of gasoline (think about two examples) • How would consumers respond to the higher price? • By how much would consumption of gasoline fall? Answer to the gasoline question • Many studies have examined consumers’ response to gasoline prices. • Consumption responds more in the long run than it does in the short run. • A 10% increase in the gasoline prices reduces gas consumption by about 2.5% after a year and about 6% after five years. Roadmap 1. Elasticity of demand 2. Measurement of price elasticity 3. Elasticity and total revenue 4. Determinants of price elasticity of demand 5. Other demand elasticity measures 6. Elasticity of supply 7. Determinants of price elasticity of supply Elasticity of demand • The price elasticity of demand is a measure of how much consumers respond to changes in price. • Total revenue that one receives from selling a good is the price of the good times the quantity sold: TR = P*Q • Seller’s dilemma: raise or lower the price? • Can be solved by knowing the elasticity of demand. Measurement of price elasticity • Problem: we cannot measure consumers’ responsiveness to changes in price by looking at...
Words: 1298 - Pages: 6
...4 Elasticity: A Measure of Responsiveness Chapter Summary This chapter explored the numbers behind the laws of demand and supply. The law of demand tells us that an increase in price decreases the quantity demanded, ceteris paribus. If we know the price elasticity of demand for a particular product, we can determine just how much less of it will be purchased at the higher price. Similarly, if we know the price elasticity of supply for a product, we can determine just how much more of it will be supplied at a higher price. Here are the main points of the chapter: • The price elasticity of demand—defined as the percentage change in quantity demanded divided by the percentage change in price—measures the responsiveness of consumers to changes in price. • Demand is relatively elastic if there are good substitutes. • If demand is elastic, the relationship between price and total revenue is negative. If demand is inelastic, the relationship between price and total revenue is positive. • The price elasticity of supply—defined as the percentage change in quantity supplied divided by the percentage change in price—measures the responsiveness of producers to changes in price. • If we know the elasticities of demand and supply, we can predict the percentage change in price resulting from a change in demand or supply. Applying the Concepts After reading this chapter, you should be able to answer these four key questions: 1. How does the price elasticity of demand vary over time? 2...
Words: 6227 - Pages: 25
