Thursday, February 23, 2006

Elasticity

Some of you looked confused on the changing elasticity of a straight line with "unchanging" slope. Here's an example - unfortunately, I can't draw it here, but assume that it is a downward sloping, unit elastic curve (it looks like a regular demand curve).

Because of the differences in quantities, even if the change in price stays the same, the percentage change in Q will differ along the demand curve.

So - if the change from $10 to $9 results in a change in QD of 1 to 2:

2-1/(2+1)/2 over 9-10/(9+10)/2 = 1/1.5 over 1/9 = .66/.11 = 6 = elastic


But, further down the curve, as the price changes just one dollar, the QD's are different, so the percentage change is different. For example, further down the same demand curve, if the price fall from $6 to $5, the QD rises from 5 to 6:

6-5/(6+5)/2 over 6-5/(5+6)/2 = 1/5.5 over 1/5.5 = .18/.18 = 1 = unit elastic


Then, even further down the same demand curve, the QD's are also different. For example, when price falls from $3 to $2, the QD rises from 8 to 9:

9-8/(9+8)/2 over 3-2/(3+2)/2 = 1/8.5 over 1/2.5 = .12/.4 = .3 = inelastic.


Even though the change is $1 in each part of the curve, and even though the QD is only changing by 1 each time, because of the law of demand and the fact that you're looking for percentage change, the elasticity can be different in different parts of the curve.

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Good job on the three in the previous post - you have the changes down really good there.

Other things to tease your brain:

1. When would you want to own a business that sells price-elastic products? Why?

2. In 2000, cattle were selling for 69 cents a pound, up from 61 cents a year earlier. This was despite the fact that supply increased over the year.

3. The rent for apartments in New York City has been rising sharply. Demand for apartments in New York City has also been rising sharply. This is hard to explain, because the law of demand says that higher prices should lead to lower quantity demanded. Do you agree or disagree? (and, as always, explain)

4. Taxicab fares in most cities are regulated. Several years ago, cab drivers in Boston obtained permission to raise their fares 10%, and they anticipated that revenues would increase by about 10% as a result. They were disappointed, however. When the commissioner granted the 10% increase, revenues increased by only about 5%. What can you infer about the elasticity of demand for taxicab drivers? What were cab drivers assuming about the elasticity of demand? (You may not be able to answer this one without looking up other ways to determine elasticity in your book) :)


And a tougher one, just to strain your brain even more:
5. Studies have fixed the short-run price elasticity of demand for gasoline at the pump at -.20. Suppose that international hostilities lead to a sudden cut off of crude oil supplies. As a result, US supplies of refined gasoline drop 10%.
If gasoline was selling for $1.40 per gallon before the cutoff, how much of a price increase would you expect to see in the coming months?



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Any questions from you?

27 comments:

forsnic said...

i almost thought about living in new york until i heard the rent prices. lol. my thoughts are because there is such a high demand for apartments in NYC that the price must also increase to ensure that only a limited number of people can get housing. the rest must move somewhere else! there is only a limited amnt of space and apartments in that city, so because people want it so much more, it is primo property hence the price increase.

forsnic said...

it is obvious that taxi drivers aren't very smart and that is why they are driving them... but.. since there are other modes of transportation (ie rideshare, bus, subway) people didnt want to pay more for taxi rides when they don't have to.

DrFeelGood said...

i actually have a question regarding elasticity... if the price of a substitute falls making demand rise but the substitute is not something desired by the consumer, does that constitute an inelasticity

helen said...

I think the rent in NYC is high because there is such a high demand, land is limited, and lots of people who want to live in NYC despite the expense

KM said...

For Nate's question: in general, the more substitutes...

Actually, I'll change my mind and see if anyone else can answer it for you. :)

I'll check back later - keep thinking!

KM

KM said...

And - for the cab drivers - what can you infer about their elasticity? And their assumptions about elasticity of their customers?

(Hint: look up Total Revenue Test. We haven't gotten there yet, but it will help explain it better)

KM

emkatbuto said...

I watched the elastic video and i can see why he says connects the dots all the time...I do have to say, it was nice to view a class that could get through a whole lecture without interuptions, i think if class ran like this we all would learn much more and benifit, (Hint???).

emkatbuto said...

Going through activity 18 I believe I am getting a bit confused on part b. How does the elastic demand change for the households if the good is inelastic but the incomes are different. In which would the demand be greater?

cranjos said...

along with ms. butorac, i'm also slightly confused on part B. electricity makes up for 1/4 of A's income, where it only makes up 1/12 of B's, meaning it costs a lot more to A than it does to B even though it costs the same exact amount. does this make it inelastic since its more of a necessity than a luxury?

cranjos said...

i agree with helen...
since land is limited in NYC, people are forced to pay a higher amount for rent, and since land in NYC is of such great value, the demand is very high. people are going to be willing to pay rent for land in NYC, no matter how much it costs, and realators understand that

KM said...

Sorry, guys, I didn't bring the assignment home with me. I'll check it out tomorrow morning. Don't panic - we'll go through it.

A day without interruptions? Well, in teacher-land, that's called a pipe dream. :)

KM

amepham said...

it makes sense that the demand and price can both rise on the apartments, because we all know that an apartment in NYC is very expensive and hard to find...but everybody still wants them. renters can get away with raising the prices because so many ppl want them and some are actually willing to pay.
so im thinking that NYC apartments are somewhat elastic because to me they are a luxury.

amepham said...

hmmm...well since i don't have my book here i'm just gonna say what i think might be it.
ok, if the taxi fare goes up ppl will just start using other means of transportation. which would cause the demand for taxi drivers to go down? i think that might be more S&D but idk.

Bethany said...

1. The only reason why I can think of someone wanting to sell something elastic is if they like competition. And if they want to get the best product out to the public as possible, because they would constantly have to keep improving their good.

2. That's an easy answer. The increase in demand for beef must have been so much greater than the increase in supply.

3. The law of demand only speaks about quantity demanded. The DEMAND curve for apartments in New York City must have shifted.

4. Taxicabs must be an elastic demand. The drivers must have assumed that people are very dependent on their form of public transportation.

5. I'm not really sure how to do this one because the problem doesn't give the price after the dropoff. It mentions change in supply, but there must be formula I don't have.

Bethany said...

Nate, I think I can answer your question. In class, Mrs. M said that if nobody desires a product, there is no market for that good, so elasticity wouldn't apply. But if you're talking about a specific person who doesn't desire the substitute, then the good isn't truly a substitute for the original good. So, in that case, the original good is more likely to be inelasitic because their are no other alternatives. I hope that answers your question.

jacnbox said...

im confused. is there a difference between price-elastic and unit elastic? are both of those different from good-ole elastic? seriously, if they are the same things, then some economist needs to get whacked upside the head for confuddling me!

jacnbox said...

new york city is the most crowded city in america. it is the center of so many things. times square is called the crossroads of the world. because of the amount of business conducted in nyc, it doesnt matter if a room sells for $2000/mnth or $7000/mnth. the need for living space is so high that people will pay whatever it takes. nyc has a higher standard of living than most other places.

cherie said...

I also believe I am confused with activity 18 part B.

cherie said...

I think I am understanding elasticity but I'm also a little worried I may be wrong and am not understanding. I am second guessing myself.

Annie said...

Owning a business that sells price elastic-goods would only be reasonable if a owner could "get out" quickly, such as in the stock market, yeah you have a share of the business but you can sell at anytime, so if the business is on the stock market it would make sense that a person would own at least part of it

Annie said...

in response the the taxicab drivers, think that they drivers assumed that they were irreplacable and business men and women as well as other cab users would be willing to continue to use the increased rate cabs. HOwever the drivers didnot take into account the intelligence of the consumer in that they could found other modes of public transportation to get to work. such as bus, carpool, walk, or ride bike. (also may be a reduced rate in the number of commuters, a movement of people from the suburbs to the city would cause less taxi needs)

theczyzewicz said...

1. You would want to own a business that sells price elastic goods when P decreases and TR increases, because you want your TR to be as high as possible.

Did you finish number two or am i just reading it wrong?

3. I disagree because the apartments are apparently inelastic, because there are many people that need somewhere to stay at that very moment. Therefore they will pay as much as they need to, and since the price is rising, they will have to pay whatever the price is.

4. TR would only increase by 10 percent if the cabs were unit elastic, but since they are inelastic, the TR will increase by less than 10%.

NicolleM said...

I'm pretty sure I'm understanding this stuff. And, I like using the total revenue thing a lot more than the coefficient thing. Anyways...
2.) The price for beef went way up because the demand exceeded the rising supply.
4.) The drivers are assuming that taxis are an inelastic good, however, there are several substitutes for them. Therefore, the price can go up, but the the QD isn't going to go with it because people can take the bus and such.
5.) Would this question be answered by doing the coefficient thing and solving for the new price? I have no idea...I think I'm making things up

DrFeelGood said...

I always wondered on these blogs that if there are people that like to answer every stinkin question (bethany...lol) i cant really say anything new besides yea i agree or no i disagree which would be agreeing with someone else who commented off another person so in actuallity i agree with them and im just confused on what to say... KM please send help...---...

forsnic said...

this is my thought on the price-elastic thingy. if people are rich it would be wise to own that type of business because people will have more money to spend on non-necessity stuff, aka luxuries. this would be good for business!!! however if people are making less then it would suck to own one.

Reid said...

Okay, seing that I'm not really getting this stuff, I'm just a poser and act like I am I have some questions that maybe you guys can help me figure out. Okay. First off, I really don't understand that whole vanilla ice cream scenario. How can vanilla be less elastic. I can see if we were only looking at vanilla ice cream, then you can only choose different brands of vanilla, making substitutes minimal and therefore becoming less elastic, but the question didn't say that we were looking at just vanilla ice cream, not only would you have the choice of having chocolate, strawberry, and all of the other flavors, you would also have different types of deserts. This would provide more substitutes compared to if we were looking at all of the ice cream where all of the flavors have been covered and you could only choose from the different desserts, thus creating less substitues, and causing ice cream as a whole to be less elastic than vanilla ice cream. I think my logic is pretty solid, but apparently I wrong. WHY?

Reid said...

Again, with the not understanding what the question wants, I'll give it a whirl though. I would have to say that you would want to own a company when it is selling things that are less elastic or inelastic, the reason for this is because if a good is less elastic, than people will need them, and therefore, buy them. This means that the amount of income you bring in would be greater because people would not have as many substitues to choose from.