Thursday, February 15, 2007

Elasticity

Here is some info on elasticity:

http://www.reffonomics.com/elasticity1.html (animated gif file)

http://apecon.us/tanstaafl_files/ (38 minute video file, a lecture from another teacher)

http://en.wikipedia.org/wiki/Price_elasticity_of_demand

http://hspm.sph.sc.edu/COURSES/ECON/Elast/Elast.html (interactive tutorial)

http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm


Some questions for thought:

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


2. 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)

3. 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) :)

8 comments:

Ashley said...

#2: I think there are exceptions to law of demand. Because of the amount of people in New York there will always be a great demand for apartments. The price of rent will rise and not cause a change in demand because people WANT to live in New York. The total cost to them is worth it. The number of apartments are scarce, in comparsion to the number of people living in New York. Why not raise the prices if people are still going to demand the apartments?

rusch said...

i agree with ashley about the new york apartments. everybody and their brother wants to live in new york. the reason is is that there are tons and tons of opportunities there and people want to take advantage of them. it's the big apple, and peoples dreams come true there!! so they will pay the price it takes to live there.

Dan said...

#1 Well, while the risk of getting screwed and losing tons of money is there, the chance for greater profit is there as well. In any investment, if you are going to make a lot of money, you have to have a greater risk. There are very few examples where high profit is not accompanied by a high risk of loss.

D Mac said...

#2. this phenomenon could be explained simply by having the demand for apartments in NY rising first, allowing both the price of apartments and the quantity of apartments demanded to rise as well.

also, because of the monstrous number of people who consider an apartment in NY to be a necessity, demand for NY apartments becomes inelastic, making a price increase not affect the demand as much, if at all.

Wojtek said...

#3- The taxi drivers obviously haven't taken the microecon or any econ class.. They thought that the price elasticity demand for their services is unit elastic. It turned out that it is not. From this situation we can infer (new word :) that the price elasticity demand for taxi fares in Boston is inelastic, because the rise of demand was lower than rise in the price.

kfbare said...

Okay I think #2 has to do with inelasticity. People need to have some place to live. And if they are pursuing a corporate job or acting career etc in New York City, which has the motherload of opportunities, they are going to want to live there. In that case a rising price is not going to make much of a difference to them. They NEED to live in New York City.

keri said...

#2....Well, while this does violate the law of demand, this does make sense. Think of how many people live in NYC. Think of how many people move there all the time, and how many businesses are set up in NYC, requiring mroe and mroe employees to move to the city. People need to live in their apartments, that is just how NYC works. The cost of hosue is already probably astronomical and impractical for most NYC people, so they have to buy an apartment, regardless of how much it is going to cost. It isn't a necessity to live there, but if your job is there and you don't own a car (because you live in the city and a car is impractical ) then you really don't have much of a choice but to get an apartment. It's the law of No other choice.

keri said...

Alright, I keep trying to think of things that are either inelastic or elastic, straightforward one or the other, but in so many differnt cases I think of different scenarios in which case they could be both. First of all, can people name different things that are alwasy elastic and always inelastic? Second of all, on the AP test will it be really straightforward whether the items they are talking about are one or the other, or will I sit there and think about it too much? I mean, a car is inelastic if you need it to get to work and you live far away from work, but elastic when you are looking at a luxury car....there are alwasy so many variables to consider