Download ECO/365 Version 4 Principles of Microeconomics WEEK 1

ECO/365 Version 4
Principles of Microeconomics
WEEK 1, DISCUSSION QUESTION 4
Below are estimated price elasticities of demand for several products (note: the
“negative” sign is assumed). Use these estimates to answer the following questions:
A) Discuss what each one of the numbers mean:
B)
Look in the text at the four factors that affect the number of
substitutes a good has and use them to EXPLAIN why EACH of the
goods are either very elastic, a little elastic, a little inelastic, or very
inelastic.
Beef
.64
Bread
.15
All Food
.24
Tobacco
.50
Gasoline (Short Run)
.20
Gasoline (Long Run)
.70
Houses
1.20
Restaurant Meals
New Cars
2.30
4.00
Answer:
A)
The following goods are inelastic (price elasticity of demand <1). This
means that the quantity purchased will fall (rise) by a smaller percentage than the
increase (decrease) in price. (This means, in general, you make a bit more money by
raising your prices a bit. If you can anyway. We’ll discuss competition later in the
course.)
Beef
.64
Bread
.15
All Food
.24
Tobacco
.50
Gasoline (Short Run)
.20
Gasoline (Long Run)
.70
These goods, however, are elastic (price elasticity of demand >1). This means
that the quantity purchased will fall (rise) by a larger percentage than the increase
(decrease) in price. (This means, in general, you make a bit more money by lowering
your prices a bit).
Houses
1.20
Restaurant Meals
New Cars
B)
2.30
4.00
From most inelastic to least inelastic the inelastic products are:
Bread
.15
Bread is the most inelastic. It is a staple of most people’s diets (think
PB&J’s) and it is relatively cheap (meaning not a large part of your budget).
Gasoline (Short Run)
.20
Gas is something we need (meaning not a luxury) to get to work and to
purchase the goods we need to live (ie: bread). In the short run, we can’t make other
arrangements for transportation easily.
All Food
.24
Like most of us, my parents got me addicted to food at a very early
age. Without it, I will die. While I may be able to switch to cheaper foods (Raman
Noodles instead of Steak), I HAVE to buy food. Notice though, it is not zero. We
can (and most Americans should) eat less.
Tobacco
.50
Long before the tobacco companies admitted it, economists knew that
tobacco was addictive. It is fairly highly inelastic. This means that even when the
price rises a lot, the number of cigarettes smoked only drops by a little. (It is also
why smokers in Potsdam will go outside for a smoke even when it is 10 degrees
below zero).
Beef
.64
Compared to bread, beef is a bit more of a luxury food.
Gasoline (Long Run)
.70
In the long run, we can make other arrangements. In the 70’s I drove
car’s made of a thing called steel. They had 8 cylinder engines that allowed me to
actually pass other cars. I could watch the gas gage fall as I accelerated. Now I
drive a 4 cylinder car made of paper-mache. The first time I tried to pass a car my
engine sounded like a dying cow and I pulled back in behind the car I had tried to
pass. But I get good gas mileage, and thus use less gas. (I just hope I don’t get in an
accident.) Also, as gas prices have risen, it takes up an increasingly large part of our
budget. In Atlanta, I filled up three times a week, and gas, for me, was a very large
part of my budget. Because of that, I tried to limit “pleasure trips”. Now I put about
2,000 miles a year on my car and don’t really care much what the price of gas is (so
now, for me, it is more inelastic than it was when I lived in Atlanta).
From most elastic to least elastic the elastic products are:
New Cars
4.00
The key here is the word “new”. It is easy to purchase a used (sorry,
previously owned, oops, now it is “previously enjoyed”, O.K. let’s just say “used”)
car instead of a new one. Or, you can do what I do, and really save money by
maintain your car and driving it till it drops. (I drive a 2000 Nissan Altima with >
100,000 miles). Also, a car is a very large purchase (as a percentage of our incomes).
Restaurant Meals
2.30
Again, it is the market definition. Restaurant meals are “food”, and we
have seen that food is highly inelastic. But, you can eat at home, far more cheaply
than eating out. One of the largest budgeting mistakes American’s make is eating too
many meals at restaurants (also one of the largest health mistakes we make.) Cutting
back on restaurants is a great way to both save money and keep (or get) healthy.
Houses
1.20
You have to live somewhere, so this is one of the “least” elastic
products. But, talk about a huge part of our budgets. Also, you can rent, although if
you are going to live somewhere for five or more years I recommend buying.