Download Economics Mr. Joshi Market Elasticity – A Matter of Responsiveness

Economics
Mr. Joshi
Market Elasticity – A Matter of Responsiveness
A common example of a question that economists and policy-makers would want to know
is, “If gas prices were to go up by 20%, by what % would the demand for gasoline fall?”
This ratio is called Elasticity by economists.
There are a number of comparisons that economists do that are helpful in understanding
the responsiveness of a given market:
For example, the law of demand predicts that if the price of a good were to increase, its
quantity demanded would _____________.
Conversely, if the price of a good were to decrease, its quantity demanded would _______.
The law of supply predicts that if the price of a good were to increase, its quantity
supplied would _____________.
Conversely, if the price of a good were to decrease, its quantity supplied would _________.
If incomes for everyone were to go up, the quantity demanded of a good is likely to go
_______.
If incomes for everyone were to go down, the quantity demanded of a good is likely to go
________.
If the price of a given good goes up, the demand for a complementary good would go
________.
If the price of a given good goes down, the demand for a complementary good would go
________.
But, economists have been interested not only in the direction of the responsiveness, but
also its magnitude. Someone clever came up with the idea of looking at % change (rather
than actual units or $s) so that the numbers would be easier to work with.
The following are formulas for the most popular kinds of elasticity:
Why might anyone want to know each of these ratios?
Price Elasticity of Demand
% Qd
=_______
% P
Price Elasticity of Supply
% Qs
=_______
% P
Income Elasticity of Demand
% Qd
=_______
% I
Cross-Elasticity of Demand
% Qd of Good B
=_______
% P of Good A
What would a graph of these relationships look like?
P
P
Qd
I
Qs
Pa
Qd
Qd of b
Let’s look at Price Elasticity of Demand more closely:
Price Elasticity of Demand
% Qd
=_______
% P
What would you guess is the Price Elasticity of Demand for Gasoline in the short-term?
What would a graph of demand look like for gasoline?
P
Qd
If the price elasticity of demand for a good is less than 1, economists call this inelastic.
Why might this be?
If the price elasticity of demand for a good is equal to 1, economists call this unit elastic.
If the price elasticity of demand for a good is more than 1, economists call this elastic.
Why might this be?
What factors can you think of that would impact how elastic demand might be for a
given good?
4 COMMON FACTORS in determining the Price Elasticity of Demand:
1. % of Budget that the Price of the Good Takes (circle)
__More/Less_ Elastic
Small % of Budget
_More/Less_ Elastic
Large % of Budget
2. Necessity vs. Luxury (circle)
__More/Less_ Elastic
Necessity
_More/Less_ Elastic
Luxury
3. Availability of Substitutes (circle)
__More/Less_ Elastic
Few Substitutes
_More/Less_ Elastic
Many Substitutes
4. Short vs. Long Term (circle)
__More/Less_ Elastic
Short-term
_More/Less_ Elastic
Long-term
Now, it is time to use your experience in the economic world to guess the price elasticities
of demand for the following goods:
Goods and Services
Salt
Matches
Toothpicks
Airline travel, short-run
Gasoline, short-run
Gasoline, long-run
Residential natural gas, short-run
Residential natural gas, long-run
Coffee
Fish (cod) consumed at home
Tobacco products, short-run
Legal services, short-run
Physician services
Taxi, short-run
Automobiles, long-run
Movies
Housing, owner occupied, long-run
Shellfish, consumed at home
Oysters, consumed at home
Private education
Tires, short-run
Tires, long-run
Radio and television receivers
Restaurant meals
Foreign travel, long-run
Airline travel, long-run
Fresh green peas
Automobiles, short-run
Chevrolet automobiles
Fresh tomatoes
Price Elasticity of Demand (0-5)
Estimates on reverse side are from: Economics: Private and Public Choice, James D. Gwartney and Richard L.
Stroup, eighth edition 1997, seventh edition 1995; primary sources: Hendrick S. Houthakker and Lester D.
Taylor, Consumer Demand in the United States, 1929-1970 (Cambridge: Harvard University Press, 1966,1970);
Douglas R. Bohi, Analyzing Demand Behavior (Baltimore: Johns Hopkins University Press, 1981); Hsaing-tai
Cheng and Oral Capps, Jr., "Demand for Fish" American Journal of Agricultural Economics, August 1988; and
U.S. Department of Agriculture.
Table 5. Estimated Price Elasticities of Demand
for Various Goods and Services
Goods
Estimated
Elasticity of
Demand
Inelastic
Salt
Matches
Toothpicks
Airline travel, short-run
Gasoline, short-run
Gasoline, long-run
Residential natural gas, short-run
Residential natural gas, long-run
Coffee
Fish (cod) consumed at home
Tobacco products, short-run
Legal services, short-run
Physician services
Taxi, short-run
Automobiles, long-run
0.1
0.1
0.1
0.1
0.2
0.7
0.1
0.5
0.25
0.5
0.45
0.4
0.6
0.6
0.2
Approximately Unitary Elasticity
Movies
Housing, owner occupied, long-run
Shellfish, consumed at home
Oysters, consumed at home
Private education
Tires, short-run
Tires, long-run
Radio and television receivers
0.9
1.2
0.9
1.1
1.1
0.9
1.2
1.2
Elastic
Restaurant meals
Foreign travel, long-run
Airline travel, long-run
Fresh green peas
Automobiles, short-run
Chevrolet automobiles
Fresh tomatoes
2.3
4.0
2.4
2.8
1.2 - 1.5
4.0
4.6
What factors might you guess are the most important
in determining the Elasticity of Demand for these
goods?