Transcript Elasticity - David E. Harrington

“The economics of coal revolved around two factors: most of the cost of
production was wages for miners, and if the supply fell the price would
shoot up because in an age before oil and electricity, there were no good
substitutes. Profits were low in 1902 because of an over supply; therefore
the owners welcomed a moderately long strike. They had huge stockpiles
which grew in value daily. It was illegal for the owners to conspire to
shut down production, but not so if the miners went on strike. The
owners welcomed the strike, but they adamantly refused to recognize the
union, for then it would control the coal industry.”
http://en.wikipedia.org/wiki/Coal_Strike_of_1902
1
What is ed for Cigarettes?
• “Economic studies have suggested
that a price increase of 10 percent
reduces smoking about 4 percent”
• ed =
%∆Qd
%∆Pcig
=
-4
= −0.40
10
Hence, studies  Demand for cig is
inelastic
2
Premium Cig (PC) and Discount Cig (DC)
In 1998, PPC ↑ from $2.45 to $2.90 per
pack while the PDC = $1.50. Analysts
predicted 10% ↓ in Q of PC demanded.
PC
What is the analyst’s estimate of ed ?
ed PC =
=
=
= −0.60
Why | ed PC| = 0.60 > | ed Cig| = 0.40?
3
Determinants Of Elasticity
1. Number of Substitutes
Example: Demand for premium cigs
Demand will be more elastic as the number
of substitutes increases
|e
Camels
| > |e
PC
| > |e
All Cigs
|
4
Fetal Heart Rate and Uterine Contractions
5
Determinants of Elasticity
2. Necessities versus Luxuries
Demand for necessities tend to be inelastic
Market for At-Need
Epidural Blocks (EB)
PEB
Very Nearly
D
perfectly inelastic
QEB
6
Gardasil: vaccine (for pre-teen girls)
against (HPV) virus that causes
cervical cancer. The price charged
by Merck & Co. is $360. (Wikipedia)
“Anti-Cancer Vaccine A Tough Sell To Parents”
National Public Radio, Thursday, September 18, 2008
“As of late 2007, just one in five American girls under
the age of 18 had received shots for HPV.”
Reasons for Low %:
1) Parents doubt that their child is sexually active.
2) Mistrust of vaccines
3) Price…“cost is a major obstacle if the girl is not
covered by insurance”
Determinants Of Elasticity
3. Proportion of the Budget
|e
Gardasil
Poor HHs
Gardasil
|
Non-Poor HHs
| > |e
Goods that are a small % of
peoples’ budgets tend to have
inelastic demands (e.g., salt)
4. Time Frame
|e
Real Skeletons
Long-Run
| > |e
Real Skeletons
Short-Run
|
India banned skeleton exports in 85
9
250GB Hard
Western
Drives
Digital (WD)
Seagate
Internal
External
“My Book”
“FreeAgent”
The Demand for WD Drives
WD’s Internal Drive
P
P
Nearly…
Perfectly
Elastic
$75
WD’s External Drive
Less than
perfectly
elastic
$100
D
D
Q
Q1
Q
Q1
11
Snow Storms Hit
East Coast in Jan 05
Boston
Snowfall
(inches)
Price of
Salt in
Boston
($ / ton)
Quantity of
Salt in US
(millions
tons / year)
2004
39.4
32
16
2005
86.6
46
20
 (Q05  Q04 ) 


(Q05  Q04 ) / 2 

e=
 (P05  P04 ) 


 (P05  P04 ) / 2 
January 27, 2005
1-month snowfall a 113-year high
 (20  16) 


(20  16) / 2 


 (47  32) 


 (47  32) / 2 
INELASTIC
= 0.62
Elasticity of … Supply
PRS
Market for Road Salt, 2004-2005
S04 =S05
($ per ton)
$46 P05
$32 P04
D05
D04
Q04
Q05
16
20
QRS
(millions tons / yr)
13
Elasticity of Supply
PRS
Market for Road Salt, 2004-2005
S04 =S05
($ per ton)
$46 P05
$32 P04
Q04
Q05
16
20
QRS
(millions tons / yr)
14
Income Elasticity of Demand, ey
ey =
%∆D
___________________
%∆Y
• If ey > 0, then good is a normal
good.
• If ey < 0, then good is an inferior
good.
15
Table 1. Income and Garbage, 1960-2000
1960
1970
1980
1990
2000
Garbage Collected
(lbs per capita )
Mean Family
Income
(thousand of real $)
1000
1200
1350
1650
1700
30
41
42
49
57
Sources: Environmental Protection Agency, Municipal Solid Waste in the United
States,2007; www.demographia.com/db-lg-hhld.htm
16
↑ Income
↑ Garbage Collection?
Garage
Collected
(lbs per
capita)
2000
1960
Average Family Income (thousands of real $)
17
Income Elasticity of
%(Demand for Garbage Collection )
Demand for Garbage =
%

Income
Collection
≈ ____________________
 1700  1000 


(1700  1000) / 2 

=
 57  30 


 (57  30) / 2 
= 0.84
18
Income Elasticity of Demand, ey
Our estimate,
% D
ey =
 0.84
% Y
From Fullerton & Kinnaman (2000),
% D
ey =
 0.33
% Y
Garbage removal is a normal good.
Cross-Price Elasticity of D, ex,z
ex,z measures ∆ demand for a good caused
by a ∆ price of another good, ceteris paribus.
%∆DX
ex,z =
%∆PZ
eX,Z > 0 
X & Z are substitutes (e.g., heroin and
marijuana)
 X & Z are complements (e.g, graves
and caskets are complements
eX,Z < 0
20
Not Surprising… to an Economist
Suppose eHeroin,Marijuana
%∆DH
%∆PM
In 1969, US
Army launched
“an all-out
campaign”
 PM  DH 
against
marijuana
suppliers in
Vietnam.
>0
In 1972,
thousands of
US soldiers
were using
heroin daily.
21