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Analyzing Elasticity in Everyday Choices

Explore the concept of elasticity by examining various consumer choices including mystery novels, classical music, heating oil, root beer, travel expenses, income changes, and spending habits on clothing and gas. Understand how price elasticity affects decision-making and consumer behavior in different scenarios.

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Analyzing Elasticity in Everyday Choices

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  1. Ch 5 : Problems and Applications • 1. More Elastic? : • A. Mystery novels or required text • Mystery novels • Have more close substitutes • May be considered a luxury • B. Beethoven or Classical Music • Beethoven - more narrowly defined market – can find more close substitutes

  2. C. Heating Oil (over 5 years or 6 months) • Over 5 years – can adjust habits / find substitutes • D. Root Beer or Water • Root beer – may be considered luxury / can find more close substitutes

  3. 2. A. P up from $200 to $250 • Business travelers 1900 – 2000 / 2000 .05 5% $250 - $200 / 200 .25 25% PED = .2 = Inelastic Vacationers 600-800 / 800 .25 25% $250 - $200 / 200 .25 25% PED = 1 = unit elastic

  4. B. Vacationers PED is more elastic than business travelers because….. • Luxury vs. necessity • 3. at income of $10,000 P of CD up from $8 to $10 32-40 / 40 = .2 20% $10-$8/$8 = .25 25% = PED = .8 Inelastic

  5. When income is $12,000 45-50/50 = .10 10% $10-$8 / $8 = .25 25% = PED .4 inelastic • IED : Income up $10 k - $12 k when P = $12 30-24/24 = 25% $12k - $10k / $10k = 20% = IED + 1.25 Elastic, Normal

  6. IED Income up $10k to $12 k when P $16 12-8/8 50% $12k - $10k / $10k 20% IED = + 2.5 Elastic, Normal

  7. 4. A. Emily always spends 1/3 of income on clothing • If she always spends 1/3 of income …then any change in her income would result in an equal % change in her D…so IED….. = • 1 • B. PED? • For every 1% increase in P, then would be 1% change in D to maintain her 1/3 spending of income • PED = 1

  8. If change taste and now spends ¼ of income .....how does D curve change • D curve shifts left…at every P, D is now less • What is IED and PED now??? • Still 1

  9. 4 million fewer riders in Dec… a 4.3% decline After P increased 25 cents to $1.50 A. PED? 4.3% $1.50-$1.25 / $1.25 = 20% = PED .215 = inelastic B. What happens to revenue? If PED is inelastic and P increases = TR increases

  10. C. Why might PED estimate be unreliable ? • It has only been 1 month after P increase • As time passes, people may find alternatives and therefore it becomes More Elastic

  11. 6. Before looking at Price, Tom says I’d like 10 gallons of gas. • Toms PED = ? • 0 Perfectly Inelastic…explain • He will buy same Q (10 gal) no matter what the price • Jerry says I’d like $10 worth of gas • Jerry’s PED = ? • 1 unit elastic…explain • He will spend $10 no matter what the P is…if the P has risen, QD will fall at same ratio

  12. 7. spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. Explain – • Econ downturns = decrease in income • Expect a decrease in income to result in a larger decrease in D for restaurants than a decrease in food at home • = Luxury vs. necessity

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