Chapter 5:
Elasticity and its Application
Give an
example of sales based on price elasticities that you have seen or used. Why do you think it worked (or didn't work)?
The law of demand states that there will be a greater demand
for a good if the price decreases and consequently a lesser demand for that
same good if the price increases (qualitative).
The difference between the law of demand and the elasticity of demand is
that the latter illustrates by how much (quantitative) of that impact a change
in price (increase or decrease) will have on the demand. The demand for a good is considered to be
elastic is there is a relatively significant relationship between price and
demand whereas the demand for a good is considered inelastic if there is an
insignificant relationship between price and demand. Gas, for example tends to be inelastic. As the price may rise, people still need to
get around in their cars and will pay as the increase dictates. On the other hand, if the price of sugar
rises and as a result chocolate prices increase, most people will forgo buying
it as it is not a necessity.
The text states that the price elasticity of demand for any
good measures how willing consumers are to buy less of a good as it price
rises. The best example of this I can
think of from a consumer standpoint is gas.
I don’t mean to copy the textbook example, but even before this class
began I realized what I was doing, just not realizing it had to do with an
economic concept, like elasticity. Gas
prices are high (been higher, been lower) and I drive 50 miles round trip to
work 4 days a week – no way getting around that one. I once read in a little novelty book filled
with someone else’s wisdom that you should always fill up your gas tank when
it’s half full/empty. Great thought,
except that lately with the less than desirable prices I’ve been allowing my
low fuel light to illuminate before I put any gas in the tank. Ultimately it is an inelastic good, however
elastic to point where I don’t fill up with more than I have to at any given
time.
Another thing that came to mind was gas prices in the
1970’s. The oil crisis in ’73 and ’79
led prices to rocket while cars idled their engines during long wait times at
the gas pumps. I think this is a good
example of how the sale of gas was based on the inelastic demand of the good to
consumers. I don’t think the sale of gas
during that time worked well because consumption seemed to be based on fear of
shortages; resulted in massive amounts of gas from running engines in line to ironically
‘get’ gas and caused and caused panic-buying among consumers. As the price per barrel of oil raised in
these years and people watched the pump prices rise, the demand for it not only
increased, but almost faced a shortage.
This can be exemplified by the implementation of even-odd rationing. The price elasticity of demand for gas is
high considering it is a necessity for most people rather than a luxury. Considering this, it is best example I can
think of to illustrate how willing consumers are to buy more or less of a good
based on the fluctuation of its determinants.
As I mentioned before about my own gas tank, if the prices per barrel of
oil fell and gas prices dropped, I probably would take the book’s advice and
fill up my tank when half-full.
What topic
made the least sense to you in this chapter?
The variety of demand curves
(Chapter 5). I had difficulty getting a
concrete understanding of the idea that demand is considered elastic when the elasticity is greater than 1 and
inelastic when the elasticity is less than 1.
Maybe it’s just the way it’s worded, but I can’t think of any practical
applications of how this translates into a real world example. Also, perfectly elastic is an obscure concept
so far. I can identify them on graphs,
but still don’t know how these concepts translate practically.
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