Exercises 8-14. Chapter 5. Elasticity and its application.

Summary

This video explains elasticity and its application based on exercises from Chapter 5 of Gregory Mankiw's 'Principles of Economics.' The presenter tackles key topics, including the price elasticity of demand for cigarettes, the impact of price changes on smoking habits, and differences in elasticity between teenagers and adults. It also discusses elasticity concepts applied to ice cream, pharmaceuticals, and computers, alongside real-world cases like the effects of flooding on farmers and droughts on grain revenue. The video concludes with an analysis of farmland productivity and its influence on land prices.

Takeaways

• 🚬 The price elasticity of demand for cigarettes is about 0.4, indicating inelastic demand.
• 📈 To reduce smoking by 20%, the government should increase the price of cigarettes by 50%.
• 📅 The policy's effect on smoking will be more pronounced in the short run than in the long run.
• 👶 Teenagers have a higher price elasticity of demand for cigarettes than adults due to their lower income and shorter smoking history.
• 🍦 The price elasticity of demand is higher for vanilla ice cream compared to all ice cream flavors.
• 📊 The price elasticity of supply is higher for all ice cream compared to a specific flavor like vanilla.
• 💊 Pharmaceuticals have inelastic demand, while computers have elastic demand.
• 💻 A technological advance that doubles the supply of both products leads to lower prices and higher quantities in the market.
• 🏖 Beachfront resorts have inelastic supply, while automobiles have elastic supply.
• 🌎 A global drought raises total revenue for farmers due to inelastic demand, but a local drought in Kansas reduces revenue due to elastic demand.
• 🌱 Better weather increases the price of farmland due to higher productivity, but technological advances over time have led to a decrease in farmland prices despite increased productivity.

Q & A

What is the price elasticity of demand for cigarettes mentioned in the video?

The price elasticity of demand for cigarettes is 0.4, which is considered inelastic since it is less than 1.

How much should the government increase the price of cigarettes to reduce smoking by 20%?

The government should increase the price of cigarettes by 50% to reduce smoking by 20%.

Will the policy of increasing cigarette prices have a larger effect on smoking one year from now or five years from now?

The policy will have a larger effect in one year because, in the short run, people cannot easily change their smoking habits. Over time, they may find substitutes like cigars or chewing tobacco.

Why do teenagers have a higher price elasticity for cigarettes compared to adults?

Teenagers have a higher price elasticity because they have less income and are more likely to stop smoking when prices rise. Adults, having a longer history with cigarettes, find it harder to quit despite price increases.

Would the price elasticity of demand be larger for the market for all ice cream or for vanilla ice cream?

The price elasticity of demand would be larger for vanilla ice cream because if its price increases, consumers can easily switch to other flavors, making vanilla more elastic.

What happens to the equilibrium price and quantity when technological advances double the supply of both pharmaceutical drugs and computers?

For both products, the prices decrease and quantities increase. However, the price decrease is larger for pharmaceutical drugs due to their inelastic demand, while the quantity change is larger for computers due to their elastic demand.

Which product experiences a larger change in price when demand doubles: beachfront resorts or automobiles?

Beachfront resorts experience a larger change in price because their supply is inelastic, while automobiles have a more elastic supply, leading to a smaller price change.

Why did farmers whose crops were not destroyed by floods benefit, while those whose crops were destroyed suffered?

Farmers whose crops were not destroyed benefited because the supply of wheat decreased, increasing prices. Those whose crops were destroyed had less to sell and couldn't take advantage of the higher prices.

Why does a global drought increase farmers' total revenue, but a drought in Kansas reduces revenue for Kansas farmers?

A global drought increases revenue because the demand for grain is inelastic globally, meaning prices rise significantly. In Kansas, the local demand is more elastic, so price increases lead to a drop in revenue.

Why are farmland prices positively related to productivity across regions, but negatively related over time?

Productive land commands higher prices in regions with good weather because demand is inelastic. Over time, technological advancements make all farmland more productive, making the demand for farmland more elastic, leading to lower prices.

Outlines

00:00

🚭 Cigarette Pricing and Elasticity

This section of the video discusses the economic principles behind public policy targeting smoking. It introduces the concept of price elasticity of demand, using cigarettes as an example. The price elasticity of demand for cigarettes is given as 0.4, which indicates inelastic demand since it's less than one. The video explains how to calculate the percentage increase in price needed to achieve a 20% reduction in smoking, using the formula for price elasticity of demand. It concludes by discussing the short-term versus long-term effects of such a policy and compares the price elasticity of demand between teenagers and adults, suggesting that teenagers have a higher elasticity due to their lower income and shorter smoking history.

05:01

🍦 Ice Cream Flavors and Elasticity

The video then explores the price elasticity of demand and supply in the context of ice cream flavors. It uses the example of vanilla ice cream, explaining that if the price of one flavor increases, consumers are more likely to switch to another flavor due to the availability of alternatives, thus exhibiting higher demand elasticity. Conversely, the supply elasticity is higher for all ice cream than for a specific flavor like vanilla, as it's easier for producers to adjust the production of ice cream in general rather than a single flavor. The video also compares the elasticity of demand for pharmaceutical drugs and computers, explaining how a technological advance that doubles the supply would affect the equilibrium price and quantity in both markets differently due to their differing elasticities.

10:03

🏖️ Beachfront Resorts and Automobiles

This part of the video examines the impact of increased demand on the equilibrium price and quantity for two products with different supply elasticities: beachfront resorts and automobiles. It describes how a doubling of demand affects these markets, with resorts having inelastic supply and automobiles having elastic supply. The video uses graphs to illustrate the changes in price and quantity, and discusses the resulting changes in consumer spending. It concludes by comparing the total consumer spending for both products, noting that while spending increases for both, the extent of the increase varies due to the differing elasticities of supply.

15:04

🌾 Wheat Supply and Demand Dynamics

The video discusses the effects of flooding on the wheat market, particularly how it impacts farmers differently based on whether their crops were destroyed or not. It uses the concept of supply and demand curves to explain how a decrease in supply due to floods can lead to higher prices and thus higher revenues for farmers whose crops were not affected. Conversely, those who lost their crops are worse off due to the reduced supply and higher prices. The video also touches on the need for information about the market for weed to assess the impact of events like droughts on farmers' revenues, emphasizing the importance of understanding the elasticity of demand and supply in such analyses.

20:05

🌍 Global vs. Local Impact of Droughts

This section contrasts the effects of a global drought versus a local drought in Kansas on the total revenue of farmers. It explains that a global drought, which reduces supply and leads to higher prices, can increase total revenue due to the inelastic demand for grain. In contrast, a local drought in Kansas, where demand is more elastic, can reduce total revenue because the price increase is not enough to compensate for the decrease in quantity sold. The video concludes by discussing how technological advances have made farmland more productive over time, leading to a decrease in the price of farmland when adjusted for inflation, despite the positive relationship between productivity and farmland prices in specific regions.

👋 Wrapping Up Economics Insights

The final part of the video script is a brief conclusion where the presenter summarizes the key points covered in the video and invites viewers to join for more economics discussions in the next video. It serves as a friendly sign-off, indicating the end of the current video's content.

Keywords

💡Elasticity

Elasticity in economics refers to the measure of how much the quantity demanded or supplied of a good changes in response to a change in some other variable, such as price. In the video, elasticity is a central concept used to discuss how changes in price affect the demand for cigarettes, the supply of beachfront resorts, and the impact of technological advances on the prices and quantities of pharmaceutical drugs and computers.

💡Price Elasticity of Demand

Price Elasticity of Demand (PED) is a specific type of elasticity that measures the responsiveness of the quantity demanded of a good to changes in its price. The video explains that a PED of less than one indicates inelastic demand, as seen with cigarettes, where a 20% reduction in quantity demanded requires a 50% increase in price.

💡Inelastic Demand

Inelastic demand describes a situation where the quantity demanded of a good does not change proportionally with price changes, meaning the demand curve is relatively steep. The video uses cigarettes as an example, where even a significant price increase only leads to a small decrease in quantity demanded.

💡Technological Advance

A technological advance refers to an improvement in technology that can increase productivity or efficiency. In the video, it is discussed how such advances can double the supply of products like pharmaceutical drugs and computers, leading to changes in equilibrium price and quantity.

💡Equilibrium Price and Quantity

Equilibrium in economics is the state where the quantity demanded of a good or service equals the quantity supplied. The video explains how changes in supply due to technological advances or changes in demand due to population growth can shift the equilibrium price and quantity in markets.

💡Supply and Demand

Supply and demand are fundamental economic concepts that describe the relationship between the quantity of a good that producers are willing to supply and the quantity that consumers are willing to purchase at various prices. The video uses these concepts to explain the effects of various market interventions and events, such as government policies and natural disasters.

💡Substitutes

In economics, substitutes are two goods such that if the price of one good increases, the demand for the other good also increases. The video touches on this concept when discussing how consumers might switch to other tobacco products if the price of cigarettes increases.

💡Complements

Complements are goods that are used together, and if the price of one good increases, the demand for the other good decreases. While not explicitly mentioned in the video, this concept is relevant to the discussion of how changes in one market can affect another, such as the impact of a drought on the wheat market.

💡Total Consumer Spending

Total consumer spending refers to the total amount of money spent by consumers on a particular good or service. The video discusses how changes in price elasticity can affect total consumer spending, as seen with the examples of pharmaceutical drugs and computers where technological advances lead to different outcomes for spending.

💡Long-run vs. Short-run

The distinction between long-run and short-run effects is important in economics, as it reflects the time it takes for markets to adjust to changes. The video explains that the impact of a price increase on smoking is more immediate in the short run but could lessen in the long run as consumers find substitutes.

💡Income Elasticity of Demand

Income Elasticity of Demand measures how quantity demanded of a good responds to changes in income. The video suggests that teenagers have a higher price elasticity of demand for cigarettes than adults, possibly due to differences in income levels and the relative necessity of smoking.

Highlights

The price elasticity of demand for cigarettes is about 0.4, indicating inelastic demand.

To reduce smoking by 20%, the government should increase the price of cigarettes by 50%.

In the short run, the policy to increase cigarette prices will have a high effect on smoking.

Teenagers have a higher price elasticity of demand for cigarettes than adults due to their lower income and smoking history.

The price elasticity of demand is higher for vanilla ice cream due to substitution possibilities.

The price elasticity of supply is higher for all ice cream than for a specific flavor due to production flexibility.

Pharmaceutical drugs have inelastic demand, while computers have elastic demand.

Technological advances that double the supply of products lead to lower prices and higher quantities.

The equilibrium price for medicines decreases more due to their inelastic demand.

Total consumer spending on medicines decreases after a technological advance due to inelastic demand.

Beachfront resorts have inelastic supply, while automobiles have elastic supply.

An increase in demand leads to higher prices and quantities for both beachfront resorts and automobiles.

The price increase is more significant for beachfront resorts due to their inelastic supply.

Total consumer spending increases for both products due to the increase in demand.

Farmers whose crops were not destroyed by floods benefit from higher prices due to reduced supply.

The market for weed would need aggregate demand and supply information to assess the impact of floods.

A worldwide drought increases total revenue for farmers due to inelastic global demand for grain.

A drought in Kansas alone reduces the total revenue of Kansas farmers due to elastic local demand.

Productivity and farmland prices are positively related across space but negatively related over time due to technological advances.

Transcripts

hi everyone in this video we are going

to solve the exercises from 8 to 14 of

chapter 5 which is elasticity and its

application this is the book of gregory

mancu which is principles of economics

so

the eighth point says consider public

policy aimed at smoking

a

studies

indicate that the price elasticity of

demand for cigarettes is about 0.4

so this is means which is inelastic

because it's less than one which makes

sense

people

maybe can pay a little bit more for the

same quantity because it's advice they

need

if a pack of cigarettes

currently costs two dollars and

the government wants to reduce smoking

by 20 percent

by how much should it increase the price

so remember

that here we have the elasticity price

of demand which is 0.4

we have the price which is two and we

have the quantity the percent the

percent

that the government wants to

to decrease the quantity is 20 percent

so we know that the elasticity price of

demand is given by the change in the

numerator of the quantities and the

change in the price

so here

we can we need to find out this variable

which is the

percentage

change of the price so i can collect i

can just multiply to the other side and

the elasticity price of domain can go to

divide we already have these two data so

we can

solve for

the change

in the price so here is 0.2 which is 20

percent and 0.4 which is elasticity of

demand

so here we have the the change in pers

in in the price is 50

so it means that they have to increase

in 50 percent the

the price of two okay this is the

increase

for the government

so be

if the government permanently increases

the price of cigarettes will the policy

have a larger effect on smoking one year

from now or five years from now

so

when

when they have like

it remember

that in the short run there is a high

effect

okay

because people

they can they cannot like manage

or change

their consume

in the

in the in the long run

they can they can change

the they consume what it means it means

for example when we

increase the price

now

maybe it's going to be

a reduce of cigarettes because of the of

the change but maybe in the future they

will find another substitute that's

chewing tobacco or tobacco or cigars

so

in this case we will say that the policy

will have more effect just in one in one

year

so studies also find that teenagers have

a higher price elasticity than do adults

why might this be true so this is

because of elasticity

adults they have a curve demand more

inelastic

why

i have

maybe the first it would be because they

have like more income so they can spend

more on cigarettes on the other side

where there is a teenager maybe they are

just starting um

they are just starting smoking so in

this case they can just like

stop

um

stop smoking the other side the adults

they have like a long history with

cigars with cigarettes so in this case

they need more okay could be both case

the income and the necessity of the

others

would you expect the price elasticity of

demand to be larger in the market for

all ice cream or the market for all ice

cream or the market sorry i brought to

ice or the market for vanilla ice cream

would you expect the price elasticity of

supply for be larger in the market for

all ice cream or the market for well

neela ice cream be sure to explain your

answers

so here

we know that the elasticity price of

demand is higher for vanilla ice cream

imagine that you have all the flavors

okay in the ice cream shop but

you won't buy the vanilla

but the price is higher than the other

ones what would you do

usually you change the flavor you go to

another flavor so the elasticity price

of demand is higher okay in the other

case the 60 price of supply is higher

for the ice cream

why because they can give they can

produce easier than one specific flavor

okay

imagine you know that when you have the

lscc price of supply which is completely

inelastic for you is so hard to produce

one more of this quantity in this case

it's the same when you have ice cream

you can produce in general whatever ice

cream you you cannot i mean you must not

produce just one particular flavor

instead when you have just one specific

flavor it could be more inelastic

because maybe you cannot when it runs

out

of one flavor you cannot produce

immediately this one flavor okay instead

of the completely ice cream that you can

move

with the price more you can offer more

quantity of ice cream

10th

pharmaceutical drugs have an inelastic

demand

and computers have an elastic demand

suppose the technological advance

doubles the supply of both products that

is the quantity supplied at each price

is twice what it was

a what happens to the equilibrium price

and quantity in each market so here we

have the market for medicines so we have

the supply and here we have the demand

which is completely inelastic okay

here if you see the it looks like an eye

of inelastic okay so here is the price

so there is the

technological advance so the

supply curve shift to the right

which make

this is the price the prices are lower

and the quantities are higher so this is

what happens what about the computers

market

here we have the supply and here we have

the demand which is

elastic

okay this is almost horizontal so here

we have the prices and quantities of

equilibrium so there is a technological

advance so here we have

the

new equilibrium so what happened with

the prices it happens exactly the same

there is a decrease in prices or there

is an increase in quantities okay

so the next question

is we here we have the graphs again

to answer the other three questions okay

so b1 says

which product experiences a larger

change in price so here we have a change

large a change

in price larger for medicines here

um see

which product experience is a larger

change in quantity here computers

due to the technological advance andy

what happens to total consumers spending

on each product remember that when you

have an inelastic

curve is better for you charge a larger

price okay

in this case the income of the medicine

of the medicine market market it will be

less than before because just this

square

which is

uh like earn

is not complain that it doesn't

compensate the loss of this square here

okay

so in this case the income

in the total is spending on each product

is going to be less for the medicine on

the other side when we have an elastic

demand we know that our strategy is to

charge a less price because

this square

which is the new uh

consumer spending is larger that we lost

with the price

higher than we charged it before

so

in this case for computers the computer

spending will be

higher than before

okay the 11th point

beachfront resorts have an inelastic

supply and automobiles have an elastic

supply supply suppose that a price in

population doubles the demand for both

products

that is the quantity demanded at each

price is twice what it was

a

what happens to the equilibrium price

and quantity in each market so here we

have the resort

here is the supply which it looks like

inelastic is

almost vertical so this is an inelastic

curve

okay and here we have the demand

so what happened there was an increase

in the demand

so here it was an increase the demand

so we have this so what happened to the

equilibrium price quantity of each

market okay the increases

and for the automobile we have the

supply which is almost

horizontal

and here we have the same an increase in

the gment

so here we have the same

here we have exactly the same

an increase in prices and increasing in

in quantities

now we have to answer the same questions

before so here we have the graph

to understand better what has happened

so the first question says which product

experiences a larger change in price so

this one is going to be larger

change in price for the resort and which

product experience is a larger change in

quantity is going to be for the

automobile

for the automobile market what happened

to total consumer expanding which

product so we see here that the consumer

spending will increase for both

because we see here larger quantities

and larger prices

okay

this is 12

years ago flooding

along the missouri and mississippi

rivers destroyed thousands of acres of

wheat

a

farmers whose crops were destroyed by

the floods were much worse off but

farmers whose crops were not destroyed

benefited from the thoughts why so here

we have the first

i just

suppose here an elastic demand

okay

i

suppose an elastic demand because i know

that there was a

effect in the supply because of the

float so the supply is going to shift to

the

in this case

here

is going to shift to the left sorry here

it's going to be one and two okay so

this is shift

to the left and why i put demanding uh

a demand which is elastic because we

know that inelastic curve for demand

when we have an increase in the price

there is going to be a decrease in the

income in the total revenue because here

we have the this this was the initial

point okay so the quantity is going to

decrease the arrow is in the other side

so is in the other side and the price is

as well so these quantities that will

those

they are not compensated but the little

increase by the price so this is why

they are worse off this is crops

destroyed remember the arrow is going to

be to the other side and the price as

well so this is going to be a shock to

the supply it's going to be shift to the

left so it's going to be this one

okay and why

the orders so i'm going to maintain like

the demand curve because they're elastic

okay for so this is the case why

they

why they

they are worse off and now given the

this was an increase in the demand

why because

given the increase in the price with

these crops they have to consume to the

other that they were not destroyed so

they earned because of their flaws

okay

b what information would you need about

the market for weed in order to assess

whether farmers as a group were hurt or

helped by default so first we need to

obtain the sum

of the aggregate demand and supply okay

in order to block everything in just one

graph

so if the aggregate demand is inelastic

in general they will help

why because they will because of the

floats there will be a the total

aggregate supply

usually because of the fault it goes

shift to the left so an increase in the

price in inelastic demand it

it returns a higher revenue okay so it

would be better but in the other side if

the aggregate demand is elastic in

general they work hard because an

increase in the price as we saw for the

crops where they were destroyed there

was a decrease in the total revenue

13

explain why the following might be true

a drought around the world raises the

total revenue that farmers receive from

the sale of grain but a drought

only in kansas reduces the total revenue

of that council of council farmers why

this is given because of the elasticity

demand price so in the world the

elasticity

is more inelastic so an increase in the

price returns higher revenue and in

kansas is elastic a higher price it be

it returns a less revenue so here we

have the price

we have this one which is the elasticity

which you see is completely almost

perfectly inelastic the demand

so there was a drought so it it turns

out um

decrease

oh my god this is okay this was the

initial point

this one price one and quantities one so

there was a drought so the supply shift

to the to the left from c1 s1 to s2 it

has

less quantities and a higher price so

you see here

the the total revenue in the world

is higher because of this and what about

cancers kansas is completely the

opposite because the demand

demand is complete um is elastic so in

this case there was a drought so they

were to shift to the left for the supply

the curve and in this case is going to

be a decrease in the quantities and a

little increase in prices so this loss

is not compensated by the little

increase in prices so they are for this

reason kansas is worse off and the world

is better off

so the last point because better weather

makes farmland more productive

farmland in regions with good weather

condition is more expensive than

farmland in regions with bad weather

conditions

over time however as advances in

technologies have made all farmland more

productive the price of farmland

adjusted for overall inflation has

fallen so use the concept of elasticity

to explain why productivity and farmland

prices are positive positively related

across space but negatively related over

time so here

we have the this case

for um

for

this is the case for productive land so

no don't pay attention to this is what

at this point okay so

here we have the the

the productive the productive land so

here we have a demand

inelastic

why because

because of the farmland imported

productive land

is more expensive because they can

charge a higher price

because they will receive a higher

revenue so this is going to be the case

and in the other side for the

non-productive

non-productive farmland we have here at

demand which is inulus elastic so they

have to charge a lower price

okay in order to have more revenues so

here you will see because if they

farmland with the productive land they

charge

this point remember that when inelastic

curve they will receive less when they

decrease the price so for this reason is

higher okay so for this reason is

positively

related

higher productivity higher price because

of the demand what happened in the

in the long run

in the long run

we have

the demand it turns out more

elastic or it turns out more in the

middle because there is no more

difference

there is no more difference for

non-productive a productive

farmland because they are almost the

same because of the technological

advance so the demand is going to be

almost the same

but with the important thing is like

there's going to be a

technological advance

so we see here how over time the price

decreased from p1

to p2 and the quantities increases as

well so this is devoted by the

technological advance and we see here

that the demand curve is almost the same

for both because they are almost

substitutes

okay a hobby has worth of a great

success with economics and see you the

next video bye bye