Chapter 5. Exercises 1-7. Elasticity and its application.

Summary

This video explores the concept of elasticity in economics, focusing on demand elasticity across various goods and services. The speaker discusses questions from Chapter 5 of Gregory Mankiw's 'Principles of Economics,' comparing the elasticity of different goods such as textbooks, mystery novels, classical music, and heating oil. The video also calculates price elasticity for airline tickets using the midpoint method, examines business travelers versus vacationers, and analyzes income elasticity of demand for compact discs. The video concludes by discussing price elasticity in scenarios like subway ridership and fuel consumption.

Takeaways

• 📘 The video covers exercises 1 to 7 from Chapter 5 on 'Elasticity and its Application' from Gregory Mankiw's 'Principles of Economics'.
• 📚 Required textbooks have inelastic demand because students must buy them despite price changes, unlike mystery novels, which are more elastic as they can be substituted.
• 🎵 Beethoven recordings are more elastic compared to general classical music, which is more inelastic due to the broader nature of the category.
• 🕑 The longer the time horizon, the more elastic the demand becomes. For example, heating oil demand is more elastic over five years than six months.
• 💧 Water is more inelastic than root beer, as it's a necessity, while root beer can be substituted with other beverages.
• ✈️ Business travelers have inelastic demand for airline tickets due to the necessity of travel, while vacationers have elastic demand as they can substitute or cancel trips.
• 💿 Compact disks are normal goods, meaning demand increases with income. Elasticity calculations show how demand shifts based on price and income changes.
• 🧥 Emily's demand for clothing shows that her spending habits are proportionate to her income, demonstrating unit elasticity for clothing demand.
• 🚇 Subway ridership showed inelastic demand after a fare increase, meaning people continued using the subway despite price changes.
• ⛽ Tom’s demand for gas is perfectly inelastic, as he always buys 10 gallons, while Jerry’s demand is unit elastic, adjusting the quantity based on price changes.

Q & A

What is the difference between elastic and inelastic demand in the context of required textbooks and mystery novels?

Required textbooks have inelastic demand because they are mandatory for students, meaning that even if prices increase, students will still need to buy them. Mystery novels have more elastic demand since they are not essential purchases, and consumers can easily substitute them with other forms of entertainment if prices rise.

Why are Beethoven recordings considered to have more elastic demand than classical music in general?

Beethoven recordings are more specific and can be substituted with recordings from other musicians, making them more elastic. Classical music, being a broader category, is more inelastic because the demand for the genre as a whole doesn’t change significantly with price fluctuations.

How does the time horizon affect the elasticity of demand for heating oil?

Heating oil over the next five years has more elastic demand compared to heating oil over the next six months. Over a longer time horizon, consumers have more options to switch to alternative energy sources, making the demand more responsive to price changes.

Why is the demand for water more inelastic compared to root beer?

Water is a necessity, and its demand remains relatively constant regardless of price changes. Root beer, on the other hand, can be easily substituted with other beverages, making its demand more elastic.

How does the price elasticity of demand differ between business travelers and vacationers when the price of airline tickets increases?

Business travelers exhibit inelastic demand because they need to travel regardless of price increases, as it is often a necessity for work. Vacationers, however, have more elastic demand as they can choose not to travel or opt for cheaper alternatives when ticket prices rise.

What is the income elasticity of demand, and how does it apply to compact discs?

Income elasticity of demand measures how the quantity demanded changes with income. In the case of compact discs, they are a normal good, meaning that as income increases, people buy more. When the price increases from $8 to $10, the income elasticity for someone earning $10,000 is unit elastic, while it is inelastic for someone earning $12,000, indicating that higher income makes people less sensitive to price changes.

How can Emily’s decision to always spend one-third of her income on clothing affect her price and income elasticity?

Emily’s income elasticity of demand for clothing is 1, meaning that her spending on clothing increases proportionally with her income. Her price elasticity is also unit elastic, implying that the percentage change in the quantity of clothes she buys matches the percentage change in the price of clothes.

What factors might make the estimate of price elasticity for Subway ridership unreliable?

The estimate may not account for external factors such as seasonal variations, vacation schedules, weather conditions, or economic changes. These variables can influence ridership independently of price changes, making the estimate less reliable.

What is the difference in price elasticity of demand between Tom, who orders 10 gallons of gas, and Jerry, who orders $10 worth of gas?

Tom’s demand is perfectly inelastic since he always orders 10 gallons regardless of the price. Jerry’s demand is unit elastic because he adjusts the quantity of gas he buys based on the price, meaning the percentage change in the quantity demanded matches the percentage change in price.

How does elasticity explain the decline in restaurant spending during economic downturns compared to spending on food eaten at home?

Restaurant meals are considered a luxury good with elastic demand, meaning people reduce their spending on eating out significantly during economic downturns. In contrast, food consumed at home is more inelastic since it is a necessity, and people will continue to buy it even during tough economic times, though they may make slight adjustments to their spending.