Chapter 5. Exercises 1-7. Elasticity and its application.
Summary
TLDRThis 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.
Outlines
📘 Understanding Elasticity of Demand: Required Textbooks vs. Mystery Novels
This paragraph explains the concept of elasticity of demand by comparing required textbooks with mystery novels. Required textbooks are considered inelastic because students must buy them regardless of price changes. In contrast, mystery novels are more elastic since consumers can choose not to purchase them or substitute them with other genres of literature.
🎶 Elasticity in Music Preferences: Beethoven vs. Classical Music
The paragraph examines the elasticity of demand in music, comparing Beethoven recordings (more elastic) with classical music in general (more inelastic). Consumers can easily substitute Beethoven’s music with other composers, making it more elastic, while classical music as a whole is harder to substitute, leading to a more inelastic demand.
⏳ Time Horizons and Elasticity: Heating Oil Over Different Periods
This section explores how time affects the elasticity of heating oil demand. Heating oil over a short period (six months) is more inelastic since people have fewer alternatives in the short term. Over a longer period (five years), heating oil becomes more elastic as consumers have more time to find substitutes or alternative energy sources.
🚰 Elasticity of Water vs. Root Beer
Here, the comparison between water and root beer illustrates the difference in elasticity. Water is a necessity and is more inelastic since people will continue to purchase it despite price increases. Root beer, being non-essential, has more elastic demand as consumers can easily switch to other beverages if the price rises.
✈️ Business Travelers vs. Vacationers: Elasticity of Airline Tickets
The paragraph discusses the elasticity of demand for airline tickets between business travelers (more inelastic) and vacationers (more elastic). Business travelers must fly regardless of price changes due to work obligations, while vacationers are more sensitive to price changes and can choose alternative modes of transportation.
💿 Income Elasticity of Compact Discs: A Case Study
This section uses the midpoint method to calculate the price elasticity of compact discs at different income levels. The analysis shows that compact discs are a normal good, as demand increases with higher income levels. Additionally, demand becomes less elastic at higher income levels since consumers are less affected by price changes.
🧥 Emily’s Clothing Demand: Price and Income Elasticity
This paragraph explores Emily’s demand for clothing and how it reacts to changes in her income and the price of clothing. It shows that clothing is a normal good, as she spends more on clothing as her income rises. Both her income elasticity and price elasticity of demand are calculated, demonstrating a unit elastic response to price changes.
🚇 Subway Ridership and Elasticity After a Fare Increase
The paragraph examines the price elasticity of demand for subway rides in New York following a fare increase. Despite a significant price increase, the drop in ridership was relatively small, indicating inelastic demand. The analysis suggests that transit authorities can increase revenue by raising fares due to the necessity of public transportation.
⛽ Gasoline Elasticity: Tom vs. Jerry
This section contrasts the elasticity of demand between two drivers: Tom and Jerry. Tom always buys 10 gallons of gas, making his demand perfectly inelastic, while Jerry always spends $10 on gas, resulting in unit elastic demand. Jerry’s demand changes with price fluctuations, while Tom’s does not.
🍽️ Restaurant Meals vs. Home Cooking: Elasticity During Economic Downturns
The paragraph explains why spending on restaurant meals declines more during economic downturns compared to spending on food for home consumption. Restaurant meals are a luxury good with elastic demand, meaning people reduce dining out when incomes fall. In contrast, food for home consumption is a necessity and has inelastic demand.
Mindmap
Keywords
💡Elasticity of Demand
💡Inelastic Demand
💡Midpoint Method
💡Normal Goods
💡Unit Elasticity
💡Income Elasticity of Demand
💡Price Elasticity of Demand
💡Substitutes
💡Luxury Goods
💡Inferior Goods
Highlights
The video covers exercises 1 to 7 from Chapter 5 of 'Elasticity and its Application' in Gregory Mankiw's 'Principles of Economics.'
Explanation on elastic demand for mystery novels versus required textbooks: Required textbooks have inelastic demand due to necessity, while mystery novels are more elastic since they can be substituted.
Beethoven recordings have a more elastic demand compared to classical music as a genre, which is more inelastic due to broader demand.
Heating oil's elasticity changes over time; it's more elastic in a 5-year span compared to a 6-month period, allowing more time for substitutions.
Water is more inelastic compared to root beer since it's essential and has fewer substitutes.
The video demonstrates the calculation of price elasticity of demand for business travelers and vacationers using the midpoint method, showing business travelers have more inelastic demand due to necessity.
Vacationers exhibit more elastic demand for airline tickets compared to business travelers, as they can easily switch to alternative travel methods if prices rise.
Compact discs are considered a normal good, as demand increases with higher income, demonstrating positive income elasticity.
Price elasticity of demand for compact discs shows a unit elastic relationship when price changes from $8 to $10, meaning the quantity demanded changes proportionately with the price.
Income elasticity of demand is shown to be higher for compact discs when income increases from $10,000 to $12,000, especially when the price of CDs is higher.
Emily’s demand for clothing is unit elastic, meaning her clothing consumption rises in proportion to her income increase, maintaining a constant spending ratio.
Spending on clothing becomes less elastic if Emily decides to spend only one-fourth of her income, causing her demand curve to shift leftward.
Subway ridership is inelastic, as demonstrated by the 4.3% decline in ridership after a fare increase, with the fare hike still increasing overall revenue.
Tom’s demand for gasoline is perfectly inelastic since he always buys 10 gallons, regardless of price changes.
Jerry’s demand for gasoline is unit elastic, as he buys gas worth a fixed dollar amount, meaning his quantity demanded changes proportionately with the price.
Economic downturns lead to more elastic demand for restaurant meals, as consumers quickly reduce luxury spending, while home food consumption remains inelastic due to necessity.
Transcripts
hi in this video we are going to solve
the exercises from one to seven of
chapter 5 elasticity and its application
this is a book of Gregory manual
principles of economics so the first
question says
of the following pairs of good which
good would you expect to have more
elastic demand and why a require
textbooks or mystery novels so I would
say the the good with
um
higher
the elastic demand
is Miss renewable because comparable
required textbooks they are mandatory
you need to buy them even if there is a
change in the price
you need to spend more but you will buy
them in others I have the mystery novels
they are not completely required we are
talking about more something more
elastic that you can change so for
example you can change buying food with
another generous or Another Part of
literature okay
the B is b solving recording or
classical music recorder in general
so as we said before
when we have like more specific good in
this case is Beethoven recording this is
like a vanilla ice cream so you can
change for another another flavor so in
this case you can change for another
musician for example so
so in this case you will change
Beethoven easily so when we are talking
about more General Goods as classical
music it turns out more inelastic so in
this case this is going to be this is
gonna be the Beethoven recordings okay
so this is going to be more elastic
more elastic good so because classical
music requires more General so it is
inelastic so heating oil during the next
six months or hitting all during the
next five years so so as you remember
elastic change
changes with the time Horizon the longer
the Horizon the more elastic is the good
so in this case it's going to be heating
oil during the next five years okay this
is going to be in the time Horizon it's
going to be more time so you can time
for substitute this kind of energy
so G root beer of water so again we need
more water than beer in theory or mostly
people so in this
and in this case we have the water so
it's going to be more inelastic if they
change the price
10 percent even you need to spend more
is something that you need to pay so the
demand is not going to change too much
instead of broadbeard you can find
another beverage that can
change or or like yeah it can be like
a substitute of this good
second suppose that business Travelers
and vacationers have the following
demand for airline tickets from New York
to Boston so here we have the price
which goes from 150 to 300. in the other
column we have the quantity demanded for
business Travelers so we see here 200
2
000 to 100 for 150 dollars until
1800 for 300 in the last column we have
the quantity demanded by the vacationers
they have one thousand for 150 and 1 and
400 for 300 for 300 price
okay
so the question is
as the price
of tickets rises from 200 to 250 what is
the price elasticity of demand for one
business Travelers and vacationers we
use the midpoint method in your
calculations so here we are going to
find out the business Travelers so
remember the elasticity of demand is
given by the change the percentage
change of the quantities in the
numerator over the change and percentage
of the price so in this case we are
finding from 200 to 250 so this is going
to be the changes for the Travelers it's
going to be
1900 minus two thousand and the midpoint
between these two is
1950 over the change in the price the
final price which is 250 T and minus 200
over the midpoint which is 225. so we
find this value
what does it mean it means that is less
or lower than one so this is inelastic
as we expected because business
Travelers they need to they need to
travel so maybe if the anything is like
the change
of the price anyway they will travel
because they need to so in this case why
is given that because the change of the
quantities is much or less than the
change are in the price so here we have
we have the elasticity
now we are going to do the same for
vacationers we have the denominator
which which is exactly the same because
the change for in the price for business
Travelers and the cashioners is the same
on the other side we have the change
which is going to be from
from 600 uh
in this case to 800 okay the price
before was sorry again was 800 and after
the price is going to be 600 and they
made 0.700 and now we have 1.28
so this is as we expected is larger than
one so it means that they are they are
more sensitive for the change uh for the
change in the price there is a change in
the price but the quantities change more
proportionally than the price change
so here
B why might vacation we have different
our system business Travelers so uh as
we said is more necessary for business
Travelers by cash owners that maybe they
would say okay the flight is to is too
expensive so we can go instead of going
from New York to Boston we can just go
by car or we can go to another place
instead of business because they have to
go they have an appointment they have an
agenda they have a schedule so they have
to do it so the elasticity they are much
more inelastic okay
third suppose that your demand schedule
for compact disk is as follows okay so
imagine here we have the price from a to
16. this uh are the quantity demanded
for an income of ten thousand and here
we have the quantity demanding demanded
of income 12 12 000. as you see here we
see when you have more money
here you demand more for each price
okay you demand more so even without
analyzing any equation you already
realize that for you the compact discs
they are a normal good what is what
normal good is a normal good is a good
when you receive more money or more
income you demand more this is a normal
good so here we have
the first question use the midpoint
method to calculate your price
elasticity of demand as the price of
compact disk increases from 8 to 10 if
one your income is ten thousand and
second your income is twelve thousands
so first first of all we have the the
income
which is ten thousand so remember we
have in the numerator the change in
percentage of the quantities which is
going to be given by the midpoint method
so we are going to have the quantities
we are evaluating from 8 to 10 so we
have uh in this case 32
okay
um is going to be -40
because this is the change over the
midpoint which is 36 and the change in
the price is from 10 to 8 from 8 to 10.
so it's going to be 10 minus 8 over the
midpoint which is 9. this is one so what
does it mean 1 means that uh there's
gonna be a the same proportion of the
change and the quantities and the change
in the price this is unit elastic it's
going to be a proportion relation for
the other side for the income Which is
higher we have the same price the change
in the new denominator which is exactly
the same as the spread as the previous
one and here we have 45 and 50. if you
see here the change in the quantities is
less than the change the price which is
expected because you because of you have
more money you are not so affected by
the change of the price you consume
almost like the same I mean almost the
same so here is inelastic because it's
less than one okay so now they asked for
calculate your income elasticity of
demand as your income increases from 10
000 to 12 000 if one the price is 12
until the price is 16. so here remember
the table and now we are going to start
analyzing when the price is 12. so when
the price is 12 12 when we are finding
out uh about the elasticity of
or of demand are you income increases
okay so we are we are going to analyze
the elasticity
um
of your income okay so instead of having
the price here you will put here the
income so here we're analyzing with the
price fix which is 12 so it's going to
be the change in quantity is going to be
30 minus 24 over the midpoint which is
27. on the numerator we will put the
change in the income which is 12 000
um and minus 10 000 over the midpoint
so we have here one point YouTube
periodic okay it continues so here we
figure out that is positive so when it's
positive as we said before this is a
normal good it means when the income
increases the quantities as well for the
case of price of 16 we evaluate the same
the denominator is exactly the same but
the quantities is going to be fixed with
price of 16 which is going to be from 8
to 12 is going to be 12 minus 8 over the
midpoint so here we have 2.2 so we have
again
the in this case the quantities
increases even more than the income
increase but what what is important here
is design so here we see again that this
is a normal good for the for the guy
Emily has decided always to spend one
third of her income on clothing a what
is her income elasticity of clothing
demand so let's imagine that Emily has a
salary of 1200 so it means that she
spends always four hundred dollars in
clothing because it's one third of one
thousand two hundred
and there is an increase to
1500 for her salary
then she will spend 500 on clothes so
here
imagine that the price of the one piece
of clothes whatever she buys paints
sweaters I don't know whatever thing is
is 80 dollars for each piece of clothes
then she will be first given that she
will spend 400 she will spend 400 over
80 and after 500 over 80 80 given the
increase in the
in the in the salary so but so here
whereas income elasticity of cost demand
so here in the denominator we have the
hypothetical change in the salary from 1
200 to 1 500. so so here we have and we
have a denominator here we have over the
midpoint and here the quantities this is
uh 500 over 80 which is 6.25 and 400
over 80 which is 5 and over the midpoint
so what we realize here that the
elasticity
income is one so this is positive so
this is a normal good what does it mean
a normal good is a good a good word when
your income
is higher you will consume more so in
this case you would figure out here that
they she will consume more but
proportionally what he she has earned
more okay so the next Point says what is
her price elasticity of glossy or
clothing demand so imagine that each
goodies area as we said before so she
will consume five and if there is an
increase to 100 she will consume four
okay
because remember that the price is one
third of her income which is 400 dollars
so here we have the change in the
quantities which they are going to be 4
minus five and the midpoint 4.5 and the
changes in the price is going to be 100
which is the which is the original the
final price minus the initial price
which which is 80 at the midpoint this
is one this is unit elastic what does it
mean it means that the proportion of the
change in the quantities given the
increase in the price is exactly the
same as the change in the price so this
is the elasticity of demand is unit
elastic
see if Emily's tastes change and she
decides to spend only one-fourth of her
income on clothing how does her demand
curve change what are her income
elasticity and price elasticity now so
first her demand curve will be shift
shifted to the left given the less
quantity available for spending remember
that she has initial salary
1200 and after one one thousand five
hundred but with the change she will
have 1 200 divided four okay which is
going to be
300 and with the increase of this salary
is going to be this divided 4 which is
375. so imagine that the price is 80 for
each piece of clothes so then she will
first just consume
300 over 80 and after
375 over 8. so we're going to figure out
about
her elasticity
so here we have the elasticity of income
which is this is the income and those
are the quantities consumed this is
going to be
375 over 80 is 3 sorry 300 over 80 is
going to be 3.75 and this one is going
to be
4.6875 over the midpoint so we have here
one so we have an interesting conclusion
even the tastes has changed and she now
she will spend less in clothes given
that she will spend the same proportion
the elasticity of the in income is going
to be exactly the same and it's going to
be behave as a normal good remember
normal good
not remember good
um
you have like
higher higher price
sorry you have higher income more
quantities demanded
okay so here I would like to find out
for the case of the elasticity of demand
here the price is going to be 100 minus
80 over 9 over 90. and here we have the
quantities that's going to be exactly
the same and we have one so it's
interesting again even the the price
that I mean the quantities that Emily is
going to spend on clothing given that
there is a proportion that she will
still maintain or she will keep this
proportion the elasticity of income and
demand is going to be exactly the same
why is what is going to be the the great
like the most important change the most
important change is that she will
consume less of clothing
so the fifth point the New York Times
reported that Subway
readership's readership declined after a
fair increase
there were nearly 4 million fewer
Brothers in December 1995. the First
full month after the price of a token
increased 25 cents to 150.
then in previous uh December a 4.3
percent decline a use this data to
estimate the price elasticity of demand
for Subway Riders so here I'm just
summarized the information so you have 4
million fewer ride Riders which is
4.3 percent required there is the
initial price which was was this one and
after the increase of 25 the final price
is this
so the first we need to figure out the
price elasticity of demand so remember
the numerator we have the personal
change of quantities which is 4.3 so as
a number I divided of divided by 100 so
this is going to be 0.043 the change in
the price by the midpoint method is
going to be 1.5 minus 1.25 over this one
which is the midpoint so here we have
the result so it means as expected that
this is an inelastic good people need to
move people need to transport so in this
case they don't like take uh pay much
attention to this change because they
are still the change in the quantities
was not as representative as the change
of the price
according to your estimate what happens
to the transit Authority's Revenue when
the fair Rises this is inelastic okay so
remember which is lower than one so it
means that an increase in the price
brings a larger increase in the income
so given the naturality of inelastic the
characteristic when you increase the
price you increase your Revenue so
opposite to the elastic the C Point why
might you estimate of elasticity be
unreliable so from my point of view I
think is reliable so you can think more
a little bit about that but maybe you
are not thinking taking into account
some variables because as you know in
economics we think about set respirables
so what does it mean when you have like
one variable you are whole you're you're
taking like you hold all the other
variables which maybe cannot be so
realistic so for example imagine about
one simple variable the more people
vacation so if there is more people in
vacation they don't need to commute
every single day so maybe it is going to
be a decrease
in the
is going to be a decrease in the in the
transportation or maybe there is less
people on vacation so for this reason
this was a little change on quantities
because people still were using the
subway what about the weather conditions
so for example the weather conditions I
don't know if I spell okay maybe I'm not
sorry whether conditions so in this case
for example there is a hurricane or a
typhoon or whatever
conditions in this in this city so maybe
it makes the there is a decrease
and the Subway or maybe in the country
because you cannot take the car because
impossible is a lot of snow in the
streets so you need to take the subway
which is the unique is the only way you
travel Transportation which work in the
city or maybe in can condition maybe
this time is Crisis so this is the the
big crisis so people they cannot take
more cars so they can to sell them so
they start to use
they start to use Subway or maybe the
other case they receive more money so
they abandoned because it's an inferior
good which are in very good is when you
receive more money you consume less of
this good in this case the subway maybe
you receive more money you go you
commute by car or okay so it could be
this these things make our elasticity a
little bit unreliable okay
so six point two drivers Tom and Jerry
each drive up to a gas station before
looking at the price each place is an
order
Tom says at like 10 gallons of gas Jerry
says I'd like 10 worth of gas what is
each driver's price elasticity of demand
so I'm going to suppose that the price
per gallon is two dollars and there is
an increase of two two dollars fifty so
I'm going to find out which is the
elasticity price of demand for Tom and
for Jerry here I'm going to find out
about term elasticity here as you
realize here he always asks for 10
gallons of 10 gallons of gas which makes
the sorry here is not the income here is
price okay it didn't I made a mistake so
here is going to be 10 minus 10 over 10
which is going to be the numerator zero
so it's going to be zero with us what
does it mean this is a perfectly
inelastic demand it doesn't matter the
price for Tom because he will always ask
for 10 gallons so they consume is going
to be exactly the main the same no
matter the price and the other guy case
we have the Jerry's elasticity which is
here again price made the mistake so
here we have
so given that he will pay 10 worth of
gas is going to be the price is going to
change the same as this one from two to
two five this is the midpoint and here
the change is going to be 10 over 2
and which is this the initial and this
one is going to be the final 10 over 2.5
which is 4 and over the midpoint here is
one which means you need elastic so the
same proportion of the change of the
price is going to be the same proportion
of the change of the quantity demanded
by durian
so this and the last Point economists
have observed that spending on
restaurant meals declines more during
economic downturns than thus spending on
food to be eaten at home how might the
concept of elasticity help to explain
phenomenon so here when we think about
luxury good is something when you have
economic downturn you have some economic
problem you immediately you could the
consume so this is the case of eat
outside so this is an elastic good but
when you have the necessity of it maybe
you safe you put away a little money
when when when you go to the supermarket
but basically you need to eat so this is
going to be more inelastic okay so I
hope it has worth have great success
with economics and see you the next
video bye bye
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