Exercises 8-14. Chapter 5. Elasticity and its application.
Summary
TLDRThis 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
🚭 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.
🍦 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.
🏖️ 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.
🌾 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.
🌍 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.
Mindmap
Keywords
💡Elasticity
💡Price Elasticity of Demand
💡Inelastic Demand
💡Technological Advance
💡Equilibrium Price and Quantity
💡Supply and Demand
💡Substitutes
💡Complements
💡Total Consumer Spending
💡Long-run vs. Short-run
💡Income Elasticity of Demand
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
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