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.