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“The economics of coal revolved around two factors: most of the cost of production was wages for miners, and if the supply fell the price would shoot up because in an age before oil and electricity, there were no good substitutes. Profits were low in 1902 because of an over supply; therefore the owners welcomed a moderately long strike. They had huge stockpiles which grew in value daily. It was illegal for the owners to conspire to shut down production, but not so if the miners went on strike. The owners welcomed the strike, but they adamantly refused to recognize the union, for then it would control the coal industry.” http://en.wikipedia.org/wiki/Coal_Strike_of_1902
What is edfor Cigarettes? %∆Qd -4 %∆Pcig 10 • “Economic studies have suggested that a price increase of 10 percent reduces smoking about 4 percent” • ed = = −0.40 = Hence, studies Demand for cig is inelastic
Premium Cig (PC) and Discount Cig (DC) In 1998, PPC↑ from $2.45 to $2.90 per pack while the PDC = $1.50. Analysts predicted 10% ↓ in Q of PC demanded. PC What is the analyst’s estimate of ed ? ed PC = = = = −0.60 Why |edPC| = 0.60 > |edCig|= 0.40?
Determinants Of Elasticity 1. Number of Substitutes Example: Demand for premium cigs Demand will be more elastic as the number of substitutes increases | eCamels||ePC||eAll Cigs| > >
Market for At-Need Epidural Blocks (EB) Very Nearly perfectly inelastic PEB D QEB Determinants of Elasticity 2. Necessities versus Luxuries Demand for necessities tend to be inelastic
Gardasil: vaccine (for pre-teen girls) against (HPV) virus that causes cervical cancer. The price charged by Merck & Co. is $360. (Wikipedia)
“Anti-Cancer Vaccine A Tough Sell To Parents” National Public Radio, Thursday, September 18, 2008 “As of late 2007, just one in five American girls under the age of 18 had received shots for HPV.” Reasons for Low %: 1) Parents doubt that their child is sexually active. 2) Mistrust of vaccines 3) Price…“cost is a major obstacle if the girl is not covered by insurance”
Determinants Of Elasticity 3. Proportion of the Budget | eGardasil ||eGardasil | > Poor HHs Non-Poor HHs Goods that are a small % of peoples’ budgets tend to have inelastic demands (e.g., salt) 4. Time Frame | eReal Skeletons||eReal Skeletons | > Long-Run Short-Run India banned skeleton exports in 85
250GBHard Drives Western Digital (WD) Seagate Internal External “My Book” “FreeAgent”
WD’s External Drive WD’s Internal Drive P P $100 $75 Q Q Q1 Q1 The Demand for WD Drives Less than perfectly elastic Nearly… Perfectly Elastic D D
Snow Storms Hit EastCoast in Jan 05 January 27, 2005 1-month snowfall a 113-year high INELASTIC e = = 0.62
Supply Elasticity of … Market for Road Salt, 2004-2005 PRS S04 =S05 ($ per ton) $46 P05 $32 P04 D05 D04 QRS Q04 Q05 (millions tons / yr) 16 20
Elasticity of Supply Market for Road Salt, 2004-2005 PRS S04 =S05 ($ per ton) $46 P05 $32 P04 QRS Q04 Q05 (millions tons / yr) 16 20
Income Elasticity of Demand, ey %∆D ___________________ %∆Y • If ey> 0, then good is a normal good. • If ey < 0, then good is an inferior good. ey =
↑ Income ↑ Garbage Collection? Garage Collected (lbs per capita) 2000 1960 Average Family Income (thousands of real $)
Income Elasticity of Demand for Garbage Collection = ≈ ____________________ = = 0.84
Income Elasticity of Demand, ey Our estimate, ey= From Fullerton & Kinnaman (2000), ey= Garbage removal is a normal good.
%∆DX %∆PZ Cross-Price Elasticity of D, ex,z ex,z measures ∆ demand for a good caused by a ∆ price of another good, ceteris paribus. ex,z= eX,Z> 0 X & Z are substitutes (e.g., heroin and marijuana) eX,Z < 0 X & Z are complements (e.g, graves and caskets are complements
%∆DH %∆PM Not Surprising… to an Economist Suppose eHeroin,Marijuana > 0 In 1969, US Army launched “an all-out campaign” against marijuana suppliers in Vietnam. In 1972, thousands of US soldiers were using heroin daily. PM DH
