Elasticities Examples

Elasticities Examples

Own-Price Elasticity of Demand

Chapter 5 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward

© 2010 Pearson Higher Education, Upper Saddle River, NJ 07458. • All Rights Reserved.

Example

Interpretation Let’s take rice as an example, which has an own price elasticity of - 0.1467. This suggests that if the price of rice drops by 10%, for example, the quantity of rice demanded will only increase by 1.467%. P Rice producer Revenue? 10% 10%drop drop Consumer surplus? 1.467% 1.467%increase increase Q Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward


The answer… 1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30. If the Chicken increases the price of the platter by 50 cents: a. How many platters will the chicken sell?__1,440____ Solution: -0.30 = %∆Q÷%∆P -0.30= %∆Q÷[($4.00-$3.50) ÷(($4.00+$3.50) ÷2)] -0.30= %∆Q÷[$0.50÷$3.75] -0.30= %∆Q÷0.1333 %∆Q=(-0.30 × 0.1333) = -0.04 or –4% So new quantity is 1,440, or (1-.04) ×1,500, or .96 ×1,500 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward



Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward

1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30. If the Chicken increases the price of the platter by 50 cents: a. How many platters will the chicken sell?__________ b. The Chicken’s revenue will change by $__________ c. Consumers will be ____________ off as a result of this price change.



The answer… 1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30. If the Chicken increases the price of the platter by 50 cents: a. How many platters will the chicken sell?__1,440____ b. The Chicken’s revenue will change by $__+$510___ Solution: Current revenue = 1,500 × $3.50 = $5,250 per month New revenue = 1,440 × $4.00 = $5,760 per month So revenue increases by $510 per month, or $5,760 minus $5,250 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward


1

The answer…

Another Example

1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –0.30. If the Chicken increases the price of the platter by 50 cents:

1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30. If the Chicken increases the price of the platter by 50 cents:

a. How many platters will the chicken sell?__1,440____

a. How many platters will the chicken sell?__________

b. The Chicken’s revenue will change by $__+$510___

b. The Chicken’s revenue will change by $__________

c. Consumers will be __worse___ off as a result of this price change.

c. Consumers will be ____________ off as a result of this price change.

Why? Because price increased. Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward


The answer… 1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30. If the Chicken increases the price of the platter by 50 cents: a. How many platters will the chicken sell?__1,240____ Solution: -1.30 = %∆Q÷%∆P -1.30= %∆Q÷[($4.00-$3.50) ÷(($4.00+$3.50) ÷2)] -1.30= %∆Q÷[$0.50÷$3.75] -1.30= %∆Q÷0.1333 %∆Q=(-1.30 × 0.1333) = -0.1733 or –17.33% So new quantity is 1,240, or (1-.1733) ×1,500, or .8267 ×1,500 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward




The answer… 1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30. If the Chicken increases the price of the platter by 50 cents: a. How many platters will the chicken sell?__1,240____ b. The Chicken’s revenue will change by $__- $290___ Solution: Current revenue = 1,500 × $3.50 = $5,250 per month New revenue = 1,240 × $4.00 = $4,960 per month So revenue decreases by $290 per month, or $4,960 minus $5,250 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward


The answer… 1. The Dixie Chicken sells 1,500 Freddie Burger platters per month at $3.50 each. The own price elasticity for this platter is estimated to be –1.30. If the Chicken increases the price of the platter by 50 cents: a. How many platters will the chicken sell?__1,240____ b. The Chicken’s revenue will change by $__- $290___

Income Elasticity of Demand

c. Consumers will be __worse___ off as a result of this price change. Why? Because the price increased. Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward




2

Some Examples Own Price elasticity

Income elasticity

Beef

-0.6166

0.4549

Chicken

-0.5308

.3645

Cheese

-0.3319

0.5927

Rice

-0.1467

-0.3664

Lettuce

-0.1371

0.2344

Tomatoes

-0.5584

0.4619

Fruit juice

-0.5612

1.1254

Grapes

-1.3780

0.4407

Nonfood items

-0.9875

1.1773

Commodity

Elastic Elastic Introduction to Agricultural Economics, Penson, Capps, Rosson, and Woodward

5th

Inferior Inferiorgood good

ed

Luxury Luxurygood good Page 79 © 2010 Pearson Higher Education, Upper Saddle River, NJ 07458. • All Rights Reserved.

Example Assume the government cuts taxes, thereby increasing disposable income by 5%. The income elasticity for chicken is .3645. a. What impact would this tax cut have upon the demand for chicken? b. Is chicken a normal good or an inferior good? Why?



The Answer

The Answer

1. Assume the government cuts taxes, thereby increasing disposable income (I) by 5%. The income elasticity for chicken is .3645.

1. Assume the government cuts taxes, thereby increasing disposable income by 5%. The income elasticity for chicken is .3645.

a. What impact would this tax cut have upon the demand for chicken? Solution: .3645 = %∆QChicken ÷ %∆ I .3654 = %∆QChicken ÷ .05 %∆QChicken = .3645 ×.05 = .018 or + 1.8%

a. What impact would this tax cut have upon the demand for chicken? _____+ 1.8%___ b. Is chicken a normal good or an inferior good? Why?



Chicken is a normal good but not a luxury since the income elasticity is > 0 but < 1.0



Some Examples Cross Price Elasticity of Demand

Item

Prego

Ragu

Hunt’s

Prego

-2.5502

.8103

.3918

Ragu

.5100

-2.0610

.1381

Hunt’s

1.0293

.5349

-2.7541

Values Valuesin inred redalong along the thediagonal diagonalare areown own price priceelasticities… elasticities… Page 80 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward




3

Some Examples

Some Examples

Item

Prego

Ragu

Hunt’s

Item

Prego

Ragu

Hunt’s

Prego

-2.5502

.8103

.3918

Prego

-2.5502

.8103

.3918

Ragu

.5100

-2.0610

.1381

Ragu

.5100

-2.0610

.1381

Hunt’s

1.0293

.5349

-2.7541

Hunt’s

1.0293

.5349

-2.7541

An Anincrease increasein inthe theprice priceof of Ragu RaguSpaghetti SpaghettiSauce Saucehas hasaa bigger biggerimpact impacton onHunt’s Hunt’s Spaghetti SpaghettiSauce Saucethan thanvice vice versa. versa. Page 80

Values Values off off the the diagonal diagonal are are all indicating these these all positive, positive, indicating products as products are are substitutes substitutes as prices priceschange… change… Page 80 © 2010 Pearson Higher Education, Upper Saddle River, NJ 07458. • All Rights Reserved.


Some Examples Item

Prego

Prego Ragu Hunt’s



Some Examples

Ragu

Hunt’s

Item

Prego

-2.5502

.8103

.3918

Prego

.5100

-2.0610

.1381

Ragu

1.0293

.5349

-2.7541

Hunt’s

AA10% 10%increase increasein inthe theprice priceof of Ragu RaguSpaghetti SpaghettiSauce Sauceincreases increases the thedemand demandfor forHunt’s Hunt’sSpaghetti Spaghetti Sauce Sauceby by5.349%….. 5.349%…..

Ragu

Hunt’s

-2.5502

.8103

.3918

.5100

-2.0610

.1381

1.0293

.5349

-2.7541

But…a But…a10% 10%increase increasein inthe theprice priceof of Hunt’s Hunt’sSpaghetti SpaghettiSauce Sauceincreases increases the thedemand demandfor forRagu RaguSpaghetti Spaghetti Sauce Sauceby byonly only1.381%….. 1.381%….. Page 80 © 2010 Pearson Higher Education, Upper Saddle River, NJ 07458. • All Rights Reserved.


Example


The Answer

1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60. a. If the price of hamburger buns rises by 5 percent, what impact will that have on hamburger consumption? b. What is the demand relationship between these products?


Page 80 Introduction to Agricultural Economics, 5th ed Penson, Capps, Rosson, and Woodward


1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60. a. If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ____ - 3% ______ Solution: -.60 = %∆QH ÷ %∆PHB -.60 = %∆QH ÷ .05 %∆QH = .05 × (-.60) = -.03 or – 3%



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The Answer

The Answer

1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60.

1. The cross price elasticity for hamburger demand with respect to the price of hamburger buns is equal to –0.60.

a. If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ___ - 3% _____

a. If the price of hamburger buns rises by 5%, what impact will that have on hamburger consumption? ___ - 3% _____

b. What is the demand relationship between these products?

b. What is the demand relationship between these products? These two products are complements as evidenced by the negative sign on this cross price elasticity.





Another Example

The Answer

2. Assume that a retailer sells 1,000 six-packs of Pepsi per day at a price of $3.00 per six-pack. Also assume the cross price elasticity for Pepsi with respect to the price of Coca Cola is 0.70.


a. If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption?

a. If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption?


Solution: .70 = %∆QPepsi ÷ %∆PCoke .70 = %∆QPepsi ÷ .05 = .035 or 3.5% New quantity sold = 1,000 × 1.035 = 1,035 New value of sales = 1,035 × $3.00 = $3,105





The Answer

The Answer



a. If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? __35 six-packs or $105 per day__

a. If the price of Coca Cola rises by 5 percent, what impact will that have on Pepsi consumption? __35 six-packs or $105 per day__


b. What is the demand relationship between these products? The products are substitutes as evidenced by the positive sign on this cross price elasticity!





5

Demand Characteristics

Price Flexibility of Demand



¾ Which market is riskier for producers…elastic or inelastic demand? ¾ Which market would you start a business in? ¾ Which market is more apt to need government subsidies to stabilize producer incomes?



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Elasticities Examples

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