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| | In this example, however, consider price increases on the same route that are due only to increases in fuel costs. Will those price increases have the same elasticity? (No, because the alternative of traveling by car increases in cost by a similar amount. But demand will decrease anyway, because some people will simply stay at home rather than travel.) | | In this example, however, consider price increases on the same route that are due only to increases in fuel costs. Will those price increases have the same elasticity? (No, because the alternative of traveling by car increases in cost by a similar amount. But demand will decrease anyway, because some people will simply stay at home rather than travel.) |
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| | + | ==For Honors Students Only: Minor Point about Calculating Elasticities== |
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| | + | Warning: for honors students only! |
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| | + | There is an ambiguity in calculating the percentage change in price or quantity. What should be used as the denominator in deriving the percentages? If $100 increases to $110, then the percent change could be described as $10/$100 x 100% or $10/$110 x 100%. Above we used the initial price and quantity as the denominator, but we could have used the final price and quantity as the denominator instead. |
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| | + | Economists resolve this by typically using the average overall value as the denominator in calculating the elasticities. So if the price changes from $20 to $30, the percentage change in price is $10 divided by the average of $20 and $30, which is $25. The percentage change is thus $10/$25, which is 40%. This is also known as the “arc elasticity” because it is a more accurate depiction of the “arc” or curve of demand. Use this method when doing specific calculations on homework in order to obtain the precise result. |
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| | ==Income Elasticity== | | ==Income Elasticity== |
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| | A [[necessity]] is a good that has a positive income elasticity that is less than 1. A [[luxury]] is a good that has an income elasticity greater than 1. | | A [[necessity]] is a good that has a positive income elasticity that is less than 1. A [[luxury]] is a good that has an income elasticity greater than 1. |
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| − | ==Minor Point about Calculating Elasticities==
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| − | Warning: for honors students only!
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| − | There is an ambiguity in calculating the percentage change in price or quantity. What should be used as the denominator in deriving the percentages? If $100 increases to $110, then the percent change could be described as $10/$100 x 100% or $10/$110 x 100%. Above we used the initial price and quantity as the denominator, but we could have used the final price and quantity as the denominator instead.
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| − | Economists resolve this by typically using the average overall value as the denominator in calculating the elasticities. So if the price changes from $20 to $30, the percentage change in price is $10 divided by the average of $20 and $30, which is $25. The percentage change is thus $10/$25, which is 40%. This is also known as the “arc elasticity” because it is a more accurate depiction of the “arc” or curve of demand. Use this method when doing specific calculations on homework in order to obtain the precise result.
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| | ==Complements and Substitutes== | | ==Complements and Substitutes== |
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| | 2. Donald Trump makes money by "selling" the service of gambling. Donald Trump can keep increasing and increasing his price for the gambling (the losses by the players), and the addicted gamblers just keep on paying to play. Does this describe an "elastic" or "inelastic" service? Explain. | | 2. Donald Trump makes money by "selling" the service of gambling. Donald Trump can keep increasing and increasing his price for the gambling (the losses by the players), and the addicted gamblers just keep on paying to play. Does this describe an "elastic" or "inelastic" service? Explain. |
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| − | 3. Give examples of a complement and a substitute for a hamburger for lunch. | + | 3. Explain the similarity and difference between price elasticity of demand and income elasticity. |
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| | 4. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape. | | 4. A nearly perfectly elastic demand curve is nearly ________ in shape; a nearly perfectly inelastic demand curve is nearly __________ in shape. |
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| | Write an essay of about 200-300 words total on one or more of the following topics: | | Write an essay of about 200-300 words total on one or more of the following topics: |
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| − | 8. Explain price discrimination, and conclude with your view of whether it should be legal or illegal. | + | 8. Take a straight line demand curve and describe what the shape the total revenue has as a function of price. |
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| − | 9. Do you support "free trade" because it creates wealth, or do you oppose it for simply redistributing wealth to foreigners, some hostile to the United States? | + | 9. Explain price discrimination, and conclude with your view of whether it should be legal or illegal. |
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| − | 10. Is economics almost always determinative of the outcome on political issues, such as elections? | + | 10. Do you support "free trade" because it creates wealth, or do you oppose it for simply redistributing wealth to foreigners, some hostile to the United States? |
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| | 11. "A bird in the hand is worth two in the bush." Explain that thought in economic terms, including a discussion of risk. | | 11. "A bird in the hand is worth two in the bush." Explain that thought in economic terms, including a discussion of risk. |