Foundations of Economics

Foundations of Economics

Tutorial 3 Elasticity

Q1. Elasticity recap

1. Price elasticity of demand measures the percentage change in ___________ caused by a percentage change in ______________

1. Income elasticity of demand is defined as  __________________________

1. If the demand for a product is said to be elastic, this is demand for which price elasticity is  ________ than 1.

1. Which of he following pairs of good is likely to have a positive cross price elasticity of demand?

1. A Sony Playstation and the games that are played on it
2. A Sony Playstation and Microsoft X Box
3. Airline travel and airline fuel

1. A manufacturer reduces the price of its digital cameras by 20% and, as a result, the volume of sales rises by 30%. Therefore, the value of price elasticity of demand for the good is _______________.

1. For alcohol, the short run price elasticity of demand is estimated to be 0.2 in Europe. This means that the demand for alchohol is relatively price ___________and that prices need to increase by _______ to reduce alcohol consumption per head by 15%. Will producer be able to increase TR by decreasing the price?

1. Suppose that a pizza vendor at a basketball game can sell 3,000 slices of pizza per night at a price of $3 per slice. If the vendor raises the price to $4 per slice, the number of slices sold falls to 2,000. Based on this information, the price elasticity of demand is ______________

1. An income reduction of 15% causes Sardor to increase his purchase of minced beef by 10%. Which of the following statements is most likely to be correct?

1. The income elasticity of demand for minced beef is -2/3 and ground beef is a superior good
2. The price elasticity of demadn for ground beef is -1.5 and ground beef is a normal good
3. The income elasticity of demand for minced beef is -2/3 and ground beef is an inferior good
4. The price elasticity of demand for ground beef is -2/3 and minced beef is a normal good

1. The income elasticity of demand for private dental services, rental movie services, and private label clothing available in supermarkets have been estimated to be +2.5, +0.8, and -1.5 respectively. Interprete these coefficients.

1. An increase in the price of hot dogs from $1.50 to 2.10 per pound increased the average number of beef burgers demanded per week from 300 to 360. Assuming that all other economic variables were held constant the cross-price elasticity of demand between hot dogs and beef burgers is  ___________ which indicates that the two goods are __________

1. A café observed an increase in the demand for its coffee following a rise in the price of a cup of tea from $1.20 to $1.50. Assuming the cross price elasticity of demand of coffee with respect to a change in price of tea is +0.8, by how much (in per cent) will the demand for coffee have increased?

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Q2. Case study

What the market will bear? Secondary markets and ticket touts

23 September 2016. John Sloman.

[pic 1]

If you want a ticket for an event, such as a match or a concert, but the tickets are sold out, what do you do? Many will go to an agency operating in the ‘secondary market’. A secondary market is where items originally purchased new, such as tickets, company shares, cars or antiques, are put up for sale at a price that the market will bear.

The equilibrium price in a secondary market is where supply equals demand and the actual price will approximate to this equilibrium. In the case of tickets, this equilibrium price can be much higher than the original price sold by the venue or its agents. The reason is that the original price is below the equilibrium.

This is illustrated in the figure (s. left). Assume that the total supply of tickets is Qs. Assume also that the official box office price is Pbo and that demand is given by the demand curve D. [pic 2]

At the box office price demand exceeds supply by Qd – Qs. There is thus a shortage, with many fans unable to obtain a ticket at the official price.

Many of you will be familiar with having to be as quick as possible to get hold of tickets where demand considerably outstrips supply. Events such as Glastonbury sell out within seconds of coming on sale.

If you buy a ticket and then find out you cannot go to the event, you can sell the ticket on the secondary market through an online site or agency. Such agencies could be seen as providing a useful service as it means that otherwise empty seats will be filled. But if the equilibrium price is well above the original ticket price, there is the potential for huge gain by the agencies, who may pay the seller considerably less than the agency then sells the ticket to someone else.