Manon's Econ Blog

Archive for the ‘2.2 Elasticities’ Category

Thanksgiving in one day in the entire year. During this day, people are expected to eat turkey. To add to this tradition, it is a national holiday. As we can imagine, the demand for turkey increases drastically before Thanksgiving.

Before and after Thanksgiving (D1), people who demanded turkey wanted it for a normal meal. The demand was not particularly elastic nor inelastic.

On Thanksgiving day (or a few days before), demand for turkey increases (D2). People now want turkey for their meal, no matter the price. In addition to the increase in demand, demand becomes inelastic. With this shift in demand to the right, the price for turkey increases drastically, as well as the quantity demanded.

Happy Thanksgiving! 🙂

Taxing plastic bags in order stop people from wasting them is a great idea. Too many bags are thrown away everywhere.

The problem with the free plastic bag is that people tend to use more than necessary, “after all, it’s free!” But then, not all of them are thrown away properly, and many end up in nature. They need many years before disappearing.

In Japan, taxing plastic bags can have the same effect that in Ireland if people realize the troubles of throwing them away. Nevertheless, plastic bags seem to be potent in Japanese society, although people start to carry cloth bags.

Also, even if the plastic bag is taxed, there are still a kind of plastic bag (without a place for the hands) that can be found everywhere in shops, and in unlimited quantity; so I do not think that the taxation will have such a  great impact in Japan.

But, after a while, people will get used to the idea of cloth bag, and the demand should be more elastic (change in taste and preferences), as shown on the diagram below.

Less plastic bags will be demanded, but the demand for cloth bag (substitutes) will increase, as shown on the diagram below.

The same thing that happened in Ireland may happen in Japan, but it will take probably more time than it did in Ireland for people to stop using plastic bags.

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Brazil, in the economic crisis, “did not avoid the downturn, but was among the last in and the first out.” Its economy is based upon the exportation of oil. Both demand and supply for oil are inelastic (it is a necessity but difficult to extract from the ground).

As more people entered the market and supplied oil, the supply curved for exported oil shifted to the right (see diagram below).

As we can see on the diagram, the equilibrium quantity increased a little while the price dropped a lot. This is what happened in the short term when more suppliers entered the market.

Since Brazil’s economy is developing and needs money, the government took advantage of the inelasticity of demand to put taxes on the oil exported. This is a long term move. It is illustrated on the graph below.

On this graph we can notice the huge proportion of total revenue that the government gets (purple square). This money can then be used for the public good. As we can see, most of this tax is paid by the consumers (see graph below).

Brazil’s government is trying to improve its society, not others. Therefore, it does not matter if the consumers pay more of the tax (it is the point), because if they pay it, less tax is left to be paid by the suppliers, and they can improve.

By taxing the imported oil, Brazil’s government improved itself and its oil suppliers at the same time. It is a smart move to get out of the economic crisis.

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The Broadway Theatre

 

Oprah Winfrey is an American media personality, actress, television producer, literary critic and magazine publisher. Well known throughout America and the whole world, people would pay enormous amount of money to see her on her show. This can be seen on the diagram below.

OprahEP1 on the diagram was the equilibrium point before Oprah became famous. After advertising, shows and so on, the equilibrium point shifted to EP2. The quantity stays unchanged because there is only one Oprah, so the supply curve is perfectly inelastic; but now people are willing and able to pay an higher price to see her. Since the demand curve is really elastic (taste changes very fast and people who want to see her are willing and able to pay a very high price), a small change in quantity demanded will lead to a huge change in price.

 

On the reverse, as her celebrity will decline, demand curve will shift again but to the left, as shown on the diagram below.

Oprah 2On this diagram we can see the exact opposite of what happened before. Demand curve shifted to the left because less people are willing and able to pay a high price to see Oprah. As before, since the demand curve is really elastic, a small change in quantity demanded will lead to a huge change in price.

Looking at these two diagrams, we can conclude that Oprah should aim to increase her popularity (or at least to keep it up) because if it drops, demand will shift, and her revenue will drastically fall.

As people’s income decreases because of the economic recession, the demand for McDonalds decreases as well. To bring demand back up again, McDonalds used advertisement. It now offers free coffees to consumers. This shifted demand to the right; more people are willing to eat McDonalds food to have a free cafe latte cup.

Demand decreased because of the recession, but went back up  in order for McDonalds to increase its revenue.

Link

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The increase in price of wheat and raw materials forced bread companies to increase the price of bread. However, out of the three comanies competing, Hovis, Warbutons and Kingsmill, only Hovis increased their prices in September. The other two companies waited till December to do so. Nervertheless, the demand for Hovis bread was too elastic, and as the price increased the quantity demanded drastically decreased.

Hovis bread

The other two companies waited till December to increase their price of bread. Since the demand for Hovis bread decreased demand for Warbutons and Kingsmill bread increased (they are subsitute goods) as shown on the diagram below.

hovis related price

Then, in December, as the price of wheat still increased, Warbutons and Kingsmill decreased their supply, but the change is demand was not as drastic as Hovis since it increased back in September (as shown on the diagram below).

Warbutons and Kingsmill bread final

The dashed lines are a reminder of the increase in demand. As we can see on the diagram above, price increased but the quantity demanded did not decrease compared to the original position.

 

 

Because of the economic recession in the world since a couple of years, people’s income have decreased. For the Hovis bread, as income decreases, the demand decreases too; therefore Hovis bread is a normal good, since if we apply the formula for Income Elasticity of Demand (YED= (% change in demand) / (% change in income) ), the result will be positive.

There is an economic recession in the world today. People’s income decreased, and so did demand, as shown on the diagram below.

People are more willing to travel with low-cost companies because it takes a small proportion of their income. If we assume that revenue increases as demand is inelastic, then that is what JAL should aim for.Reducing the cost will help to lower the price of the ticket, as shown on the diagram below (this will not bring the revenue back to its original position but it will be better).

One way of reducing it is to reduce the number of hostesses by plane. This will not only reduce the costs of wages but also food. Airplanes still need hostesses, but less would not make much of a difference for passengers. Another way is to have more seats by plane; the cost will be more spread among passengers, and therefore the ticket can be cheaper. Some planes fly without being full, cheap tickets should be affordable soon before the departure of the plane so that JAL could still make a profit out of these seats supposed to be empty. Flying half empty is a waste of money because there are still as many hostesses, and as much food, and air used, as if they were full. In general, waste should be avoided as much as possible. Each possibility to avoid waste should be taken in consideration.
These options will reduce the cost of the flight, and therefore the plane ticket. People, since they will be spending a smaller portion of their income, will fly more; and, as the quantity demanded increases, revenue will increase as well.
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