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Chapter 3: Problem 4

Cranfield (2012) estimated that the demand elasticities were \(-0.83,-0.61,\) and -0.76 for Canadian beef, chicken, and pork respectively. Are these demand elasticities elastic or inelastic? Which product is the most elastic?

Short Answer

Expert verified
All demand elasticities are inelastic. Canadian beef is the most elastic.

Step by step solution

01

Understanding Elastic and Inelastic Demand

Demand elasticity measures how the quantity demanded of a good responds to a change in its price. If the absolute value of the elasticity is greater than 1, the demand is considered **elastic**, meaning consumers are relatively responsive to price changes. If the absolute value is less than 1, the demand is considered **inelastic**, indicating that consumers are not very responsive to price changes.
02

Evaluate Beef Elasticity

For Canadian beef, the demand elasticity is given as \(-0.83\). The absolute value is \(0.83\), which is less than 1. Therefore, the demand for Canadian beef is **inelastic**.
03

Evaluate Chicken Elasticity

For chicken, the demand elasticity is \(-0.61\). The absolute value is \(0.61\), which is less than 1. Hence, the demand for chicken is also **inelastic**.
04

Evaluate Pork Elasticity

The demand elasticity for pork is given as \(-0.76\). The absolute value is \(0.76\), which is less than 1, indicating that the demand for pork is **inelastic** as well.
05

Determine the Most Elastic Product

The absolute values of the demand elasticities for beef, chicken, and pork are \(0.83\), \(0.61\), and \(0.76\) respectively. The closest to 1 is 0.83 (for beef), making Canadian beef the most elastic among the three.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Elastic Demand
Elastic demand refers to a situation where the quantity demanded of a product changes significantly in response to price changes. In economic terms, if the absolute value of the price elasticity of demand is greater than 1, then demand is considered elastic. When demand is elastic, consumers are quite sensitive to price changes, meaning a small change in price results in a larger change in the quantity demanded.
  • For example, luxury goods often have elastic demand because consumers will buy significantly more or less of them if prices drop or rise.
  • Imagine a scenario where the price of a trendy gadget drops by 10%, and as a result, sales increase by 20%. Here, the demand would be considered elastic since consumers reacted strongly to the price change.
Understanding elastic demand helps businesses and policymakers assess how price changes can affect sales and revenue. If they know a product has elastic demand, they may capitalize on lowering prices to increase overall revenue.
Inelastic Demand
Inelastic demand arises when the quantity demanded of a product doesn't change much with a change in price. This means that the absolute value of the price elasticity of demand is less than 1. Consumers keep buying similar quantities of the product even if prices go up or down. Often, necessities or basic everyday items fall into the category of inelastic demand.
  • For instance, insulin for diabetics is a necessity, and its demand is quite inelastic; changes in its price will not significantly impact the quantity bought since it is essential for health.
  • Another classic example can be salt: even if the price increases, people won't significantly reduce their consumption.
Companies selling products with inelastic demand might not benefit much from price reductions. Instead, they might focus on improving product quality or loyalty programs because demand will remain steady regardless of price shifts.
Price Elasticity of Demand
The price elasticity of demand measures how sensitive the quantity demanded of a good is to changes in its price. Elasticity scores can predict how a price alteration would affect demand for the product. This concept is crucial when businesses and economists are planning pricing strategies or assessing a market.
  • The formula to compute price elasticity of demand is: \ \[ E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}} \]
  • When computing, if the result is greater than 1, demand is elastic; less than 1, it is inelastic; equal to 1, it is unitary elastic.
  • Consider products like Canadian beef, where the demand elasticity is \(-0.83\). Since its absolute value (\(0.83\)) is less than 1, it's considered inelastic.
Understanding this elasticity helps in pricing decisions, product marketing strategies, and financial forecasting. By gauging how price changes are likely to affect demand, companies can optimize their pricing systems to balance profitability with consumer satisfaction.

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Most popular questions from this chapter

According to Duffy-Deno \((2003),\) when the price of broadband access capacity (the amount of information one can send over an Internet connection) increases \(10 \%,\) commercial customers buy about \(3.8 \%\) less capacity. What is the elasticity of demand for broadband access capacity for firms? Is demand at the current price inelastic? \(\mathbf{A}\)

Governments often use a sales tax to raise tax revenue, which is the tax per unit times the quantity sold. All else the same, will a specific tax raise more tax revenue if the demand curve is inelastic or elastic at the original price?

Do you care whether a \(15 \&\) tax per gallon of milk is collected from milk producers or from consumers at the store? Why?

Suppose that the demand curve for wheat in each country is inelastic up to some "choke" price \(p^{*}-\mathrm{a}\) price so high that nothing is bought-so that the demand curve is vertical at \(Q^{*}\) at prices below \(p^{*}\) and horizontal at \(p^{*} .\) If \(p^{*}\) and \(Q^{*}\) vary across countries, what does the world's demand curve look like? Discuss how the elasticity of demand varies with price along the world's demand curve.

After a major freeze destroyed many Californian crops, the price of celery increased several hundred percent. What can you conclude about the shape of its supply curve? The price increase was more moderate for avocados because they can be imported from other countries. Use a graph to explain why the ability to import avocados moderated the price increase.
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