Meanwhile, in my other economics set, we spent a large proportion of the lesson stretching rubber bands. Well, I did at least, I'm not sure about the rest of the set (my teacher should have known that leaving me unattended with a rubber band was a mistake...)
What exactly does is have to do with economics? Truth be told, I don't really know. I still don't, other than to provide light relief from the pressures of school.
Elastic bands do, however, share one word of their name with our new topic 'Price Elasticity of Demand' (well played Mr Williams) and that is, indeed, what my next post is about.
I will now briefly summarise the sheet we were given to fill in, including the headings:
What is the concept of elasticity in economics all about?
"The concept of elasticity tries to identify the impact of changes that one variable (e.g price or income level) has on another variable (e.g quantity demanded)"
Hang on a second, doesn't that sound just like the demand schedule? (for further reading on the demand schedule, refer to this website which is oddly from my blog too.... Coincidence?). Well it basically is, but it's not a graph, it's the responsiveness of demand to change in the price level in theory and practise.
What is the formula for calculating price elasticity of demand?
The formula we (and by we, I mean everyone, not just A Level students) use is percentage change for quantity demanded divided by percentage change for price (and percentage change is calculated as new amount - original amount divided by the original amount)
For example, if, due to a heat wave, puffa jackets are put on sale in a store, then their prices decreases from £40 to £36. But the next week, there's a freak snow storm, and demand for puffa jackets from that store rises from 1000 to 1200 (god forbid), then the price elasticity of demand would be as follows:
Price percentage change: (36-40)/40 = -10%
Quantity demanded percentage change: (1200-1000)/1000 = 20%
Then we use the original formula as follows... (%QD)/(%P). So: 20/-10 = -2
So, this example would be described as Price elastic demand, as it's got quite a large negative number. If the end result would have been smaller, e.g -0.5, then we would describe that as price in elastic demand. And if we had a positive figure, then... Well, I don't really know. Apparently we don't come across those at A Level, so I'll cross that bridge when I will obviously go on to study economics at Oxbridge.
I then turn the page on my highly informative sheet, and find an explanation of what the end result actually means. Handy, huh.
So, when the answer is 0, the example is called perfectly inelastic and I'm informed that this is almost impossible, but if it were to happen, then the firm's revenue would go down as demand would stay the same when price was changing.
When the answer is between 0 and -1, then the example is called price inelastic demand, and the firm's revenue would go down a very small amount as prices fall but demand increases at a smaller rate then price dropping.
When the answer is -1, then it's called unitary price of elasticity of demand (bit of a mouthful) but that basically means that there's very little change to a firm's revenue as the change in price is proportionate to the change in demand.
And finally, when the answer is bigger than -1, then the firm's revenue increases, and it's called price elastic demand (just like my chilling puffa jacket example), as a demand changes by a higher amount than price change.
I do hope I haven't disturbed the fashionistas or 'summer-lovers' amongst you, I know the prospect of puffa jackets and of freak snow storms will deeply affect you, as it has me. Time to bask in the mid-afternoon sun, whilst gazing at my trench coat in appreciation, I think.
Obviously, however, there's more to be said, so I must postpone my lazy afternoon for just a few seconds longer, because we, my friends, must discuss tax.
I know, you don't want to. Tax should be avoided as little as possible (and no, that doesn't mean I'm condoning The Cayman Islands to you again, Jimmy Carr), but this section is going to be relatively brief.
There is, also, price elasticity for the incidence of tax, where tax is either shifted or unshifted. Shifted tax is the tax that the firm has to pay, but they offload that cost onto the consumer by increasing the price of the good, and unshifted tax is the tax imposed on a firm which they pay off themselves, therefore by not rising the price of the good or service. On a relatively elastic curve (one with a gentler gradient) there is generally less shifted tax, and more unshifted, meaning that the price won't go up that dramatically due to taxes. However, on a graph for a product with inelastic demand, then shifted tax is generally higher than unshifted, meaning that the price of the good is likely to rise to accommodate for the extra tax imposed.
And, there's more! As I mentioned earlier, there's also income elasticity of demand, which is pretty similar to price elasticity of demand, but it varies according to whether you're a high earner or a low earner, and whether your income is high or low.
I feel an example would be the best way to paint this picture, so assume that Ellie earns £15,000 (making her a low earner), has positive income elasticity and spends £20 on Primark clothes a week. If her income should increase to £16,000, then she will be able to spend £30 on Primark clothes a week due to her positive income elasticity (hey, big spendeeerrr!)
However, if Katy (the best name on the planet, and oddly, mine) earns £50,000 (making her/me a high earner, obviously), has negative income elasticity and spends £20 a week on Primark clothes. If her income rises to £53,000, then she will be able to spend £19 a week on Primark clothes, and significantly more on luxury items (for example, to name but a few, Chanel, D&G, Chloe, Gucci, Fendi, Prada, Burberry etc.) all due to her negative income elasticity.
So really, if you're a 'Katy' of the world, you're doing pretty well for yourself, and it's all due to your negative income elasticity, and glorious name.
Now, I shall finally retire to my garden, to bask in the midday sun, sipping at a glorious concoction of juices, thanking god for the prospect of all the designer brands I can invest in if I have negative income elasticity. Or, I'll imagine I am whilst ploughing through yet more economics homework (oh woe is me...)
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