For Each Of The Following Events, State The Relevant Elastic

For Each Of The Following Events State The Relevant Elasticity Concep

For each of the following events, state the relevant elasticity concept. Then compute the measure of elasticity using averages of prices and quantities in your calculations. Assume ceteris paribus changes. Show your calculations:

• a) Due to the recent hurricanes in the United States, lumber prices have increased by 14 percent. Canadian lumber production increases from 8 million to 11 million broad feet.
• b) After a major crop failure for strawberries, the price of strawberry jam increases from $4.00 to $5.80 per kilogram. Sales of peanut jam increase from 8,000 kg per month to 8,500 kg per month.
• c) When the price of a ticket to Saint Mary’s football game is reduced from $16.00 to $13.00, ticket sales increase from 1,200 to 1,350.
• d) When the price of basic telephone services increases from $0.10 per minute to $0.12 per minute, total minutes used per month fall from 200 to 190.
• e) An average household income in Nova Scotia increases by 10 percent, and annual sales of new trucks increase from 56,000 to 67,000.

Paper For Above instruction

The following analysis explores the elasticity concepts relevant to each given event, calculating the respective elasticities based on average prices and quantities and interpreting their implications on market behavior. Elasticity measures the responsiveness of quantity demanded or supplied to changes in variables such as price, income, or other factors. Understanding the elasticity types helps determine how markets react to shocks and guides strategic decision-making.

a) Lumber Price Increase and Canadian Production Response

The event involves a 14% increase in lumber prices due to hurricanes, with Canadian lumber production rising from 8 million to 11 million broad feet. The relevant elasticity here is the price elasticity of supply since we are examining how production responds to price changes. To compute it, we calculate the percentage change in quantity supplied relative to the percentage change in price using the midpoint formula:

Percentage change in quantity supplied = ((11 - 8) / ((11 + 8) / 2)) 100 = (3 / 9.5) 100 ≈ 31.58%

Percentage change in price = 14% (given)

Elasticity of supply = (Percentage change in quantity supplied) / (Percentage change in price) ≈ 31.58% / 14% ≈ 2.25

This result suggests that the supply of lumber is elastic, meaning that producers significantly increase their output in response to price increases. The elasticity reflects a responsive supply market, possibly owing to the ability of Canadian producers to ramp up production or reallocate resources swiftly, especially after a supply constraint caused by hurricanes elsewhere.

b) Strawberry Jam Price and Sales Response

The price of strawberry jam increases from $4.00 to $5.80, and sales of peanut jam increase slightly from 8,000 kg to 8,500 kg. While these products are likely substitutes or unrelated, the focus here is on the price elasticity of demand for strawberry jam and the cross elasticity of demand between strawberry jam and peanut jam.

First, the price elasticity of demand for strawberry jam:

Percentage change in price = ((5.80 - 4.00) / ((5.80 + 4.00)/2)) 100 = (1.80 / 4.90) 100 ≈ 36.73%

Percentage change in quantity demanded of strawberry jam (hypothetically, if sales data for strawberry jam were provided):Since sales of peanut jam increased, indicating a possible substitution effect, the cross elasticity of demand can be examined between strawberry jam and peanut jam.

Cross elasticity of demand = (% change in quantity demanded of peanut jam) / (% change in price of strawberry jam) = (500 / 8,000) / 36.73% ≈ (0.0625) / 0.3673 ≈ 0.17

Since the cross elasticity is positive but less than 1, peanut jam and strawberry jam are weak substitutes, and the increase in strawberry jam's price slightly nudges customers toward peanut jam. This indicates some substitutability but not a strong one, aligning with typical demand responses.

c) Football Ticket Price and Sales

The ticket price reduces from $16.00 to $13.00, while sales go up from 1,200 to 1,350 tickets. The elasticity of demand here measures how sensitive ticket sales are to price changes:

Percentage change in price = ((13 - 16) / ((13 + 16)/2)) 100 = (-3 / 14.5) 100 ≈ -20.69%

Percentage change in quantity demanded = ((1,350 - 1,200) / ((1,350 + 1,200)/2)) 100 = (150 / 1,275) 100 ≈ 11.76%

Elasticity of demand = 11.76% / 20.69% ≈ 0.57

Since the elasticity is less than 1, demand for tickets is inelastic. Fans are somewhat responsive to price decreases—possibly due to affordability concerns or loyalty—but the inelastic nature suggests that the majority of fans will attend regardless of small price shifts, especially if attending the game is viewed as a social or entertainment necessity.

d) Telephone Service Price and Usage

The price increases from $0.10 to $0.12 per minute, and monthly minutes decline from 200 to 190:

Percentage change in price = ((0.12 - 0.10) / ((0.12 + 0.10)/2)) 100 = (0.02 / 0.11) 100 ≈ 18.18%

Percentage change in quantity demanded = ((190 - 200) / ((190 + 200)/2)) 100 = (-10 / 195) 100 ≈ -5.13%

Price elasticity of demand = -5.13% / 18.18% ≈ -0.28

The low absolute value indicates an inelastic demand for basic telephone services. Consumers allocate essential communication services like phone calls with limited flexibility in spending, so even a price increase results in a small decrease in usage.

e) Income Increase and Truck Sales

Household income in Nova Scotia increases by 10%, with annual truck sales rising from 56,000 to 67,000 units:

Percentage change in income = 10%

Percentage change in truck sales = ((67,000 - 56,000) / ((67,000 + 56,000)/2)) 100 = (11,000 / 61,500) 100 ≈ 17.89%

Income elasticity of demand for trucks = 17.89% / 10% ≈ 1.79

Since the elasticity exceeds 1, trucks are considered a normal good with elastic income elasticity. Income increases lead to proportionally larger increases in truck sales, indicating that trucks are more likely viewed as luxury or high-quality goods that consumers purchase more of when their income rises.

Implications of Elasticity on Market Conditions

Understanding the elasticity in each case provides valuable insights into consumer behavior and market strategy. For instance, the elastic supply of lumber suggests producers can respond vigorously to price hikes, which may lead to increased investments or capacity expansion during supply shocks. The inelastic demand for telephone services indicates stable revenue despite price changes, but less potential for revenue growth from price increases alone. Furthermore, the positive income elasticity for trucks underscores their status as normal, possibly luxury, goods, which could influence marketing strategies aimed at higher-income segments.

Conclusion

In conclusion, elasticity concepts serve as powerful tools for analyzing market responses to various economic changes. Recognizing whether a product is elastic or inelastic helps businesses and policymakers predict sales fluctuations, set pricing strategies, and understand consumer preferences. The calculations and interpretations presented here demonstrate that market reactions vary depending on the nature of the good or service, the type of elasticity involved, and broader economic conditions.

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