ECONOMICS 12 FINAL PROJECT
BY: HANNA BATEMAN
INTRODUCTION
Over the course of the semester our Economics 12 class has worked together to break down and study Microeconomics. Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. In this first half of this project I will be focusing on Elasticity & Opportunity Cost.
ELASTICITY
Elasticity is used to assess the change in consumer demand as a result of a change in the good’s price. When calculations are done with numbers such as price and quantity demand if the value is greater than 1, this suggests that the demand for the good or service is elastic, whereas a value that is less than 1 suggest that the demand is inelastic. If the vaule is equal to 1 it suggest that the demand is unitary. The law of demand is one of the most important economic principles that looks at the way consumers react to changes in prices. It indicates that as the price of a good or service increases, the quantity demanded for that good or service will usually decrease. In other words, when something becomes more expensive, people will be less willing to buy it. Likewise, as the price of a good or service decreases, consumer demand for that good or service will usually increase. In class we looked at just how responsive buyers are to price changes and how it can greatly vary. An example of price elasticity of demand is, if the price of flour was cut, consumers would not be likely to buy more flour but if the price of airplane tickets were cut, consumers would probably buy more of them.
ELASTIC VS. INELASTIC
Elasticity is the responsiveness of quantity demanded and quantity supplied to a change in price. These break up into different categories but the two main ones are Elastic and Inelastic. Elastic demand is the type of demand that will rise or fall depending on the price. For example a chocolate bar is an elastic demand. If the price is $2, it is most likely that chocolate bar will be sold with high demand. But lets say the price doubles and now that chocolate bar is $4, most people would take the pass on buying it because of price and other factors that influence them such as possible cheaper substitutes. This also applies to the supply side of elastic goods for the same reasons. As for inelastic demand is the exact opposite. Inelastic essentially means that a good is seen as necessary for survival such as transportaton like gasoline used necassary for travel and power. People will almost always buy this good no matter the price. Inelastic supply is determined by equations that show whether there can be an increase or decrease in quantity supplied but the demand for supply is always high. Elasticity also includes Unitary elastic, Perfect Elasticity, and Perfect Inelasticity.
ELASTICITY WITH DEMAND
The demand for an inelastic good will not be impacted by price change. Demand will almost always remain the same for an inelastic product because it is simply almost impossible to live without. Elastic demand totally depends on the price changes and other factors. With this being said there are things that can affect the elastic or inelastic demand for a good. A method that is used is called SPLAT.
Substitutes
For an inelastic good there are very few substitues therefore casuing a person to purchase the item. For an elastic good there will be many substitutes thus causing there to be compitions on pricing.
Portion of Income
For an inelastic good the price can range but since the product is inelastic it still causes a person to purchase it. Elastic goods can be a large portion of ones income therefore making it difficult for the person to purchase the item.
Luxury or Necessity
Inelastic good are seen as necessary for someone to have in their life so people are more willing to pay for it. As far as elastic goods go they are mostly seen as a luxury and if a peson can afford it they will make the purchase but some people who can not will regret it.
Addictive
Inelastic goods can be addictng casuing people to purchase them no matter the price. If a good is elastic most of the time it is not addictive.
Time
No matter how long it makes to produce and inelastic good, it does not affect the comsumer becasue they will still have to buy it. But if the good is elastic, then people will not purchase it because they will find other options.
ELASTICITY WITH SUPPLY
Elasticity also applies to the supply portion in the market. Generally as market prices rise, suppliers want to supply more because their profit will increase. Elasticity of of supply measures how responsive the quantity supplied by a seller is to a rise or fall in prices. A seller with elastic supply should take more advantage of the increase in demand for the product or good. Supply can quickly change to meet a certain demand thus increasing revenue. When supply is inelastic this means the seller cannot increase the quantity supplied. There are factors that affect the supply elasticity and these include:
Time: It takes time to produce a certain product and the longer a seller takes to produce that product will determine if it is inelastic or not. In the long run products come out to be elastic but in the short run they are inelastic. An example of an inelastic supply is fresh produce because it can’t be grown over night and there is nothing to do to speed up the process. With comparing this to elastic supply such as newspapers, they can be produced over night and quickly can adjust to quantity demanded.
Storage: Storage can be based off the price of a certain good at the time. If the price of a product drops, there are options for what the seller can do. They can either sell the product at that price and gain less revenue or they can put their product into storage and sell it when the price starts to rise. Fresh produce would be inelastic because the seller can not wait for a price increase because the food will go bad.Halloween decoration are a good example of an elastic supply because sellers can wait till an increase in price.
Cost to Produce: Big products such as cars and boats take a large amount of money to produce therefore making them inelastic. Increasing the output of trucks can be expensive because producing trucks requires a lot of workers and supplies so in the short run manufactures may be able to increase supply but a permanent increase would involve much more money and factories to built. Pens are an example of an elastic supply because they are not expensive to produce and production can easily be adjusted to increase in demand for a certain pen. Essentially as a producer you want an elastic good because you can keep your production ahead of price increases.
DETERMNING ELASTICITY
To show the degree to which demand consumer’s desire for a particular good or service reacts to changes in price. This tracks the quantity of a good or service that consumers want to buy at any given price. The demand curve is always downward, or negatively, sloping, indicating that when the price of a good or service rises, consumer demand for it decreases. If a small increase in price results in a significant decrease in the quantity demanded, the demand curve will flatten and become more horizontal. The flatness of the curve indicates that the particular good or service is elastic. If the quantity of the good demanded changes little as the price changes significantly, the demand curve is more upright, and the good is considered inelastic. This graph above demonstrates that.
TOTAL REVENUE APPROACH
It is very important for economists and business people to know and study whether total revenue will rise or fall when prices rise or fall. If the Elasticity coefficient is inelastic then the answer would be yes. With inelastic items or goods, as the prices rises the quantity demanded falls. But with the item being inelastic it does not greatly affect the total revenue because although people are buying less at a higher price this potential loss of revenue is compensated for by the income of dollars due to the high price. If the price falls, revenues will fall because even though quantity demanded is high because of the low price, this potential revenue increase is affected by the grater percent decrease in the price. When you compare this to the prices of an elastic item the strategies are different. When the price of an elastic good falls, the total revenue will rise, this happens because the decrease in price is less than the increase in quantity that is purchased. Conversely, if prices were to rise the total revenue would fall. If it is unitary the total revenues will not be affected if the prices rises or falls because the increases or decreases in price and quantity demanded are the same.
REFLECTION
Elasticity is a huge part of your life that affects what you buy, how much you buy, and if you decide you want to buy. Whether you think about it or not, your always going to buy goods that are inelastic or elastic. The question is how much does the price have to rise in order for you not to buy it? Companies that produce inelastic goods are getting away with raising their prices even if the revenue slightly drops because the good is simply necessary. An example of this is gas. Inelastic and Elastic don’t only cover goods like gas or fruits, it also covers sports and cars etc. Every person is different and sees different things as inelastic or elastic. If something elastic is priced low then it gives an opportunity for other people to take advantage causing the good to become inelastic in their eyes thus convincing that person to pay for it again even if the price slightly goes up. In the world of economics there are factors that can affect and influence the overall decision humans make. I know in my life my parents had to make decisions whether they would allow me to play sports or even if they were going to buy me a car for high school.
SPORTS
I play high league soccer that requires a lot of commitment on my end and a lot of money on my parents end. Playing soccer is elastic but it is something I have participated in for over 8 years. Soccer wasn’t always just my main sport, I also did dance, musical theatre, volleyball and track. These were all fun at the time but I decided to focus on soccer. Soccer can be very expensive and when playing you have to purchase inelastic items such as soccer cleats, new jerseys, and shin pads that add on to the cost. If soccer was cheaper then it would give me more opportunities to attend possible soccer camps to improve my soccer skills and maybe end result in a scholarship.
TRANSPORATION
My schedule is always busy and I find myself driving almost everyday. I am very lucky to have my license and have my parents let me drive their car. With having this car comes the expectation to pay for inelastic goods like gas. Although I have a job I am trying to save up money for school and sometimes do not want to be spending that money on gas. For my situation, driving and using a car right now is something that is necessary because there are not many substitutes. When it comes to gas it is something that I need to purchase because it allows me to get to work and make money and go to school to better my education, which in the long run is good. When I won’t be needing the car is in the next year because I am going to be travelling four hours away from home to attend UBC Okanagan. I will not be needing the car because I am living on campus and I don’t need to spending my money on inelastic things like gas and car insurance that can be avoided. The only inelastic things that I will be purchasing when I’m away is textbooks and other educational school items. Elasticity is a tricky method used in economics and life because it makes you question your morals and how much you want to pay for something based on the money you have in your pocket. Elasticity truly does make you figure out you priorities.
OPPORTUNITY COST
what is it?
Opportunity cost is quite literally the cost or affect of an opportunity that has been sacrificed for something else. Individuals, businesses and governments all face opportunity costs in every decision they make. Every time you make a choice, there is a certain value you place on that choice. You might not know it or think about it, but every choice has a value to you. Every human lives in the same world and requires the same needs but we all make different decisions about what we do, what we choose to buy, and how we spend our time.There is always effective ways to spend your time and money but the decision is based on the outcome and the value you put on that choice. It could benefit you, which is what you want, but it could negatively affect you in an unintentional way. It is important for business owners and manufacturers to identity the benefits and costs in making an opportunity cost based decision. It is always best to evaluate the effectiveness of the decision and what the possible outcomes are for both. When making this decisions humans have to figure out their needs and wants. With opportunity cost comes an economic problem called scarcity.
WHAT IS SCARCITY?
In our human race everyone has unlimited wants. No matter what we have we always want more. There is a problem with having unlimited wants because there is limited resources. This basically means there is no possible way to satisfy all those things we would like to have and some people do not have the time or money so when this happens choices have to be made. In economics we study how people choose to use their scarce resources in an attempt to satisfy their unlimited wants. Scarcity exists when there is not enough of something (good, service, resource) to meet the needs of human society at a zero price, this meaning that if the good was free everyone would want it but because that is impossible there is a price tag thus causing certain people to drop out because they can not afford it. The problem also comes around when suppliers or manufactures have make the decision on where to provide the resource and how to use them properly.
LAWS WINTIN OPPORTUNITY COST
Law of Dimishing Returns & Law of Increasing Relative Cost
Ther are two sections that tie in with opportunity cost and scarcity and those are the Law of Diminishing Returns and the Law of Increasing Relative Cost that deals with the inputs and outputs of the decisions being made. The Law of Increasing Relative Cost is in order to produce a higher quantity of one product, an increasing amount of the other product is given up.This sections deals with the outputs and how much is being produced. In order to understand this people need to take into account the nature of the goods being produced and the difference in the productive resources that each one requires, an example is fruit or vegetables. With this comes and increase in relative cost meaning, the cost of producing one item therefore increasing the price but keeping the product the same. On the other side of this is the Law of Diminishing Returns which means that one resource is fixed and the other resource is increased. Although your still paying the same amount money for a product the actual quantity will be differed.
THE PRODUCTION POSSIBILITIES CURVE AS FRONTIER
The Production Possibility Curve (PPC) shows the maximum potential that can be produced for each of the two products. to attain a perfect production possibility curve you must have productive resources and full employment. Resources are almost impossible to perfectly use because of human error or ineffective production. If this happens it cause the economy to preform under its potential. The economy always strives to set out goals and reach that perfect production possibility curve in a short time so in the long run the curve will shift to the right. In this PPC graph it compares two goods such as Refrigerators and Cars and shows the increasing opportunity cost. When all resources are bing used an increase in the production of one good will lead to less production of another good. The opportunity cost to produce it will increase. If the line was straight it would mean the graph represents a constant opportunity cost. In the example shown the Y letter represents the current unattainable area with the resources and technology of refrigerators and car, basically meaning it is beyond the production possibilities curve. The letter X represents the existence of unemployed resources.
REFLECTION
Over the course of my lifetime I have gone through many different situations where I am required to make a decision that will most likely benefit me. As I have gotten older I have recognized that in order to make the right decision you have to weight out the pros and cons to both. Not only have I been the one to make certain decisions but l’ve gotten to witness my parents make decisions and have been given their input on how to choose the right path. I’ve always been taught to never expect to get whatever I want all the time and that I need to be grateful for what I have. Having those words go in one ear and out the other at the time, I ended up discovering in the past few years that it is something to live by. Nothing is unlimited and therefore decisions have to be made in order to have the best results.
MY FIRST JOB
As you get older there comes a time when your parents stop paying for certain things. For a girl that time is tragic because now you find yourself trying to figure out a way of getting money to pay for material like new clothes or shoes that you see as necessary. Since at the time I had no source of money coming in, I was faced with the decision on whether I should apply for a job or no. As a grade 11 student I had to focus on school as well as soccer training. With soccer being such a huge part of my life I had to decide if I wanted to try and juggle working, school and soccer. The biggest thing on my mind was that I needed the money to start saving for post-secondary and having the option on buying myself nice things. At that time in my life I had a passion for business and communication with others around me. I knew I was confident with conversations and felt like working in retail or restaurant would be a good fit for me. My decision after going through the benefits and downfalls, was to apply for a job and I ended up getting hired at Cactus Club. My first job has been nothing but enjoyment and I have learned so many great skills in the past year and a half that made applying for a job worth it.
GO TO UNIVERSITY OR WORK?
University is not for everyone and thats why some people choice to go to work because they see that as more beneficial. The opportunity cost of going to school or working is money and education. Do I pursue education or decide to work to make money and possibly give up on future job opportunities. The big factor in making the decision about going to university or collage is money. Tuition fees at universities run quite high and it is difficult for people to be able to afford it. The university of choice for me is UBCO. Although I did apply to other universities that are cheaper in cost, they don’t really have the exact program I am looking for. With all this money that would be spent on tuition I thought what if maybe instead I just work full time and start saving up for other opportunities in the future. With this all being in the back of my head, I decided that in the long run it is better to give up the money that I would be making if I didn’t attend university for the money that I would be making after 4 years of university in a new well paid job. I am excited about my choice and my parents agree that although it is expensive, that it will be worth it.
END OF FIRST PORTION
By: Hanna Bateman