Elasticity of Demand and Supply


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Why would Delta Air Lines cut airline fares right before the busyholiday season? Delta is betting that the demand for airlinetickets is price elastic. Specifically, Delta believes that ifprices are lower, the quantity of tickets demanded will more thanoffset the decline in price. To discover more about Delta Air Linesand its air fare strategies, visit Delta Air Lines'"Skylinks."


Case Study Interactive Examples

Case: The Demand for Food and "The Farm Problem"
To discover more about the economics of farming, visit theEconomic Research Service (ERS),an agency of the U.S. Department of Agriculture. Also visit"Economy," a service of the Bureauof the Census and "USDA Economics and Statistics System maintained by Cornell University's Mann Library," a service of the University ofCornell's Mann Library. For global economic information aboutfarming, visit the World Agricultural Information Center (WAICENT),a service of the Food and Agriculture Organization of the UnitedNations (FAO).

Case: Pharmaceutical Prices Across Countries
To learn more about the pharmaceutical industry, visitPhARMA:America's Pharmaceutical Research Companies. Also browse"Preparingfor Change: The Parmaceutical Industry," a study by E.B.Baatz, published by CIO Magazine.


"Using the Internet" Problems

Using the principle of elasticity of demand, consider thefollowing:
  1. Tap water is readily available and usually inexpensive. Why,then, does relatively expensive bottled water find success withconsumers? In pursuit of an answer, visitFountainhead WaterCompany and PureSpring Water Company, producer of "Virgin Pure Spring Water."Consider how these products are being marketed.
  2. Jolt Cola Company, founded in 1985, initially marketed JoltCola, with "Twice the Caffeine," as a different productthan Coca-Cola or Pepsi Cola. Recently, however, Jolt has beenchallenging the other cola companies to "taste-tests."Visit "Jolt Bolt."Why would Jolt initiate these taste tests?


Study Guide Tutorial

Time, Elasticity, and Nuclear Power

In the 1970s, the Organization of Petroleum Exporting Countries (OPEC)increased the price of oil by curtailing production. Oil prices roserapidly, but consumption did not fall by as large a percentage. Thisindicated an inelastic demand. Electricity prices rose as a resultof higher oil prices. Many people feared that the increased scarcityof oil would lead to a scarcity of electricity, which would limiteconomic growth. One response to the problem was to increase theconstruction of nuclear power plants. The long-run demand for oiland electricity turned out to be more elastic than had been thought,however, and people conserved more energy than had been expected.Further, new sources of oil were discovered, which helped bring aboutlower oil prices.

Question to Think About: Has the decline in oil prices thatstarted in January 1986 generated a return to the energy consumptionpatterns of the 1960s?

Are Children Inferior Goods?

An inferior good is one that people consume less of as their incomesincrease. Economists have long noted that family size tends todecline as income increases. That is, wealthier people tend to havefewer children. It appears, then, that children are inferior goods.

Question to Think About: What are the implications of therelationship between income and family size for developing countriesthat currently have very high rates of population growth?


Author Updates

Topic: ERconomics

In January 1998 NBC agreed to pay $850 million to keep TV's top rated show, "ER," on that network. The three-year deal with Time Warner, the show's producer, will cost NBC about $13 million for each hourly episode. This is more than six time the $2 million NBC paid per episode under the current contract. Why is NBC willing to pay so much more? Because the show is consistently at the top of the ratings, which means that NBC can charge advertisers much more. A popular show also helps build viewer loyalty for other NBC shows, such as those on earlier in the evening. "ER" is obviously a product in limited supply-there is only one show. With supply fixed, or perfectly inelastic, any increase in demand jacks up the price but not the quantity supplied. When other networks made it clear they were willing to pay a lot for "ER," this prompted NBC to close the deal and not let "ER" get away. NBC had just suffered the loss to CBS of rights to American Football Conference games. CBS bid $500 million for those rights. NBC was also recovering from the loss of another of its top shows "Seinfeld," when Jerry Seinfeld announced this season would be his last. Thus the loss of football and "Seinfeld" strengthened NBC's resolve not to lose "ER" as well. High demand combined with fixed supply to yield the highest priced series in history. (Updated 2/2/98)