The “Critical Thinking Questions”

Critical Thinking Questions 1

Review Figure 3.4. Suppose the government decided that, since gasoline is a necessity, its price should be legally capped at $1.30 per gallon. What do you anticipate would be the outcome in the gasoline market?

The Answer:

In the Figure3.4, the supply curve shows the quantity that firms are willing to supply at each price, and the demand curve traces consumers’ willingness to pay for different quantities. For instance, point E in Figure 3.4 illustrates that, at $1.4 per gallon, firms are willing to supply 600 million gallons of gasoline. And also, point E in Figure 3.4 illustrates that, at $1.4 per gallon, consumers are willing and able to purchase 600 million gallons of gasoline. It's an equilibrium. 

Now, the government decided to put a price ceiling below the equilibrium price at $1.3 per gallon. After the price ceiling is imposed, at $1.3 per gallon, firms would still have been willing to supply a quantity of somewhere between 500 and 600 million gallons. But the demand curve shows that, at $1.3 per gallon, the consumers are demand more than they did at $1.4. In this case, because the government imposes the price ceiling, the price control is blocking some suppliers and demanders from transactions they would both be willing to make. This demonstrates the economic inefficiency of the market equilibrium because it is cut down the deals and transactions, which benefit both demanders and suppliers. Moreover, the reduction in supply means fewer jobs, less investment, and lower quality. For the consumers, it transfers the producer surplus to the consumer surplus which implies the consumers often favor them. But as I mentioned before, the economic inefficiency of the market equilibrium may end up with fewer jobs, less investment, and lower quality, it's should be considered carefully.

Critical Thinking Questions 2

Other than the demand for labor, what would be another example of a “derived demand?”

The Answer:

As I learned from the textbook, shifts in the demand curve for labor occur for a reason such as the demand for more new Mac consumers demand, the greater the number of engineers and programmers will need to hire, the demand for engineers and programmers is called the “derived demand.”

Nowadays, more and more business operating very dependent on modern information technology, even households supply more labors with computing capabilities and shopping online. As a result, the demand for computers and wireless gadgets rises. Components required to produce the computers rises as well. The demand chain shows the derived demand for computers, as well as the materials used to produce them.

Reference

(n.d.). Retrieved from https://cnx.org/contents/aWGdK2jw@11.330:g7yTQfC4@11/Price-Ceilings-and-Price-Floors

What Is Elasticity?

What Is Elasticity? 

Elasticity is a measure of a variable's sensitivity to a change in another variable. It is predominantly used to assess the change in consumer demand as a result of a change in a good or service's price such as hamburgers, coffee drinks, or accommodations. For instance, if Starbucks rises its Tall Blonde Caffe' Americano from $2.45 to $3. Will you stop drinking coffee? How much total quantity of coffee consume will reduce? Likewise, in order to make maximum profits, business owners need to know the degree to which consumers change their demand in response to price changes. 

An Inelastic Good

Necessities and medical treatments tend to be relatively inelastic because they are needed for survival. Due to the COV-19(Coronavirus), medical masks have seemed as necessities recently. In Taiwan, the quantity demand of medical mask has increased dramatically even if the price of a medical mask has been doubled in the very first period. Normally, medical masks are necessities for those in medical services careers, but not for all people. It's an event that changes the demand for specific goods, in this case, medical masks.

An Elastic Good

Typically, elastic goods are either unnecessary goods or services or those with many available substitutes. Normally, airline services are elastic because there are so many substitutes such as so many other airline companies for consumers to choose. If one airline decides to increase the price of its price for an economy class, consumers can use another airline, and the airline that increased its fares will see a decrease in the demand for its services. Again, due to the COV-19(Coronavirus), the airlines for travel and business has dropped down drastically. For now, no matter how attractive the discounts are, it hardly increases the demand for airline travel.

What Makes Those Goods Elastic or Inelastic?

Typically, Elastic goods are often mean unnecessary goods, unnecessary services, or those with many substitutes are available. 

In the case of the medical mask, the unpredicted event(COV-19) affects the demand for medical masks. As a result, It's has become a necessity for the public around the world even if it is fairly not necessary before.

In the example of airline services, so many substitutes causing the airline services to be fairly elastic. Another reason for this is that airline services are not a necessary service for normal people. For managers or business owners, it's might be necessary to do a business journey, but not for everyone. 

How Might Other Households Respond Differently?

It is common to see many different responses for many events due to the difference in income, tastes, personal experiences, or even educations. Other households may have different preferences on travel, so they may like some specific airline services such as in-flight meals or brand royalty. Some households may hear some bad news from their household members who work in a hospital, so they tend to buy more medical masks to stock. 

Reference

OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330

Federal Reserve Bank of St. Louis. (n.d.). Elasticity of demand - The Economic Lowdown Podcast Series, episode 16. 

Hayes, A. (2020, January 30). Learn About Elasticity. Retrieved from https://www.investopedia.com/terms/e/elasticity.asp