Elastic and Inelastic Demand

Elasticity typically falls as we move down the demand curve, an important dividing line occurs at the demand elasticity of - 1.

Demand is elastic if the price elasticity is more negative than -1. Demand is inelastic if the price elasticity lies between -1 and 0. If the demand elasticity is exactly -1, we say that demand is unit-elastic.

A cut in prices raises revenue from football ticket sales if demand for football tickets is elastic but lowers revenue if demand is inelastic. Whether or not demand is elastic is the key piece of information required in setting the price of football tickets in this example.

Although the price elasticity of demand typically changes as we move along demand curves, economists frequently talk of goods with high or low demand elasticities. For example, they will say that the demand for oil is price-inelastic (price changes have only a small effect on quantity demanded) but the demand for foreign holidays is price-elastic (price changes have a large effect on quantity demanded). Such statements refer to parts of the demand curve corresponding to prices (adjusted for inflation) that are typically charged for these goods and services. They do not necessarily describe the demand elasticity at points on the demand curve corresponding to real prices, which have never been observed historically.

What determines whether the price elasticity of demand for a good is high (say, -5) or low (say, -0,5)? Ultimately, the answer must be sought in consumer tastes. If it is considered socially essential to own a television, higher television prices may have little effect on quantity demanded. If televisions are considered a frivolous luxury, the demand elasticity will be much higher. Psychologists and sociologists may be able to explain more fully than economists why tastes are as they are. Nevertheless, as economists, we can identify some considerations likely to affect consumer responses to changes in the price of a good. The most important consideration is the ease with which consumers can substitute another good that fulfils approximately the same function.

Consider two extreme cases. Suppose first that the price of all cigarettes is raised 1 per cent, perhaps because the cigarette tax has been raised. Do you expect the Quantity of cigarettes demanded to fall by 5 per cent or by 0,5 per cent? Probably the latter. People who can easily quit smoking have already done so. A few smokers may try to cut down but this effect is unlikely to be large, In contrast, suppose the price of one particular brand of cigarettes is increased by 1 per cent, all other brand prices remaining unchanged. We should now expect a much larger quantity response from buyers. With so many other brands available at unchanged prices, consume is will switch away from the more expensive brand to other brands that basically fulfill the same function of nicotine provision. For a particular cigarette brand the demand elasticity could be quite high.

Ease of substitution implies a high demand elasticity for a particular good. In fact this example suggests a general rule. The more narrowly we define a commodity (a particular brand of cigarette rather than cigarettes in general or oil rather than energy as a whole), the larger will be the price elasticity of demand. The demand for general categories of basic commodities, such as fuel, food or even household durable goods, is inelastic. As a category, only services such as haircuts, the theatre, and sauna baths, have an elastic demand. Households simply do not have much scope to alter the broad pattern of their purchases.

Language

1. Practice reading the following words correctly. If necessary, use a dictionary.

Quantity, luxury, psychologist, energy, fuel, durable, whereas, linkage, boundary, percentage, consequently, merchandise, insurance.

2. Study the use of italicized words in different phrases and give their Russian equivalents.

market: active ~; bear ~; black -; bond -; bull -; capital-; commodity~; exchange; - external-; financial-; forward ~; futures -; international-; job-, labour-; loan-; merchandise-; money-; option-; over-the-counter-; primary -; real estate ~; secondary-; securities-; spot-, stock-; world~.

TRADE: barter ~; cash ~; external -; fair ~; foreign -; home -; illicit -; intermediate -; internal -; retail -; wholesale ~; to promote ~; to restrict -.

TRADER: floor ~; petty -; pit ~.

3. Reproduce the context the following words used in texts 1 - 2.

Visible exports; GNP; balance of payment; balance of trade; importer; deficit; terms of delivery; individual economies; foreign subsidiaries; investment capital; liquidated debts; the flow of merchandise; international transaction; capital account; current account.

4. Match the verbs from column A with the nouns from column В.

A B

1. an even balance of trade 2. to divert (resources, trade) 3. diversion, balance of payments 4. an unfavourable balance of trade 5. a favourable balance of trade 6. transaction 7. merchandise 8. the flow of merchandise 9. current account, 10. capital account, 11. unilateral transfers, 12. emergency relief, 13. financial assets 14. claim for payment 15. credit 16. debit 17.physical assets

а. кредит; сумма, записанная на приход b. дебет; сумма, записанная на расход c. активный (благоприятный) торговый баланс d. сбалансированный торговый баланс e. отвлечение, сокращение (ресурсов, торговли) f. сделка, операция g. физические активы h. пассивный (неблагоприятный) торговый баланс i. товары j. движение товаров k. платежная претензия l.отвлекать (ресурсы, торговлю на другие цели), перераспределять, перемещать m. счет текущих операций n. счет движения капитала (в платежном балансе) о. односторонняя передача средств p. помощь при чрезвычайных обстоятельствах q. финансовые активы

5. Read the words given in the box. Be sure you know the meaning of each word. Insert them in the blanks.

Backlog bulky cash on delivery cash with order crates deadline price elasticity grade hold-up inventory (US)/'stock (GB) margin point of sale premium retail special delivery surcharge tender triplicate value added tax volume wholesale merchandise balance

1. The profits made on a product vary according to the …… of sales and there is not normally a fixed profit …… on the unit price. 2. If you buy something by mail order it's normal to pay CWO(…… ), rather than COD (……). 3. The …… price of this product at the …… (i.e. in the shops ) – about 60% more than the. …… price. 4. As we have been carrying out a(an). …… control, there is a …… in processing orders. We apologize for any inconvenience caused by this……

5. As part of the consignment is very urgent, we'll be making a……of two of the twenty…… you have ordered. 6. The only supply…… one products of…… quality. Very…… consignments are shipped by sea. There is no …… for small orders. 7.They submitted a…… in…… , in accordance with our instructions, but it arrived after the…… . 8. Because of the hundreds of thousands of contracts for regular …… that are concluded internationally in the course of a year, most traders use one or other of the standard sets of contract. 9. The difference between what a country receives for its visible exports and what it pays for its visible imports is its……. 10. By using a…… (also known as a documentary credit) both parties have a considerable degree of security in the commercial contract because it is honoured through the banking system. 11. The more narrowly we define a commodity (a particular brand of cigarette rather than cigarettes in general or oil rather than energy as a whole), the larger will be the …… of demand.

6. Match the beginning with the suitable ending.

1. Many import or export deals are arranged through an exporter's agent or distributor abroad. In this case

2. Alternatively, the deal may be arranged through an importer's buying agent or a buying house acting for the importer,

3. During the last two decades, while world output has been growing about 4% per year,

4. As nations engage in world trade, some of them end up with a favourable balance of trade, in which exports exceed imports,

5. A developing nation, lacking aid and investment capital, must finance imports by

6. Although the flow of merchandise constitutes a major category on international transactions,

7. Most transactions in the current account involve the purchase and sale of goods and services:

8. Any international transaction that provides a claim for payment from another country is entered as

9. A debit is recorded whenever a transaction gives rise to a claim by foreign countries for

10. The capital account depicts the flow of capital investments between nations:

11. Care must be taken in negotiating contracts for the purchase of raw materials and products, and the importing company should,

12. Because of the hundreds of thousands of contracts for regular merchandise that are concluded internationally in the course of a year,

13. Although the price elasticity of demand typically changes as we move along demand curves,

14. The more narrowly we define a commodity (a particular brand of cigarette rather than cigarettes in general or oil rather than energy as a whole),

a. it constitutes only part of a nation's balance of payments.

b. or through an export house based in the exporter's country.

c. a credit in the balance of payments of a given country and recorded with a + sign. d.. most traders use one or other of the standard sets of contract conditions that have been proved and tested for that purpose.

e. payment from a given country, and designated by a -sign.

f. and others have an unfavorable balance of trade, in which imports exceed exports. g.. the importer buys from a company in his own country and this company imports the goods.

h the purchase and sale of physical assets and financial assets.

i. economists frequently talk of goods with high or low demand elasticity.

j. world trade has been growing about 8% and production by foreign subsidiaries

has been growing by some 10%.

k. whenever possible, take legal advice before signing an agreement.

l. the larger will be the price elasticity of demand.

m. income from merchandise trade and income generated from services performed.

by one country for another.

n. diverting sufficient quantities of natural resources and agricultural commodities.

from domestic to foreign (export) uses.

7. Complete the sentences. (see Texts 1-2)

1. The world economy is increasingly becoming a single....

2. Goods bought from abroad, such as food, cars, machines, medicines, books and many others, are called ...

3. Goods sold abroad are called ...

4. Services, such as insurance, freight are called …

5. The total amount of money a country makes including money from visible and invisible exports, for a certain period of time, usually for a year, is ...

5. The difference between a country's total earnings or GNP, and its total expenditure is called its ...

6. The difference between what a country receives for its visible exports and what it pays for its visible imports is its...

7. Many export or import deals are arranged….

8. If a country sells more goods than it buys, it will have a ...

9. If a country buys more than it sells, it will have a ...

10. Prices for exports may be quoted in the buyer's currency, the seller's currency or…

11. An import/export transaction usually requires…

12. Developing nations are generally…

8. Fill the gaps in these sentences with a suitable word + preposition.

call on capable of collaborate with comment on compensate ... for comply with consist of convince ... of co-operate with cope with credit ... with cut back on

1 I'll be _____ you when I'm next in town. 2 If you suffer any loss, we will _______ you _______ that. 3 He was unable to._____ the extra work and became ill. 4 I'm afraid I can't.________ another department's work. 5 As you appear to have been overcharged, we will _________ your account _____ the sum of ¥600,000. 6 It is important to _____ any special Customs regulations. 7 All members of a team must ____ each other. 8 We've been ____ our partners in the USA for several years. 9 Due to falling sales, the company has ______ its, R & D programme. 10 They're __________ doing a much better job than that. 11 The cargo _____ four one-ton crates. 12 She couldn't _____ them ______ the need to redesign the product.

9. Fill in the gaps with the words and expressions from the text 5.

1. Demand is _______ if the price elasticity is more negative than -1. 2. Demand is _______ if the price elasticity lies between -1 and 0. 3. If the demand elasticity is exactly -1, we say that demand is ______.4. Whether or not demand is elastic is ______ required in setting the price. 5. Economists will say that the demand for oil is the demand for foreign holidays is ______ . 6. The answer must _______ in consumer tastes. 7. If televisions are considered _________, the demand elasticity will be much higher. 8. As economists, we can ________ some considerations likely to affect consumer in the price of a good. 9. The most important consideration is the ease with which consumers can_____ another good that_______ approximately the same function. 10. Consider two ______ cases.

11. With so many other brands _____ at unchanged prices, consumers will switch away from the more expensive brand to other ______ that basically fulfil the same _____. 12. _____ implies a high demand elasticity for a particular good.

.13. Households simply do not have much scope _____ the broad pattern of their purchases.

10. Give English equivalents to the following words and word combinations.

Внутриотраслевая торговля; внутрифирменная торговля; внутрифирменное разделение труда; сбалансированный торговый баланс, платежный баланс; продажа, сбыт; дочернее предприятие; ресурсосберегающие технологии; контракт на управление производством; переводить деньги; дебет и кредит; рынок с тенденцией к снижению курсов; рынок с тенденцией к повышению курсов; товарная биржа; внутренний рынок; внебиржевой рынок; рынок ценных, бумаг; торговля за наличные; торговля на основе взаимной выгоды; контрабандная торговля; розничная торговля; ограничивать торговлю; повышать/понижать доходы от...; устанавливать цену; в конечном счете, выполнять приблизительно ту же функцию; упасть на...%; основные товары (товары первой необходимости); хозяйственные товары длительного пользования; спрос на некоторые товары.

11. Read the passage, put the verbs in brackets into the correct tense form. Sum up what the text says about Britain's visible imports, its visible and invisible exports.