Practise calculating and interpreting PED, YED and XED and applying their signs and magnitudes to classify goods, predict revenue and support pricing, product or tax decisions.
What can be measured by cross-elasticity of demand?
a change in real income as a result of a change in the price of consumer goods
a change in the demand for a good in response to a change in the price of a complement
a change in the price of a good in response to a change in the demand for a substitute
a change in the price of a good when the demand for it changes
Economic problems in Kyrgyzstan
Rouble decline affects Kyrgyzstan
Kyrgyzstan is a developing economy which has a border with Russia. At the local market in the capital, Bishkek, the price of meat increased by 9% in six weeks in 2014. A local butcher said that as a result sales had fallen. 'I usually sell 400 kilos of meat every month, but in September I sold only 250 kilos,' she complained. In Bishkek, food prices increased by up to 25% over 12 months. Another shopkeeper increased what he charged for flour by 15%, but sales did not decline by very much. 'We all need flour because we all need to eat bread, macaroni, dough,' he said. 'It's not something people can cut back even if it becomes very expensive.'
Meanwhile, a sharp decline in the value of Russia's currency, the rouble, since early September is having an impact upon countries across Central Asia, where economies are dependent on remittances (transfers of income) from workers in Russia. By October 2014 the value of the rouble had fallen 20\% against the US dollar since the start of the year. The fall had accelerated in September as the price of oil - Russia's main export - dropped to a four-year low. As local currencies followed the value of the rouble downward, the costs of imported essentials rose.
In Kyrgyzstan, remittances from the millions of workers in Russia have started to fall. In recent years, these cash transfers have contributed the equivalent of about 30% of national income to Kyrgyzstan's economy. As the rouble depreciates, however, it purchases fewer US dollars to send home. Any further drop may significantly reduce consumer demand.
This month the International Monetary Fund said it expects consumer prices in Kyrgyzstan to increase by 8.0% in 2014 and 8.9% in 2015, compared with 6.6% last year. One factor that could have an effect is a policy shift at Russia's central bank, which has already spent over US$50 billion this year attempting to protect the value of the rouble. Some people have condemned efforts to support the currency, arguing that a weaker rouble is good for exports.
In Kyrgyzstan the central bank has used some of its limited reserves to reduce the fall in the currency. Nevertheless, Kyrgyzstan's currency, the som, has fallen in value by 12% against the US dollar this year.
Source: Adapted from Asia Times Online, October 2014
Calculate the price elasticity of demand for meat in Bishkek.
How does the price elasticity of demand for meat differ from the price elasticity of demand for flour in Bishkek?
How might an economist explain this difference?
Are doughnuts demerit goods?
Consumers love to eat doughnuts. In 2019, 10 billion of these deep-fried sugar-coated products were consumed in the United States (US). Fig. 1.1 shows that the US market increased steadily from 2011 to 2019. Doughnuts are widely available throughout the US. There are specialist shops selling their branded products almost everywhere; local coffee shops invariably sell 'hole in one' doughnuts as a popular breakfast snack to tempt consumers on their way to work. The growing number of shops selling doughnuts has been an important reason behind overall market growth.
Fig. 1.1 Doughnut market size in the US, 2011 to 2021
The COVID-19 pandemic has had a varying impact on the US doughnut market. Despite having less income, many consumers have continued to buy small luxuries such as doughnuts which remain affordable and can provide some short-term relief from the stresses of the pandemic. Overall, sales of doughnuts fell in 2020 and are forecast to remain below their 2019 peak into 2021. Reasons for this fall in demand are that consumers are making fewer shopping trips and in cities, more people are working from home and therefore not buying their daily coffee and doughnut snack.
In the United Kingdom (UK), more so than in the US, there are growing concerns about the increase in sugar consumption amongst children. This increase comes from soft drinks, chocolate biscuits and sweets (candy) as well as from jam-filled doughnuts, all of which are widely available in supermarkets and local convenience stores. In 2021, it was estimated that a third of teenagers and two thirds of adults in the UK were overweight. This has increased the pressure on the UK government to end online advertising of a range of products including doughnuts. It has been estimated that viewing one minute of advertising for products like doughnuts leads to a child consuming an additional 14.2 calories. Moreover, a ban on advertising sugary foods would result in children consuming the equivalent of 62 million fewer doughnuts a year in the UK.
Comment on whether the demand for doughnuts in the US is income elastic or income inelastic.