Implicaciones de la guerra etíope-somalí

In our examples of price elasticity studies we mentioned several that were done in countries other than the United States. Here we describe briefly a group of studies spanning a large number of consumer products conducted by ACNielsen in Asia dur-ing 2001–2002.

The study looked at elasticities in various product categories, by brands and among countries. The numbers we quote below are in absolute terms. When overall categories were studied, price elasticities were relatively low, with 70 percent being less than 2.0 and 35 percent below 1.0. The average was 1.5. However, when individual brands were examined, price elasticities were considerably higher. The average for Asian countries was 2.3. For example, food and beverage brands had price elasticity of 3.0 and household and personal care items’ elasticity was 2.2. These findings conform to our previous discussion of determinants of elasticity: the broader the definition of a commodity, the lower will be the price elasticity.

There appear to be substantial differences in price elasticities among the dif-ferent countries of Asia. For instance, consumers in Malaysia and Hong Kong were considerably more responsive to price changes—well above the Asian average of 2.3—

while the Philippines and Korea exhibited elasticities of less than 1.5.²⁰

Another study examined price and income elasticities for imports and exports in five Asian countries—India, Japan, Philippines, Sri Lanka, and Thailand. The author used long-term time series to make his estimates. (You will learn more about time series regressions in Chapter 5.) He found the following elasticities:

The implications of these findings are as follows:

1. If imports are price inelastic (as they are in almost all cases), a rise in import prices will lead to an increase in the import bill.

2. If imports are income elastic, an increase in incomes will entail a more than proportion-ate increase in imports.

Import Export

Price Income Price Income

India −0.51 −0.11 −0.55 0.45

Japan −0.91 0.84 −0.80 2.84

Philippines −0.17 0.57 −1.06 0.89

Sri Lanka −0.48 −0.39 0.48 0.90

Thailand −0.20 0.90 −3.76 0.82

3. If exports are price inelastic, export earnings will rise as prices increase.

4. If exports are income elastic, an increase in world incomes will lead to a greater than proportionate increase in exports.²¹

21Dipendra Sinha, “A Note on Trade Elasticities in Asian Countries,” The International Trade Journal, 15:2, pp. 221–237.

Table 4.5 Sales Data for 2-Liter Bottles of Soft Drinks

Average Price

Average

Weekly Sales Total Revenue

Regular Price: $1.89 1,050 $1,985

Special Price: $.89 2,450 2,181

The Solution

Henry Caulfield is no stranger to the economic concept of price elasticity. He has a bachelor’s degree in business administra-tion and was doing well as the regional manager of a large supermarket chain when he decided to leave his job and open his own business. Indeed, it was his understanding of price elasticity that prompted him to reduce the soft drink prices as a way of competing against the two new stores in his area. When he had offered special discounts on soft drinks in the past, he no-ticed that people were very responsive. In fact, Henry had kept a record of the relationship between price and sales, a part of which is shown in Table 4.5. The “special” price was offered as part of the store’s “Fourth of July Celebration” sale.

The data indicate an elastic demand for soft drinks at Henry’s store. When demand is price elastic, a reduction in price causes total revenue to increase. This was exactly what had happened when Henry had offered his “Fourth of July Celebration” special. He was now puzzled because the permanent price reduction did not seem to be having the same positive effect on his total revenue.

Then, in a flash, it dawned on him. One of the most important aspects of demand elasticity—and, for that matter, of any aspect of economic analysis—is the assumption that certain factors are held constant in the examination of the impact of one variable on another. In this case, it was assumed that other factors besides price did not have an impact (or at least not much of an impact) on quantity when Henry had offered the special holiday price for his soft drink. What other factors besides price might now be taken into account?

To begin with, last summer Henry did not have any close competitors. Therefore, when he offered his discount, there was no other store nearby to match this price reduction. Obviously, the two new stores were not going to stand by idly watching potential customers go to Henry because he had the lowest price for soft drinks. Therefore, the demand for soft drinks at Henry’s store was much less elastic than he believed because he was unable to take away their business. To make matters worse, this “price war” among the three stores might have actually reduced their total soft drink revenues. This is because when all three stores dropped their price, they might well have brought the quantity demanded into the inelastic range of their combined demand curves. (We assume here that the three stores constitute the entire local market for soft drinks.)

Regardless of the reaction of his competitors and the possible impact that their price cuts might have had on the degree of price elasticity, there was one simple fact that Henry had completely overlooked. Last year’s discount took place in summer, a time when the seasonal demand for this product increases anyway.

Thus, when Henry cut the price, the demand for his product had already started to increase and his increased revenue may have been caused by the fact that during this time the demand curve was moving to the right.

One final factor had to be considered. In the past, his discounts on soft drinks were “specials” and, therefore, temporary in nature. Consumers knew that they had to take advantage of these specials during a

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22Our example may help you understand an apparent paradox in the pricing of soft drinks in supermar-kets. Very often, substantial discounts on soft drinks are offered at all supermarkets during the summer (i.e., “summer specials”). These discounts either may be offered by the soft drink companies to the super-markets, which then pass them on to customers, or they may be initiated by the supermarkets themselves.

Why should they do this at a time when demand is high? After all, economic theory states that an increase in demand causes prices to rise, other factors held constant. What probably happens is that one of the ma-jor soft drink companies decides to take market share away from the other mama-jor producers by cutting its price. The others quickly follow. The same is true among supermarkets. These price wars can and do occur at any time during the year. It is just that a “summer special” is a good reason to have a sale.

designated period. Because they now realized that the price of soft drinks in Henry’s store was permanently lowered, they were in no hurry to buy the product. In other words, Henry had failed to take “future expecta-tions” into account.

Thus, to be able to measure elasticity, Henry would have to separate the effects on unit sales of price from all the other nonprice determinants of demand. Because he had not done this, he had overestimated the degree of responsiveness by his customers to his price reduction. As a result, unfortunately, the reduction in soft drink prices did not provide a solution for Henry. But at least he now understood why it did not.²² In addition, this analysis reminded Henry never to take for granted that “other factors remain constant.” In the real world, conditions are changing all the time, and it is important to factor these changes into the analysis.

As a small consolation, Henry realized that the entry of additional suppliers into the market was all part of the economics of running a successful business. After all, if people did not think he was making any money, they would probably not be as willing to start a competing enterprise.

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SUMMARy

This chapter deals with the important concept of elasticity. In the most general terms, elastic-ity is defined as the sensitivelastic-ity of one variable to another or, more specifically, the percentage change in one variable caused by a 1 percent change in another. Several forms of elasticity con-nected with the demand curve were discussed.

The first was price elasticity of demand: the percentage change in the quantity demanded of a product caused by a percentage change in its own price. Because demand curves slope down-ward and to the right, the sign of price elasticity is negative. If the coefficient is less than −1 (or greater than 1 in absolute terms), demand is said to be elastic. In contrast, the elasticity coef-ficient can indicate inelasticity or unitary elasticity.

Elasticity is also tied to total revenue. When demand is elastic, revenue rises as quantity demanded increases; revenue reaches its peak at the point of unitary elasticity and descends as quantity rises on the demand curve’s inelastic sector. From the concept of revenue, we develop marginal revenue as the change in revenue when quantity changes by one unit. Marginal rev-enue is positive at quantities where demand is elastic and becomes negative when the demand curve becomes inelastic.

Next, we explain cross-price elasticity, the relationship between the demand for one product and the price of another. Products can be substitutes, and their cross-price elasticity is then positive; cross-elasticity is negative for products that are complements.

The third major elasticity concept, income elasticity, measures the sensitivity of demand for a product to changes in the income of the population. Goods and services are defined as superior (or luxuries), normal, and inferior, depending on the responsiveness of spending on a product relative to percentage changes in income.

The examples calculated in the chapter use the method of arc elasticity, which measures changes in both variables over discrete intervals, as well as point elasticity, which deals with change over an infinitely small interval and consequently may require knowledge of elementary calculus.

Several other subtopics appear in this chapter:

➤ Other elasticities, such as advertising and interest elasticity.

➤ Derived demand, which is the demand for inputs to a final product, and the price elasticity of derived demand.

➤ Supply elasticity, the measure of the sensitivity of quantities produced to the price charged by the producers.

In Chapter 5, which discusses methods of estimating demand functions, elasticity con-cepts are employed again, and they reappear in various guises in many of the chapters that follow.