Elasticity Essay Research Paper IntroductionElasticity is the

Elasticity Essay, Research Paper

Introduction

Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price,

Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.

The following text is real world examples of these economic principles. They have been provided to build a bridge between current economic situations and economic principles of elasticity.

The Demand for Lotto: The Role of Conscious Selection

In this article is a discussion about the elasticity of demand for lottery tickets. Time series data was used in a way in which the expected value of the lottery ticket would vary due to rollovers (Farrel 1). It was found that there are far more rollovers than expected given the lottery design (Farrel 1). There was also some strong evidence found that supported that individuals did not pick their numbers in a uniform matter. The inverse supply function was found by using estimates that enabled them to identify the demand elasticity (Farrel 1).

This analysis was based on the U.K. National Lottery that came about November 1994. With this in mind we realize that because game designs are similar throughout the world, these findings are more widely relevant (Farrel 1).

The price elasticity of demand for lottery tickets shows that demand varies depending on the expected return from a winning ticket (Farrel 1). From this we deduce that this elasticity is relevant to the design of the lottery (Farrel 1). The way that the demand elasticity is derived is by comparing the rollover weeks with the non-rollover weeks. By doing this, the normal demand is recorded during the non-rollover weeks to see what level the demand is usually at. Then from there they can see how the demand increases as the lottery rolls over.

Depending on rollovers for this study poses a problem. Rollovers should occur infrequently leaving the chance of not having enough variance in the data to create a reliable estimate (Farrel 2). However, one of the surprising details of the data is that rollovers occurred more regularly then if it was generated by “statistical chance” (Farrel 2). What this means to the U.K. lottery is that when ticket sales are at their mean level of 65 million with a 6-ball lottery; there is a one percent chance of rollover. Being that a high rollover rate is common in to all lotto games, the U.K. lottery yielded 19 rollovers from the 116 draws that were studied (Farrel 2).

The reason for this high rate of rollovers is that the people that are choosing the numbers are choosing them in a non-uniform way. This means that they cover a smaller range of combinations with their numbers. This also helps in explaining why when someone does win there is usually more than one winner (Farrel 2).

The Elasticity of Demand for Lotto Tickets

And the Corresponding Welfare Effects

This article did a study using the first 254 weeks of the Florida Lottery. The study shows evidence of the Florida Lottery price elasticity being near unity. This happens when employing a measure of lotto ticket price that is superior to that used by others (Mason 1). From these results it may be, in comparison to other states, that Florida has room to increase the odds to increase the price elasticity of demand to the revenue-maximizing level (Mason 1).

Price Elasticity of Demand and an Optimal

Cash Discount Rate in Credit Policy

The provision of a cash discount in setting up credit terms is equivalent to a reduction in price. Generally, it is assumed that when a cash discount is administered it will result in a higher level of sales. This assumption is only consistent with price elastic demand (Rashid 1). If the demand of a product is deemed price inelastic, then a cash discount will lower sales (Rashid 1). “Frantz Viscione (1976), in a survey of over 100 U.S. manufacturing firms, show that the introduction (and in some cases the elimination) of a cash discount led to more (or less) profits for some firms, less (or more) profits for some other firms and no change in profitability for the remaining firms. These findings are consistent with the differential effects of the cash discount in situations of elastic, inelastic, and unitary elastic demand (Rashid 1).”

When looking at the case of either elastic or inelastic demand, the provision a cash discount adds another benefit (cost) to be considered during the analysis of the determination of an optimal cash discount rate (Rashid 1). Regardless, there is still a level of inelasticity where all the marginal gains from a cash discount are exactly outweighed (Rashid 1).

Price elasticity may differ from one geographical location to the next. Hotch, Kim, Montgomery, and Rossi (1995) did a st

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