67
The Elasticity of Demand
Applications of Demand Elasticity
The Elasticity of Supply
Applications of Supply Elasticity
Using Elasticities for Quick Predictions (Optional)
Takeaway
Appendix 1: Other Types of Elasticities
Appendix 2: Using Excel to Calculate Elasticities
In the fall of 2000, Harvard sophomore Jay Williams flew to the Sudan where a terrible civil war had resulted in many thousands of deaths. Women and children captured in raids by warring tribes were being enslaved and held for ransom. Working with Christian Solidarity International, Williams was able to pay for the release of 4,000 people. But did Williams do the right thing? It’s a serious question and one that is surprisingly complex, both morally and economically. By paying for the release of slaves, could Williams have encouraged more people to be enslaved? If so, by how much? Slavery is an abomination. Because of the terrible effects of slavery, careful thought about the best way to deal with the problem is essential. Perhaps surprisingly, the economic concept of elasticity can help to identify the most effective policies to end slavery.
In this chapter, we develop the tools of demand and supply elasticity. To be honest, at first these tools will seem dry and technical. Stick with us, however, and you will see how the concept of elasticity is useful for dealing with important questions such as how best to help people held as slaves for ransom, why the war on drugs can generate violence, why gun buyback programs are unlikely to work, and how to evaluate proposals to increase drilling in the Arctic National Wildlife Refuge (ANWR).
In Chapter 4, we discussed how to shift the supply and demand curves to produce qualitative predictions about changes in prices and quantities. Estimating elasticities of demand and supply is the first step in quantifying how changes in demand and supply will affect prices and quantities.
68