Elasticity AND ITS APPLICATIONS in Cowen and Tabarrok
Posted by Robert Whaples on September 8, 2009
I’ve almost finished covering chapter four of Cowen and Tabarrok, “Elasticity and Its Applications.” The first thing to note is the chapter’s title, which isn’t simply “Elasticity,” as in a lot of other intro econ textbooks. After reading other textbooks my students have sometimes been at a loss as to what to do with this concept. With T&C, however, it’s clear that knowledge is power — that knowledge of elasticity is exceptionally powerful.
Among their compelling examples that got my students talking are applications on the probable futility of gun buy backs and how the war on drugs is likely to boost drug dealers’ revenues substantially. My favorite application, which we haven’t covered yet, concerns the economics of slave redemption. We tried mightily to find flaws in the gun buy back analysis, but couldn’t escape the conclusion that with a national market for guns (an extremely elastic supply), a buy back in one city won’t push up the price and therefore won’t cut back the quantity in any meaningful way.
Nifty features –1) T&C use little up and down arrows to show the relative magnitude of price and quantity changes and how these influence total revenue. If the demand curve is inelastic, revenues go up when the price goes up because the relative drop in quantity is so small. The up and down arrows show the net effect very clearly. I wish other textbooks would adopt this practice (which I’ve used in class for years). 2) The optional section giving the formula for the percent change in price due to a shift in demand or supply is tremendously useful. I don’t want to sound repetitive, but why don’t all intro textbooks do this?
Minor gripe — I’ve never found the distinction between necessities and luxuries to be very useful. Water is clearly a “necessity,” but at its modern low price we use it to fill our pools and irrigate our lawns — pretty luxurious — and I think the demand for it may be fairly elastic, i.e. I’d water my lawn a LOT more if the price fell in half.