Assignment 3 Solution

Assignment 3 Solution - Name_ Food & Resource Economics...

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Name___________________________ Due Date: 10/21/10 Assignment # 3 -solutions ELASTICITY A thorough understanding of the basic concepts of demand and supply and their derivation is the cornerstone of economics. The simple analytics of supply and demand allow the economist to evaluate and anticipate the impact of a change in any aspect of the economy on the rest of the economy. Since most economic markets are in continual state of flux, the demands on the economist for his or her expertise are never diminished. Supply and demand analyses allow the economist to describe what will happen in a given market if some change occurs within the market or a related market. For instance, if the Secretary of Agriculture uses his statutory authority to increase the amount of red meat imported into the United States, supply and demand analyses can be used to anticipate what the response will be in the retail market for ground beef, in the retail market for prime cuts, in the feeder cattle market, and in the market for pasture land. In addition, other markets such as poultry and corn would be affected by an increase in red meat. Simple partial equilibrium analyses allow the economist to describe what response can be anticipated in each of these markets. This exercise deals with the use of elasticity coefficients. An elasticity coefficient is a measure of the responsiveness of one economic variable to changes in another economic variable. Through the use of elasticity coefficients, the economist can estimate by how much a given market will adjust to a change elsewhere in the economy. For instance, if the Secretary of Agriculture allows an additional 20 million metric tons or red meat to be imported into the U.S., by how much will the price of ground beef fall at the retail level? If the economist knows the appropriate elasticity coefficient, then he or she can estimate a specific price decline to be expected in the ground beef market. Elasticities and their use are one of the most powerful, versatile tools in the economist's bag of tricks. Elasticity coefficients have been shown to be particularly powerful analytical tools because the economy responds to changes in price and other conditions in a more or less consistent manner. Therefore, the economist reasons: "If I assume that the economy will react in the future more or less as it has in the past, then I can predict what will happen in the future." These predictions are usually fairly accurate in instances of substantial market disruption. The economist uses four basic elasticities: 1. Elasticity of Demand with respect to price. 2.
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Assignment 3 Solution - Name_ Food & Resource Economics...

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