Question

Using what we have learnt about the price elasticity of demand, and what we remember about short run and long run price elasticities (Chapter 2 of Perloff (2017)), along with substitution and income effects (Chapter 4 of Perloff (2017)) as a guide, choose a particular product (good or service) which you or your family purchased during the recession of 2007 – 2009, or choose a particular good which you or your family purchased at least 2 years ago (before the start of the pandemic in 2020). You may or may not be purchasing the product this year or since March 2020. Give a general description of this product in terms of its relationship with income and its relationship with price. Then discuss your (or your family’s) spending behavior prior to the major event (recession or pandemic), and now. If you or your family no longer purchase this product, discuss why. Be sure to include in your discussion the price changes (increase or decrease, using specific values if available), how you or your family responded to these changes, and whether this product is more price elastic or price inelastic in the long run (compared to the shortrun).

Answer 1

Let the good purchased be an air-conditioner bought in 2018 as the incomes were at a rise for the family and with increase in income, family bought an air-conditioner. In 2020, after the pandemic, family income has reduced drastically due to loss of jobs, recession and lower demand for goods as people try and speculate and save for healthcare and future contingencies due to the uncertainty created. Thus, the family wont but it in 2020 as airconditioner is an expensive product which makes it price elastic in short run and when factored with income constraints and the proportion of income to be spent to buy an air conditioner whose price has increased due to unavailability of spare parts to produce these goods will lead to an elastic demand even in long run. Family responded to this fact by not buying expensive things and save money for future contingencies and necessities.