The Modern Principles Blog

Americans Driving Less? (Micro Chs. 3-4)

11 billion fewer miles were driven this March compared to last March.

Hat tip to Calculated Risk.

 

Activity:

Read the article above.

 

Questions:

1.) Is the change in driving habits what you would expect from what you have learned in Chapters 3 and 4 about demand and price? If the average car gets 25 miles per gallon, how many fewer gallons would consumers buy if they are driving as much less as the article says?

2.) If the average price of gasoline in the U.S. averaged about $2.50 in March 2007 and averaged about $3.22 in March 2008, based on the data in the article, what is the demand elasticity of miles driven to the price of gasoline?

3.) 11 billion fewer miles sounds like a big change, but what does the estimated elasticity you calculated in question 2.) say about how elastic the demand for miles driven is?

Answers:

1.) Since prices were rising, yes, one would expect the quantity of gasoline purchased--and thus miles driven--to fall. At 25 miles per gallon, consumers would be buying about 440 million fewer gallons of gasoline in March 2008 compared to March 2007.

11 billion miles/25 miles per gallon = 440 million gallons of gasoline

2.) The article tells us the 11 billion fewer miles is a 4.3% drop. We can calculate the percentage change in price by dividing the difference by the average, as in the appendix to Chapter 4 of the Cowen/Tabarrok textbook.

Percentage change in price = ($3.22 - $2.50)/[($3.22 + $2.50)/2] = 0.72/2.86 = 0.252

Percentage change in price = 25.2%

Elasticity of demand = 4.3%/25.2%

Elasticity of demand = 0.17

3.) While the change in miles looks pretty big, it is not a large percentage. An elasticity of 0.17 means that miles driven are not very responsive to the price of gasoline at these levels. It took a large percentage increase (25.2%) in the price of gasoline to get this 4.3% reduction in miles driven per month.

Equilibrium (Macro/Micro Ch. 3)

Take a look at this post from the Marginal Revolution blog:

 

http://www.marginalrevolution.com/marginalrevolution/2008/06/the-economics-1.html

 

1.) Draw a supply and demand diagram of the market for sawdust:

What is it that shifts the supply curve?  Which direction does it shift in?

 

2.) Now draw a supply and demand diagram of the market for milk: What is it that shifts the supply of milk?

 

3.) What does Alex mean when he says that “capitalist production system minimizes waste?”  Example: If a business owner turns the lights off at his factory every night instead of just keeping the lights on all night, who pockets the savings?