Tuesday, September 25, 2012

Topic 5: Ripple Effects and Elasticity

One of the fundamental economic ideas is that choices have secondary, or "ripple" effects. Imagine throwing a stone into a still pond. The primary effect is the splash it makes, but it also sends out ripples that spread out over the surface of the pond which bounce off of other objects making further ripples. The ripples going in different directions and bump into each other, creating patterns that are difficult to predict. For this journal entry, watch the video "The Ripple Effects of Oil Prices," then write about how the ripple effects of a change (up or down) in the price of oil affects the various markets that make up the economy. How does it affect you and your family? At first you might think, "Not at all," but when you think about it more deeply, it is clear that because of oil's importance in the production of every good and service that is produced, a change in its price effects everyone (albeit differently). What other goods and services can you think of that have such an inter-connectedness with other goods and services? How does the idea of elasticity affect the markets when prices change? For which goods and services is your own demand relatively elastic? Inelastic? Why?

  • When the price of oil changes and either increases of decreases, products that use oil to work and processes such as manufacturing are effected. For the products that use oil to work, they are complements to oil, so if the price of oil increases, the price of these products will also increase.  Some examples of complements include vehicles such as cars and motorbikes. The total price of the processes such as manufacturing may also increase because many small parts in manufacturing require oil.
  • My family and I are effected by the change in oil price because we must pay more for oil, meaning that our transportation fees and costs will increase. This may lower our demand for oil and force us to choose other means of transportation that either doesn't need oil, or could lower the oil expenses of the family.
  • Another good and service that may effect others so much may be wood. Many products, such as paper and materials for construction, are made from wood. Even though we have other substitutes for paper and materials for construction, these are still the primary form of material used (paper for books and posters and newspapers, etc.).
  • Elasticity affects the marketing by describing the changes of quantity in ratio to price. Inelastic means that no matter what the price is for a product, the demand is the same. An example of this may be medication. No matter the price of medication, if I'm sick, then I will definitely get medicine to make myself recover. Elastic means that no matter what the quantity is for a product, the demand is the same. I do not have any demand for totally elastic goods in real life. Even though this is possible in theory, it's hard to find totally elastic goods in real life.

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