Economic Models and Price Elasticity of Demand Estimates

Question: Discuss about theEconomic Models and Price Elasticity of Demand Estimates. Answer: Economic Models In this part, the researcher provides a precise discussion alongside evaluation of the accuracy of the statement, Economic models are false and so government should ignore their predictions. The self-serving point in relation to these models is that they are wrong in a strict perspective leave alone their incompleteness. A thorough scrutiny of these models unvaryingly discover that they vary from what they represent. Models like Production Possibility Frontier for example, has been used successfully to indicate the production possibilities of two products with fixed resources. It has enabled economist to showcase that production of a given commodity can solely rise when production of the other product is declined because of resource availability. PFF model has been used to measure efficiency in which two products can be produced jointly. This has assisted managers alongside leaders to decide appropriate mix of products that are most beneficial. Thus, this model has driven home an idea that opportunity costs usually come up where an economic organization with scarce resources have to decide between two options. A user of a give model need to be surprised when it is uncovered that model under consideration is incomplete and, therefore, false. Additionally, the falseness of a given model is arrived at with easiness. Many significant means through which a given model differs from that which it denotes can be recognized (Krugman, 2009). Models, however, remain usedness despite being false and hence give effective prediction of economic phenomena. Economist have persistently utilized these false models to predict different phenomena effectively and this rebuts the argument that such models should be discarded. Even though there is no single model that is 100 percent correct, it is equivalent to declining to use any model at all in case an economist discards a model simply because it is incomplete or false (Krugman, 2009). It is possible to distinguished useful models from useless one via scientific methods. Models have continued to useful because of their ability to simplify phenomena, though, models are untrue for this identical reason. Models are simplification/ and, therefore, they are false. The way by which models are simplifications may not be essential for particular purposes. However, the simplification might in fact make models significantly useful. Models, for instance, can be employed in the predication of income precisely (Krugman, 2009). A predictor is needed to know precisely number of commodities a firm will produce and sell in the future alongside the intended price levels. These forecasts hinge on economic particulars on how each prospective customer will act in the future. Because these details will remain unknown at the time of budget preparation, it stays inaccurate (Krugman, 2009). However, budgets are unanimously applied by the government aside such faults. It allows a company to decide as well as undertake effective planning, hence, achieve higher profits than it would be feasible in the absence of budget. The above discussion has revealed that the statement, Economic models are false and so government should ignore their predictions is accurate in part. It is accurate that economic models are all wrong but inaccurate that the government should ignore the prediction of economic models. It is a self-evident truth that economic models are useful tools for predictions and, therefore, the government should never discard the forecasts arrived at using economic models. Estimates of Price Elasticities Fundamental building block of economic theories is that snowballing (or declining) price of a commodity cuts (or surges) demand for a commodity. The PED gives a description of the degree to which use of a product drops or upsurges following a growth or a drip in its price. If PED for an item were extremely low-slung (inelastic), demand would deteriorate or upsurge only somewhat in response to vicissitudes in prices (Krugman, 2009). Where a price of a commodity is about 0.1 for instance, demand for this product would decline by just 0.1% for every percentage outpouring in price (Boland, 2014). Demand for a product with high PED would decrease extremely more brusquely in response to intensifications in prices. The list below gives estimated price elasticity of three different products: Air travel 2.4 Cigarettes 0.3 Salt 0.1 Specific brands of coffee 5.6 Water 0.2 Commenting on the Estimates Magnitudes The PED of a commodity is primarily determined by substitute products availability. A commodity with several close substitutes will possibly have a greater PED. The greater disposable f income of a consumer use to pay for product, the greater elasticity would be. The non-durable commodities higher elasticities are determined by the longer an alteration in price grips. The lower price elasticity is determined dictated by the more necessary a product is (Chen et al., 2014). The PED of, specific brands of coffee, cigarettes, air travel, water, as well as salt are selected for comment based on the PEDs magnitude with respect to determinants PED. The known determinants of PED are substitute goods availability, disposable income, degree of necessity, duration of price alteration, extensiveness of product definition, as well as brand loyalty (Galperin Ruzzier, 2013). Water (0.2) and salt (0.1) are necessity products. They have the lowest magnitude relatively in relation to PED. This is due to their greater necessity of a good, which means the lower the price elasticity of demand (Mueller et al., 2014). This implies that consumers will continuously try to purchase necessary products. Air travel on the other hand has a greater price elasticity since it is a luxury good (Azzopardi, 2014). Therefore, it tends to have larger magnitude with respect to price elasticity of demand. Initially, coffee had a less degree of necessity, however, it has turned to being a habit-forming commodity. Accordingly, coffee has become necessities to consumers hence it will have a lesser magnitude indicated by 0.3 value. Nonetheless, it is observable from the above list that the PED of specific brands of coffee has an upper price elasticity (5.6). This implies that specific brands of coffee have lower degree of necessities (Rios, McConnell Brue, 2013). Therefore, consumers will substitute it with other close substitute goods in case of a rise in the price. References Ahern, K. R. (2014). Do common stocks have perfect substitutes? Product market competition and the elasticity of demand for stocks. Review of Economics and Statistics, 96(4), 756-766. Galperin, H., Ruzzier, C. A. (2013). Price elasticity of demand for broadband: Evidence from Latin America and the Caribbean. Telecommunications Policy, 37(6), 429-438. Krugman, P. (2009). How did economists get it so wrong?. New York Times, 2(9), 2009. Rios, M. C., McConnell, C. R., Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill. Mueller, N. D., West, P. C., Gerber, J. S., MacDonald, G. K., Polasky, S., Foley, J. A. (2014). A tradeoff frontier for global nitrogen use and cereal production. Environmental Research Letters, 9(5), 054002. Chen, Y., Cook, W. D., Kao, C., Zhu, J. (2014). Network DEA pitfalls: Divisional efficiency and frontier projection. In Data Envelopment Analysis (pp. 31-54). Springer US. Boland, L. A. (2014). The Methodology of Economic Model Building (Routledge Revivals): Methodology After Samuelson. Routledge. Azzopardi, L. (2014, July). Modelling interaction with economic models of search. In Proceedings of the 37th international ACM SIGIR conference on Research development in information retrieval (pp. 3-12). ACM.