|ECO 4100 Advanced Microeconomics Overview During the Great Recession and the recovery years, consumers have been adjusting their spending behavior. In one of their Spotlight on Statistics article, The Recession of 2007 – 2009, the U.S. Bureau of Labor Statistics states that average consumer expenditures decreased from “$52,203 in 2007 to $48,109 in 2010”. This could be as a result of a decrease in the demand for goods and services – perhaps consumers were (and are) finding alternatives to their usual spending behavior. In fact, Gorman (2015) reports that households were able to spend less (save) during the recession by taking advantage of deals and discounts. This behavior, which lowers the actual price spent, could be masking an increase in spending. Reed and Crawford (2014) also looked at consumers’ spending behavior on certain products using the Consumer Price Index. They conclude that while the observed changes in expenditures were as one would expect, there were some products with unexpected changes in expenditures. Knowledge about the demand price elasticities could shed some light on the motivator behind consumers’ behavior. For instance, we know from an introductory microeconomics course, that consumers would spend more if the demand for a particular good is price inelastic and there is a price increase. However, by using coupons and similar deals, one could observe consumers’ spending less on the same product. Additionally, the Slutsky equation points to the relationship between the impact of a price change and the proportion of the consumers’ budget being spent on the product with the price change. If the consumer dedicates a small proportion of their budget to a certain product, then changes in the price would not affect their budget greatly and the observed change is mostly a substitution effect. On the other hand, if a larger proportion of their budget is dedicated to the product, and the price of the product changes, it is likely that the consumer’s change in their real income is the main influencer of the observed change in quantity. Furthermore, whether these responses differ in the long run when compared to the short run is important. That is, are some of these goods more price inelastic in the short-run than in the long-run? Knowing these statistics may explain an increased use of coupons and discounts during a time period where consumers could not adjust quickly to the change in the environment (for certain goods and services). In chapter 2 of Perloff (2017), we revisited demand and supply elasticities and noted the factors that determine the magnitude of these elasticities in the shorts-run and the long-run. Specifically, Perloff (2017) points out that how easily a product can be substituted with another, and how easily a product can be stored are the two factors which determine whether the demand for a good will be more price elastic or price inelastic in the short run. In chapter 4 (of Perloff (2017)), we expanded our investigation by looking at the substitution and income effect of a price change, and the Slutsky equation. Assignment 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)) as a guide, choose a particular product (good or service) which you or your family purchased during the recession of 2007 – 2009. You may or may not be purchasing the product this year. Discuss your spending behavior then and now. Use the Slutsky equation to explain your spending behavior. 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 short run). Additional Details o The essay should be single – sided, double – spaced with 1 inch margins. Use the 12 point Times New|
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