Answers
1. “Economic models are false and so government should ignore their predictions”
Economic models are theoretical construction that represents the process of economic through certain variables and their relationship based on quantity, which illustrates the critical process. Models of economic are prepared by considering underlying parameters that may reflects certain changes due to the factors of investigation or fitting theories. However, it has been observed that the economic models represent complicated mathematical models reflecting financial risks do not reflect the reality. Considering the professional interest, several economic models are used to forecast the economic activity that is presented in accordance to the logical assumptions (Berry & Davidson, 2016). Further, the models are used by the professionals to propose economic policies so that the economic activity can be modified in future. However, it has been observed that the economic models consists certain flaws depicting the unreal outcomes since the present models have been utilized to “calibrate” the models resulting in inaccurate results. In addition, it has been noted that most of the economic models involved complex procedures due to the assumptions used to design and incorporated historical data to measure the direct outcomes. As a consequence, the models represented inaccurate results reflecting several problems deviating the original results from reality (Azzopardi, 2014). The economic models with respect to the financial models associated with several problems on regulations since the data used to create the models were based on assumptions. Therefore, many theorists presumed the economic models to be false as the models presents inaccurate and unreal outcomes that affects the relevant presumptions of the models.
It has been noted that the models of economics are useful to analyze the planning as well as allocation of economic resources to determine the demand and supply measures of products and services. The economic models have been considered as false models as the models provide incomplete information and provides different observation against the actual results due to several erroneous and fraud designing process. Several economic models use mathematic equations to describe the economic behavior, which do not reflect the correct results to be used to predict the models for financing and trading purpose (Boddewyn, 2015). Accordingly, it has been recommended that the government should not consider such economic models to create different policies that affect the economy of the country in terms of finances, marketability, trading of products and services and availability of resources. In order to present the regulation policies for the development of organizations and country’s gross domestic product (GDP), it is essential to consider the accurate outcomes of the economic models. Therefore, if the models containdata that are fraud and error, it would reflect inaccurate results hence government should ignore the predictions resulting in unreal outcomes (Gal, Stewart & Hanne, 2013).
2. Estimates of the price elasticity of demand
Price elasticity of demand refers the measurement of economic relationship between the changes arise in quantity demanded and the relative price for a particular product which is used to explain the price sensitivity. Price elasticity for a product is measured by the percentage change in demand for a product’s quantity as well as percentage change on the product’s price (Labandeira, Labeaga & López-Otero, 2017). As a consequence, if the change in product’s price is small while change on product’s quantity demand is large, the product can be said to be responsive to the changes in price. On the contrary, if a price change for product is large and the amount of quantity change for its demand is small, then the product is said to be inelastic (Thimmapuram & Kim, 2013). In addition, the measurement of product responsiveness to the changes in price and quantity demanded is perfectly inelastic if the resultant price elasticity of quantity demand is zero. Price elasticity of demand considers the demand and supply factors indicating the fall in consumption level due to increase in price of product that indicates negative price elasticity. Similarly, if the price of product falls as per the existing price, consumption is said to be increased resulting in positive price elasticity of the product (Galperin & Ruzzier, 2013). In case of tobacco products, it has been assumed that the price elasticity of demand is less than one hence; the change in price is inelastic.
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Products
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Percentage change in quantity demand
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percentage change in the price
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Price elasticity of demand
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Petrol
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10% increase
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30% falls
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0.33
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Cigarettes
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7% decrease
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27% increase
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0.26
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Electronic products
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30% increase
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12% fall
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2.50
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In case of petrol, it can be said that the change in price affects at smaller percentage since petrol is a necessary product for the class of individuals having car. Similarly, price elasticity of demand for cigarettes is also negative as the percentage change is less than one that means change in price does not affect the product demand in large as the consumers are addicted to smoking. On the contrary, price elasticity of demand for electronic products is positive higher than one that represents the change in quantity demand at large due to change in price.
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Price elasticity of demand for products is measured by using determinants based on the product categories and market structure. In case the product is based on the necessity of the consumers, change in price level would affect the consumption level by small percentage therefore, the price elasticity of demand will be negative. Besides, in case of luxury products, price elasticity will be positive and reflect the change at higher percentage since fall in price will lead to increase in consumption at high percentage (Labandeira, Labeaga & López-Otero, 2017). Therefore, to estimate the economic determinants of price elasticity, use of relative magnitude should be accurate and based on real factors like market interest rates, product supply, and availability of resources relevant for production is required to be considered accurately. In case the products are produced under monopoly business then the price elasticity will negative because change in price would affect the consumption level at lower rate due to non- availability of substitutes (Jobling & Jamasb, 2017).
Reference List
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.
Berry, S., & Davidson, K. (2016).Improving the economics of building energy code change: A review of the inputs and assumptions of economic models. Renewable and Sustainable Energy Reviews, 58, 157-166.
Boddewyn, J. J. (2015). Political aspects of MNE theory.In The Eclectic Paradigm (pp. 85-110). Palgrave Macmillan UK.
Gal, T., Stewart, T., & Hanne, T. (Eds.). (2013). Multicriteria decision making: advances in MCDM models, algorithms, theory, and applications (Vol. 21). Springer Science & Business Media.
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.
Jobling, A., & Jamasb, T. (2017). Price volatility and demand for oil: A comparative analysis of developed and developing countries. Economic Analysis and Policy.
Labandeira, X., Labeaga, J. M., &López-Otero, X. (2017).A meta-analysis on the price elasticity of energy demand. Energy Policy, 102, 549-568.
Thimmapuram, P. R., & Kim, J. (2013). Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), 390-397.
