Modern Economics for Business

Questions: Economic models are false and so the government should ignore their prediction.Discussion and evaluation of the accuracy of this statement? Identify estimates of the price elasticity of demand for at least three different products? Answers: 1.Economic models are false and so the government should ignore their prediction The concept of modern economics has a significant number of twist and turns including factors such as trade, currency aspects, and global growth. By considering the affecting factors leading to economic sustainability Government of a country must identify the loopholes of conventional economic models to predict the outcome of an economy. Clearly, traditional economic models are based on theoretical concepts and historical data to predict the upcoming economic numbers so that financial risks can be identified and risk mitigation plan can be defined (Proto, Squillante, Kacprzyk, 2013). In the current scenario, the government of any country must not only rely on the economic models during the distribution of resources leading to economic prosperity. Due to uncertain economic situations, models can be misleading, to say the least. The conceptual economic models have been designed by following hypothetical reality-based statistics and historical data. Hence, the economic models can be utilised to test the futuristic outcome considering the economic behaviour in the past. Precisely, economic models are subjective by nature as there are no convincing verification methods to support the predicted outcomes (Dohi Yun, 2014). The failure of economic models was seen in the past during the Global financial crisis of 2008-09. Invariably, the subjective nature of economic models must not be considered as evident in determining financial as well as economic prediction of a country. As the economic models are constructed on the basis of assumption, the accuracy of the models should be questioned. By identifying the approximation based subjective economic models, governments of the developed, as well as the emerging nations, must refrain from economic predictions. Meanwhile, there are two types of economic models i.e. empirical and theoretical models. Understandably, the accuracy of both the models can be questioned as there are certain limitations of the model that may lead to wrong predictions (Beath, Chow, Corsi, 2013). Most importantly, each of the models has been created based on different assumptions. Hence, a number of economic models can deliver different outcomes even if the same set of data can be used. Lack of explanation in the economic models can be another major issue. Therefore, the reliability of the economic models must be argued (Siliverstovs, 2017). Conclusively, the analysis of the economic models and the methods of creating the models have produced a significant number of questioned to be answered. Therefore, the governments of the countries must consider the errors that can be involved in making a projection using economic models. Due to the issue of accuracy, the government must give a second thought before applying economic models to determine financial projections. Affirmatively, the economic models cannot be replaced at once. Therefore, a number of economists must be selected to recalibrate the economic models before applying the models to practical field. Precisely, it is mandatory for the governments to use the most significant and calculated models to identify the financial issues. 2. Price Elasticity of three different products The concept of price elasticity of demand is used to measure the responsiveness of the quantity demanded to the change in the price of a product. The price elasticity of demand helps in analysing the quantity demanded of a commodity before and after the change of price. Furthermore, it helps the manufacturers to identify the change in the revenue earned due to the change in the price of the goods (Marnay, Siddiqui, Bartholomew, 2014). There are five types of elasticity of demand that are known as perfectly elastic demand, highly elastic demand, elastic demand, inelastic demand, and perfectly inelastic demand. The equation used to calculate the price elasticity of demand for a product is presented herein below: Price Elasticity of Demand It is important to note that the price elasticity of demand varies from one product to another due to the utility provided by the product to the consumers. The more the utility is provided by the product, the lesser will be the elasticity of demand while other factors remain constant (Karlan Zinman, 2013). In other words, the more the product is purchased by the consumers on a regular basis, the lesser will be the elasticity of demand. But, the elasticity of demand is also influenced by several other factors such as substitution and income level of the people. The elasticity of demand of three different products is presented herein below: Sugar Sugar is considered as a necessary product that is used on a daily basis for cooking and other commercial purposes. When the price of sugar changes until a particular point, the quantity demanded for the product does not change. For example, when the price of sugar increases from $3 to $6, the quantity demanded remains constant at 4 units. Hence, the price elastic of demand for sugar is zero at any point of price. A diagram has been presented below for better understanding: Figure: Perfectly Inelastic Demand Source: (Rassenfosse Potterie, 2011) Diamond Diamond is bought rarely due to its high price, which makes it a ultimately luxury product with few alternatives. The consumer can buy some other gems, but it will not have the same appeal as diamonds. Hence, a cut in the price of diamond will not impact its demand by a high level (Sabatelli, 2016). For example, when the price of diamond falls from $100 thousands to $70 thousand, the demand of the product will hardly increase from 200 units to 220 units. Hence, the percentage change in price is 30 percent and the percentage change in the demand is 10 percent. Therefore, the price elasticity of demand for diamond is less than 1, which makes it have an inelastic demand. A diagram has been presented herein below for better understanding: Figure: Inelastic Demand Source: (Rassenfosse Potterie, 2011) Chocolate Chocolate such as Dairy Milk operates in a competitive market and has a huge number of substitute products. Hence, a small rise in the price will make the customers move to some other chocolate brand in the market. For example, when the price of Dairy Milk increases from $80 to $100, the quantity demanded will decrease from 360 units to 200 units. Hence, the percentage change in price is 20 percent, whereas the percentage change in quantity is around 44 percent. Therefore, the price elasticity of chocolate is more than 1, which makes it have a highly elastic demand. A diagram has been presented herein below for better understanding: Figure: Highly Elastic Demand Source: (Rassenfosse Potterie, 2011) References Beath, J., Chow, G., Corsi, P. (2013). Evaluating the Reliability of Macro-Economic Models.The Economic Journal,93(372), 926. Dohi, T. Yun, W. (2014).Advanced reliability modeling(1st ed.). Singapore: World Scientific. Karlan, D. Zinman, J. (2013).Long-run price elasticities of demand for credit(1st ed.). London: Centre for Economic Policy Research. Marnay, C., Siddiqui, A., Bartholomew, E. (2014).Empirical analysis of the spot market implications of price-elastic demand(1st ed.). Berkeley, Calif.: Lawrence Berkeley National Laboratory. Proto, A., Squillante, M., Kacprzyk, J. (2013).Advanced dynamic modeling of economic and social systems(1st ed.). Berlin: Springer. Rassenfosse, G. Potterie, B. (2011). On the Price Elasticity of Demand for Patents.Oxford Bulletin Of Economics And Statistics,74(1), 58-77. Sabatelli, L. (2016). Correction: Relationship between the Uncompensated Price Elasticity and the Income Elasticity of Demand under Conditions of Additive Preferences.PLOS ONE,11(4), e0154487. Siliverstovs, B. (2017). Dissecting models' forecasting performance.Economic Modelling.