BUS 640 Week 2 Discussions Responses to peers

Discussion 1 responses needed

Marginal Rate of Substitution

What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate. Guided Response: In 300 words or more, please, provide your response to the above discussion question. Find two goods from your own consumption basket and explain how the MRS changes for the two products as you substitute one for the other. Respond substantively (150 words) to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

Respond to Stephen Ghosal post

What is the marginal rate of substitution (MRS) and why does it diminish as the consumer substitutes one product for another? Use examples to illustrate.

The marginal rate of substitution (MRS) is defined as the amount of one product a consumer is willing to give up for one more unit of a different product, while still remaining at the same utility level (Douglas, 2012).  As a consumer decides between the consumption between two products, the decision the consumer makes effects both products in different ways.  The reason the marginal rate of substitution begins to diminish once the consumer substitutes one product for another is because the marginal utility is affected by the substitution process (Douglas, 2012).  The marginal utility is defined as the change in total utility due to the consumption of one more unit of that product, holding constant the consumption of the other product (Douglas, 2012).  Since one product is being utilized more, then the other product is being used less at that expense. 

An example of marginal rate of substitution is a consumer choosing between different restaurants that have differing atmospheres and cuisines, but still have the same cost. When you rate these different restaurants by the different atmospheres and by the level of the cuisine, and create a ratio out of the two numbers, this will give the consumer a better idea of which restaurant their time and money should be spent at, even though they enjoy having dinner at all the different options. This showcases marginal rate of substitution because the consumer is giving up the amount of time and money they spend at one restaurant, to spend at another restaurant that they enjoy more, at the same utility level.  If the situation had been either choose a restaurant for dinner, or eating at home, there is still going to be marginal rate of substitution however the comparison will differ since there will not be multiple restaurants being compared.

Douglas, E. (2012). Managerial Economics . [Electronic Version] Retrieved September 9, 2019 from https://content.ashford.edu

Respond to Ryne Solberg post

                Marginal Rate of Substitution (MRS) deals with consumers and their indifference towards objects, goods or events.  It is essentially stating how much a person is willing to give up a certain good for another good that is of equal satisfaction (Douglas, 2012).  The author uses a really good and relatable example of comparing movies to ballgames.  In comparing these the formula is fairly simple, it is applying a derivative to one event, and dividing it by the event that the consumer will be instead doing.  If this point aligns closely to an indifference curve, then it is still considered a good substitute.  The indifference curve graphically represents the satisfaction of a consumer, or where they will remain indifferent between the compared goods (Hayes, 2019).

                It’s important to know the ratio of each good in relation to the other prior to performing any MRS.  It essentially places a value of how much one good a consumer prefers in relation to getting the same satisfaction from another good.  My example would be in dealing with cattle.  In the local market Gelbvieh (red cattle) sell for significantly less than Angus (black cattle).  It is so much so that it would take nearly two-gelbvieh calves, to replace the cost of a single angus calf.   With this the indifference line results in a negative slope, but it is still a gradual decline.  As with this the rate of substitution could take a while to reach unacceptable terms.  This is due to how close the two goods are.  If I were to place a higher value on the angus calves, it would increase the Gelbviehs number for replacement, therefor making the curve much steeper and rate of substitution would greatly diminish as a result. 

References

Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

Hayes, A.  (2019, September 9).  Marginal rate of substitution – MRS definition.  Investopedia.  Retrieved from https://www.investopedia.com/terms/m/marginal_rate_substitution.asp (Links to an external site.)    

Discussion 2

Demand Elasticity

Please, read the article Hainer, R. (2010), provided in the required readings section for this week. The tobacco industry is a prime example to consider when talking about price elasticity of demand. While nicotine use can be addictive for many users, it is not addictive for the so-called "social smokers". What can we say about the price elasticity of demand for nicotine products (such as cigarettes, pipes, tobacco) in the group of nicotine addicted users, versus the group of "social smokers"? Can we say whose demand is likely to be more elastic? Why? Guided Response: Provide your response to the discussion question in 300 words or more. Further, comment on the effectiveness of government policy aimed at reducing the negative effects of smoking on health. For example, consider high taxation on producers? – is that effective? Respond substantively to at least two of your classmates’ postings. Substantive (150 words) responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

Respond to Keondra Tate post

 “Price elasticity of demand is an economic measure of the change in the quantity demanded or purchased of a product in relation to its price change” (Kenton, 2018). When considering the difference between the group of nicotine addicted users versus social smokers, there is a difference in elasticity. When a person is a nicotine addicted user, they are more likely to buy tobacco products regardless of the price because their body is telling them they need the nicotine. Therefore, price elasticity of demand among the nicotine addicted users’ group is low because despite the increase in prices, people will continue to buy cigarettes or other tobacco products to feed their addiction. On the other hand, social smokers are not addicted to nicotine according to the article Social Smokers Aren’t Hooked on Nicotine, Just Smoking, many social smokers confine smoking to certain situations and occasions and can sometimes go months without smoking. One social smoker said they had not bought a pack of cigarettes in over 20 years. On the contrary, while some smokers find it easier to quit smoking regularly, some say it is more difficult to quit social smoking. Since social smokers don’t usual buy the tobacco products and only use them in certain situations, I would say that the price elasticity of demand in the social smokers’ group is elastic. If a group already doesn’t buy a product frequently, increasing the price would only deter them even more from buying the product.

The article mentions that there has been a decrease in the number of habitual smokers but an increase in social smokers. With the increase in taxes and the laws prohibiting smoking in many business establishments, many smokers have opted to decrease their habit or stop all together. However, many continue to smoke in certain social settings. I believe that government policies have been effective in moving people away from smoking cigarettes but with new tobacco products being released, many smokers have just opted for an alternative rather than quit using tobacco altogether. Cigarette smokers may be decreasing but the usage of vapes and e-cigarettes has increased over time. 

References

Kenton, W. (2019, July 12). Price Elasticity of Demand. Retrieved from https://www.investopedia.com/terms/p/priceelasticity.asp

Social Smokers: Addicted or just dabbling? (2008, September 9). Retrieved from https://www.health.com/health/condition-article/0,,20213458,00.html

Respond to Nicole Ryan post

When we consider price elasticity of demand, Hainer has given us a great example that helps to illustrate this concept.  There are two kinds of smokers, one where the nicotine is addictive and they become daily smokers, and then there is the social smoker that only picks up a cigarette occasionally and can put them down at any time.  These social smothers don’t necessarily seem to be affected by changes in cost of cigarettes if they are never truly purchasing the product.  They are collecting their random supply of cigarettes from friends or whomever they are around in the social environment where they can simply fill their social desire of smoking without actually buying anything. Regardless, Douglas explains that “price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price” (2012, Section 4.2 Elasticities of Demand,” para. 2). 

The demand is more elastic for those tobacco consumers that are daily users.  The price elasticity of demand for nicotine addicted users is mostly irrelevant because it wouldn’t matter what the cost of the cigarette or other tobacco cost, the daily user is going to spend the money for the pack of cigarettes to satisfy their addiction.  No matter the change in price, the demand from this group of consumers will remain continue.  As for the price elasticity for the social smoker, these users are not physically contributing to the tobacco economy and they are not going to make the purchase regardless of the cost of the product.  The cost of the products could increase 1%, 2% and so on and the social smokers are going to rely on the daily users for their occasional smoke when they are around other smokers, at the bar or otherwise.  

The high taxation on tobacco by the government, while not 100% effective, it is still going to touch a certain percentage of the users and if that means that it helps to drive addicts to quit smoking, even a small percentage, it is worth it.  The taxation may push certain users to quit due to the cost now effecting their other monthly bills.  There’s always going those that can afford or will make it a priority to afford the cigarette no matter the taxation.  These consumers would be extremely elastic. 

 

References:

Douglas, E. (2012). Managerial Economics (1st ed.) [Electronic version]. Retrieved from https://content.ashford.edu/