Elasticity of Demand


Everyone is an economist these days and many of these new pundits have never read an economics text book. Alan Johnson is not the first to admit it and rumour has it that James Callaghan was sent  on a course at Nuffield College. Of course, some of their advisers  have read something along the lines of economics . So it was a relief to me to  tune in to a debate in the House of Lords on the proposed rise in tuition fees and hear economic terms being used.

An issue discussed was would an increase in tuition fees reduce the number of people applying for a university place particularly the ‘deserving poor’. The Coalition argues that when Labour did it applicants dropped for a short time and then the rise resumed. Well as any economist knows whether it rises or falls  depends on the elasticity of demand for university courses and their supply in the past and in the future. It is possible to calulate the numbers for the earlier period and make some reasonable forecasts now when the determinants of demand have changed. Has any one done that? if so please speak up. Obviously when Labour did it the demand for university places was rising and their provision expanded to meet this demand. The total number of applicants were on that part of the demand curve that was rising quickly.  The potential supply of students is not infinite and we would expect the rise in the percentage of the population going to a university to level off within its limits. Of course there is the issue of rising population and overseas students. No one said that forecasting was simple?

Then there is the issue of rents in London  the elasticity of demand for the properties occupied by 17, 500 hapless Housing Benefit families. What we might wonder are the demand  and supply curves for this accommodation in London. There is no doubt the population of London has been growing fast and the demand for rented accommodation has been rising. What is the percentage of these 17,500 homes to the total number of such properties in the whole of London by segment? Let’s guess. Pretty small I hear you say. And what is the demand for them? Well, you might say,  getting into the swing, the curve must be rather steep. After all who can get a mortgage these days? Atta boy you are getting the idea. What we need to predict are the growth rated in family establishments and the need and aspirations of people to settle in London. Look, you can stop at this point. I think you get the drift of this. What I am saying is that when you are seeking to change Housing  Benefit it is reasonable to predict the consequences and not make up fairy tales.

I am a prodigious borrower of books from my local library most of which comes from the British Library at £3.50 a book. My librarian tells me that the charge is to rise to £10 a book which is the real cost of the British Library lending it. I consult these books rather than read every word in them. At the British Library there is no limit to the number of books I can borrow in a day. Let us assume I work in the British Library on ten books free of charge which is quite usual for me. I can get there by train for £25. I resolve not to borrow these books  through my local library. It is a matter of elasticity of demand you see. Anyone know what it is? At the end of the year some accounting Wally will argue that there is no local demand and the Council should withdraw the facility.  And so on.

What is my gripe? The illiteracy of many people, and especailly, the politicians who debate these important public issues.

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1 Comment

Filed under Alan Budd, BBC, Big society, Cabinet, Cameron, Deficit, Economics, George Osborne, House of Lords, Housin in London, Housing Benefit, IFS, Job Seekers Allowance, Labour Blogs, Lib Dem blogs, Liberal Voice, New Stateman, Nrew Stateman, OBR, Politics, Statistics, Treasury

One response to “Elasticity of Demand

  1. This is precisely what i was seeking. Thanks!

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