Freakonomics Interview: How Inelastic Demand Can Boost Profits

Freakonomics Interview with Daron Acemoglu Essay Questions Name Institution Course Tutor Date Part A There is inelastic demand for the firm's goods if the selling price does not change due to decreased labor costs. In other words, price adjustments do not affect demand for the product. On a graph, this would seem like a straight-up demand increase. When a company lowers its labor expenses, it may make the same product for less money. As can be seen in the graph, this creates a rightward shift in the supply curve. Where the supply curve meets the demand curve is the point of equilibrium. As the supply curve shifts to the right, the equilibrium price stays stable while the equilibrium quantity rises. Figure 1: Supply and Demand Curve Graph Since the demand curve is completely inelastic, the company may maintain the same production and price level while still realizing a profit—the company's bottom line benefits as a consequence. Overall, this scenario lends credence to Acemoglu's argument that businesses led by MBAs can cut labor costs without increasing investment in innovation or technology and instead use the savings to boost profits for shareholders in the event of perfectly inelastic demand. It's important to remember that inelastic demand curves are unusual in real-world markets. Thus cutting down on labor expenses usually means dropping the price and seeing a smaller bump in profit. Part B How would you make the distinction between allocative efficiency and productive efficiency in correcting Stephen Dubner? Different from one another, economics often utilize the ideas of allocative and productive efficiency. When resources are allocated effectively, the marginal benefit should equal the marginal cost, a condition k