27 November 2005

Elasticity of Demand with respect to Transaction Costs

When transaction costs are high relative to the value of the good, you may find yourself doing rather strange things. Consider when you need one rubber band or one paper clip but you don't have one at the house. Obviously you aren't going to the store to buy one paper clip. That would take 30 minutes and you end up buying a whole package because they don't sell just one. So instead you engage in a work around activities.

I use a rubber band to secure my door key to my wrist when I go running. See below for my work around activity when the rubber band broke. To get an idea of the transaction costs of finding another rubber band, notice the number of iterations on the work around activity.

Count 'em... That's four knots.

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