1. Answer the following:
A. Define price elasticity of demand. What are the 4 major determinants of price elasticity of demand and give a short explanation of their impact on elasticity?
B. Define price elasticity of supply. What are the 2 major determinants of price elasticity of supply?
1. A. Price elasticity of demand is a measure of the degree of responsiveness or sensitive of consumers to a change in price. The first determinant of price elasticity of demand is substituted for the product, which is the more substitutes, the more elastic the demand. Another determinant of price elasticity of demand is the proportion of price relative to income, generally the larger the expenditure relative to one’s budget, the more elastic the
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Price elasticity of supply measures the sellers’ responsiveness to price changes. One determinant of price elasticity of supply is the time period that it takes to adjust production depends on the degree of flexibility, different in different industries. Another determinant of price elasticity of supply is the ease of shifting resources between alternative uses.
2. What information is in a budget line? What information is contained in an indifference curve? What is an indifference map? Where is the point of equilibrium (maximum utility) on the indifference
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Explicit costs are payments to non-owners for resources they supply. For example, this would include costs of uniform T-shirts, a clerk’s salary, and utilities. In the other hand, implicit costs are the money payments the self-employed resources could have earned in their best alternative employments. For example, this would include forgone interest, forgone rent, forgone wages, and forgone entrepreneurial income. Normal profit fit in implicit cost because they are the minimum payments required to keep the owner’s entrepreneurial abilities self-employed. Normal profits are production cost. Economic profits are total revenue less all costs and economic profits are not a cost of
Additionally, the equilibrium price, the quantity can be seen on the graph above indicated at the point where the supply and demand curve meets.
Prices are based upon the price elasticity of demand in each given market. In other terms, this means that during ladies night at the local bar, it costs more for men to have a beer than women simply because these bars find it o.k. to charge females less, as a way to draw more females to the business on a specific night.
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
Elasticity is also prominent to businesses. The price elasticity of demand is very important for companies to determine the price of their products and their total sales and revenue. Newell showed that by cutting the price of the Left 4 Dead game in half to $25 during a Valve promotion, its sales increased by 3000 percent (Irwin, 2009)viii.
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
A change in quantity supplied is just a movement from one point to another in the supply curve. In opposite, the cause of a change in supply is a change in one the determinants of supply that shifts the curve either to the left or the right. These determinants are the resource prices, technology, taxes and subsidies, producer expectations, and number of sellers. An equilibrium price is required to produce an equilibrium quantity and a price below that amount is referred as quantity supplied of zero no firms that are entering that particular business. If the coefficient of price is greater than zero, as the price of the output goes up, firms wants to produce more of that output. As the price of the output goes up it becomes more appealing for the firms to shift resources into the production of that output. Therefore, the slope of a supply curve is the change in price divided by the change in quantity. The constant in this equation is something less (negative number always) than zero because it requires strictly a positive...
Walmart’s sports car toys price elasticity is 2.25. This shows that it is elastic as a change in price causes a change in quantity demanded that is greater than one percent. As the price decreases, total revenue is expected to increase. This is so because the demand curve slopes downward which means a decrease in price leads to increase quantity purchased and increased receipts. Since the change in quantity was greater than the change in price, the quantity has a stronger effect and will be able to offset the price effect.
With supply solely, factors involved with regulation of the supply also control some aspects of demand. Things such as production costs and desired net profit can determine whether a business succeeds or not. Having a balance between quantity and price is the greatest control any business can have. Pricing is obviously one of the most beneficial, or destructive, parts of a business. Pricing is the first and most valuable thing an individual will look at, which will overrule most other judgments based off of quality and detail. Balancing the price, however, helps to create a pristine product, with just the right amount of detail that will fuel the market, while still generating a steady net income.
When demand is elastic as with Coca Cola products price changes affect total revenue. When the price increases revenue decreases and when the price decreases revenue increases. For Coca Cola if they notice a decrease in revenue they would offer products at a discount to increase revenue. They do this quite often with sales such buy 2 20 oz. bottles for $3 instead of the normal $1.89 each price
When a suppliers' costs changes for a given output, the supply curve shifts in the same direction. For example, assume that someone invents a better way of growing corn so that the cost of corn that can be grown for a given quantity will decrease. Basically producers will be willing to supply more corn at every price and this shifts the supply curve outward, an increase in supply. This increase in supply...
That is, it is sensitive to price change, and also to the quantity demanded. This means that if many people are consuming a good, the demand is greater than if less people are consuming the good. To further clarify, take the example of attending college. In an environment where most of an individual's peers are going to attend college, the individual will see college as the right thing to do, and also attend college to be like his peers. However, in an environment where most of an individual's peers are not going to attend college, the individual will have a decreased demand for college, and is unlikely to attend.
In the automobile industry, there are factors that cause a shift in the supply and price elasticity of the supply and demand. These factors can cause the supply demand to reduce or raise the demand for the automobiles. One factor to consider is if the price of steel rises. Automobile manufacturers will then produce fewer automobiles at all different price levels and the supply curve will then shift. Another factor to consider is if automobile workers decide to go on strike for higher wages. The company will be forced to pay more for labor to build the same number of automobiles. The supply of these automobiles will decrease. Lastly, another factor that can curve a shift in the supply curve could be if the government imposes a new tax on car manufacturers. In all of those cases, the supply curve will move because the quantity supplied is lower at all price levels.
One method that Toyota can consider is using the price elasticity of demand to determine whether to increase or decrease the sale price of their automobiles. The responsiveness or sensitivity of consumers to a price change is measured by a product's price elasticity of demand (McConnell & Brue, 2004). Market goods can be described as elastic or inelastic goods as change in quantity demanded for that good. If demand is elastic, a decrease in price will increase total revenue. Even though a lower price would generate lower sales revenue per unit, more than enough additional units would be sold to offset lower price (McConnell & Brue, 2004). In a normal market condition, a price increase leads to a decreased demand, and a price decrease leads to increased demand. However, a change in income affecting demand is more complex.
In the short-run the price elasticity of demand is high, however, in the long run the elasticity is not very high (Pascal 1967).
Economics is an extremely important aspect of the today’s society, especially, since it aids in the allocation of limited resources. Supply and demand are aspects and fundamental concepts of economics, which is considered the foundation of a market economy. In fact, the association between demand and supply underlie the forces responsible for the allocation of resources. Therefore, given the importance of supply and demand and its impact on the market economy, one will elaborate on the law of supply and demand. In addition, one will discuss how these fundamental concepts of economics apply and impact the prices of Airline tickets.