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DESCRIPTION

Hypothetical data

Price $

Total quantity demanded per week

Total quantity supplied per week

Surplus or shortage?

Elasticity of Demand (Ed)

5

2000

12000

10000

 

4

4000

10000

6000

 

3

7000

7000

0

 

2

11000

4000

(7000)

 

1

16000

1000

(15000)

 

Question 1

Graph for demand schedule

The graph for the demand schedule representing the price and the quantity demanded is as follows:

Graph for demand schedule
Question 2

Equilibrium Price and Quantity

Equilibrium Price and Quantity

Equilibrium price or quantity is the value at which the suppliers are ready to sell and the buyers are willing to purchase. It is the point at which the demand and supply of the product co-incident.  From the above graph it can be concluded that the equilibrium price for the given data is $3 and the equilibrium quantity is 7,000 units.

Question 3

There is a shortage of product in the market when the quantity demanded for the product is less than the quantity supplied. On the contrary when the quantity supplied exceeds the quantity demanded, it results in the surplus of products in the market. At a price of $4 for the potato chips prevailing in the market, the quantity demanded per week is 4,000 units whereas the quantity supplied per week is 10,000 units. Thus there will be a surplus of 6,000 units (10,000 – 4,000) since the quantity supplied exceeds the demand of potato chips in the market.

Question 4

Elasticity of demand at all prices (Ed)

Price $

Total quantity demanded per week

Change in quantity

Change in price

Percentage change in quantity(%)

Percentage change in demand (%)

Elasticity of Demand (percentage change in quantity/Percentage change in price)

5

2000

-

-

-

-

-

4

4000

2000

1

100

20

5

3

7000

3000

1

75

25

3

2

11000

4000

1

57

33

1.7

1

16000

5000

1

45

50

0.9

Question 5

(a) Movement along the demand curve up or down

The movement along the demand curve is caused by the price of the product in the market. If the price of the product is increased by the supplier, the demand curve moves downwards whereas on a decrease in the price of the product by the supplier the demand curve moves upwards. The reason for the movement is the increase in the quantity demanded by the customers. If price increases quantity demanded decreases and vice versa where other factors such as inflation, income etc. are constant (Riggs, 2012).
Movement along the demand curve up or down

(b) Shift of the demand curve to the left or right

The demand curve shifts from its position due to the factors such as price of substitute and complementary goods, income, expectations etc. When the income of consumer increases the demand curve shifts outwards. The reason for this is the increase in demand at all the prices as the income increases for all the consumers of the market. Similarly when income decreases the demand curve shifts inwards because of decrease in quantity demanded due to low income of consumers.
Shift of the demand curve to the left or right 
Question 6

Relationship between total revenue and elasticity

The relationship between the total revenue of the firm and the price elasticity of demand is as follows:

  • If the demand of the product is elastic, the decline in the price of the product results in an increase in revenue of the firm.
  • If the demand of the product is inelastic, the rise in the price of product will also cause increase in the total revenue.
  • In case where the demand of the product is perfectly inelastic, the percentage change in the price will be equal to the percentage change in the demand of the product in the market.

Thus the relationship between the total revenue and elasticity depends on the price elasticity of demand of the product. The graph representing the change in quantity demanded and price  and its effect on the total revenue of the firm is as follows:

Relationship between total revenue and elasticity

Question 7

substitute product of potato chips

If the price of a substitute product of potato chips falls by 50%, this will lead to a decrease in demand of potato chips. The reason for this will be when price of substitute product will fall by 50%, if the product is elastic, the quantity demanded will increase for the substitute product. Due to this the consumer will shift to the substitute product and the quantity demanded of potato chips will automatically decrease since the customer will purchase the substitute available at fewer prices. In this way it can be concluded that the decrease in price of substitute goods result in decrease in quantity demanded of the goods. (Moleybdenum, 2012).

References

  • "Molybdenum-99 market supply and demand", 2012,Nuclear Engineering International, vol. 57, no. 701, pp. 28.
  • Merzifonluoglu, Y. 2015, "Risk averse supply portfolio selection with supply, demand and spot market volatility",Omega, vol. 57, pp. 40.
  • Riggs, T. 2012, "Market Close: Demand Meets Supply; 30-Year Sets New Low", The Bond Buyer, vol. 121, no. F328.

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