Supply and Demand - Essay Example

Demand and Supply Response to question A Elasti of demand is responsiveness of the demand of a good to the changes in other economic variables (Ferguson, 1972). As such, elasticity of demand is important since it helps to determine the potential change in demand due to variation in prices. In addition, understanding elasticity helps policy makers and businesses to examine the possible market impact when there is an adjustment in the consumer purchasing behaviors. It should be noted that, if a small price change is accompanied by a big change in the amount of quantity demanded then the commodity is said to be elastic while for a case where a large price change is accompanied by a small change in the amount of quantity demanded.

As such, if the price change leads to an equal change in commodity demanded then that results to a uni elastic demand (Ferguson, 1972)Elasticity of Demand = % Change in the Quantity Demanded / % Change in the Price Elastic demand refers to the demand for which the price elasticity is greater than 1. As such, if the demand elasticity is greater than 1 it means that the percent change in quantity is much higher than the percent change in price. Unit elastic demand occurs if the quantity demanded is directly proportional to the price change meaning the coefficient of elasticity is equal to 1.

While inelastic demand, occurs when elasticity coefficient is less than 1. This implies that the percentage change in the amount of quantity is less than the price change.Response to question BCross price elasticity of demand is the rate of change the quantity required due to the price change of the other commodity (Gillespie, 2007). As such, when two good are substitutes, consumers tend to purchase more of one good due to increase in the other substitute. Similarly, for complementary commodities, price increase in a commodity causes a reduced demand for all goods.

Moreover, cross elasticity of demand points out the sensitivity of a particular commodity to price change. Response to part CIncome elasticity of demand relates on the quantity demanded due to a fluctuation in the consumer income. This can be expressed mathematically as IEoD= (% change in the quantity demanded)/ (% change in the income) (Gillespie, 2007)For a normal good, increase in income results in an increase in the demand. This is seen as the coefficient of elasticity of N>0 (Ferguson, 1972).

For an inferior, an increase in price leads to a decrease in demand. In this case, the coefficient of elasticity is N1. Notably, a superior good exhibits the same coefficient of elasticity similar to normal good. Response to part DDemand tends to be elastic in the availability of a substitute since consumers have a choice (Ferguson, 1972. A hypothetical example involves the paper clips produced by a company Q. They are standard clips just like those offered by other companies. Thus, company Q sell all its clips at its own specific price but, in case it reduces the price other buyers who may have purchased other clips will instead buy those of company Q.

as such if the price is raised buyers will buy other clips made by other companies.Response to part E The proportion of a consumer’s income devoted to a good can be both inelastic and elastic. If we view the consumers overall time horizon the income elasticity of demand will be more elastic as a consumer’s income increases as they will be willing to buy expensive products. In the long-term horizon these products will start to decrease in price and substitute products will enter the market.

However, in the short run or short – term horizon consumers will generally react only slightly to price hikes, as they will not care how much the product costs if it fills a need. In the long run, consumers will have broader choices and will in turn buy more of the substitutes to test them out (Ferguson, 1972)For example if a consumer sets aside $350.00 a month - for gas ($250.00) and concert tickets ($100.00). If the price goes up on gas in a month the consumer will still buy reflecting an inelastic demand.

Since the demand for gas is a constant the funds set aside for concert tickets become highly elastic and the funds for gas become inelastic. After all, when the gas tank of a car is low, because he/she has to refill the tank quickly or face being stuck somewhere. This shows short-term time-horizon. However, if the consumer takes the view of the long term horizon they will look into alternative transportation. In this case, possibly busses or carpooling and in effect lessening demand. Conversely, if prices went down for gas during a given month we could possibly spend more on concert and concerts t-shirts.

Response to E1 The price elasticity of demand will differ among goods, for instance considering gas and concert tickets, a similar increase in price on the two commodities it is expected that the demand for both commodities will reduce due to the price increase, however the percentage change in the quantity of concert tickets demanded is likely to be greater since concert tickets are less of a necessity as opposed to gas. As such the demand for concert tickets is more price elastic than the demand for gas, this can also be stated that the demand for gas is more price inelastic than the demand for concert tickets.

Response to part FIn a short run price increase in the commodities leaves no choice for consumers due to the inconveniences and high costs of looking for alternatives. However, in the long consumers the same price increase on the commodity will have no effect on the consumers since they will have alternatives or they will know that the price are there to stay (Ferguson, 1972). Considering a case for an increase in the subway fares, in the short run consumers will stick to this forms of transportation due to convenience since they cannot bare the inconveniences and huge expenses in switching to other forms of transportation, however if the fare were to remain high for a long time period, consumers would gradually shift to other means of transportation.

As such, the number of subway rides demanded by the consumer will be less responsive in the short run as d to the long runResponse to part GGraphs for elasticity of demand and total revenueThe graphs above illustrate the relationship between the elasticity of demand and the total revenue for a linear demand curve. A decrease in price from $80 to $50 within the elastic range of point P to Q increases the total revenue from $75 to $200. In the unit elastic range between Q and R any change on the price has no effect on the total revenue within this range the coefficient of elasticity of demand is equal to 1 thus the total revenue is maximized.

However, price decrease from $40 to 0 leads to an inelastic demand between R and S, within this region total revenue reduces from $200 to 0ReferencesFerguson, E. C. (1972). Microeconomic Theory. Illinois: Richard D. Irwin publishers. PrintGillespie, A. (2007). Foundations of Economics. Oxford: Oxford University Press. Print