Demand and Supply Functions of Managed Lane Planning - Coursework Example

Running Head: Supply and demand Supply and demand Insert name: Module: Institution: Instructor: Date: Abstract Price elasticity is very decisive in support of parking lane in football matches. The pricing policy of the parking is largely affected by its aggregate demand curve and related elasticities. To locate a successful pricing policy which could attain a particular goal-whether to take full advantage of freeway system operations, alleviation of unnecessary costs or football fans, or to maximize on revenue- stakeholders, planners and policy makers in sport sectors should understand or forecast how fans or players are likely to respond to a range of pricing policies of parking lanes in sport grounds. The concern is yet more imperative especially where the public has not so far embraced issues of parking pricing. In evaluating the price elasticity in the sports sector, three methods have repeatedly been employed such as midpoint elasticity and log arc elasticity. Nevertheless, less is documented in relation to the appropriateness of the methods. This paper explores an aspect of price elasticity of demand and supply and shows how it applies to a particular market sector, that’s transport. The paper takes a broad view of the theoretical form through both demand and supply functions of managed lane planning. The findings hint that the suitability of price elasticity in a market set up is very important in determining the supply and demand of a particular product. The paper will also help as gain a perfect understanding of how supply and demand are connected, and its role within the market.  Table of Content Page 1. Abstract …………………………………………………………………………….. 2 2. Introduction ………………………………………………………………………… 4 3. Materials/ Methods ………………………………………………………………… 5 4. Results ……………………………………………………………………………… 6 5. Discussion …………………………………………………………………………. 6 6. Conclusion …………………………………………………………………………. 12 7. Annotated Bibliography …………………………………………………………… 13 Introduction Demand of goods and services refers to the quantity or amount of a consumer is able and willing to buy at a given price and over a specified period of time. The law of demand states that the quantity demanded of a commodity is inversely related to its price meaning that, the higher the price the lower is the quantity demanded and vice versa. According to Case and Fair (1999), the exceptions of law of demand applies to (a) giffen goods, one that is too inferior that a fall in price leads to a fall in the quantity demanded, (b) Veblen goods, this are luxurious products whose demand rises as price rises, (c) necessities, goods whose demand is independent of changes in price, meaning that their demand does not change even if the prices changes like medicine. There are many factors that influence the quantity of a commodity demanded, they comprises of price of the good, consumer income, tastes and preferences, climatic or weather conditions, population size, future price expectations, government policy, advertisement and price of other related goods. Goods may be related in two ways, (i) they could be substitutes; goods that are used for the same purpose, for example coffee and tea. A rise in price of one leads to a rise in the demand of the other, (ii) compliments goods; this are goods that are used together, and a rise in price of one leads to a fall in the demand of the other good. Methods of evaluations a) Midpoint elasticity formula This is a common technique of working out the coefficient of elasticity through the estimation of average elasticity for discrete changes in tow variables. The unique feature with this method is that % changes are worked out based on the average of preliminary and final prices. In evaluating the response of changes in supply to changes in demand, may be summarized in the formula given as: Midpoint Elasticity = (S2 - S1) (S2 + S1)/2 ÷ (D2 - D1) (D2 + D1)/2 b) Arc elasticity This is method evaluates the elasticity of one variable with respect to another involving two given points. Lets assume that connotation of y represent supply while x represent demand at a given market, therefore the y arc elasticity of x is defined as; Where the % change is computed relative to the midpoint The formula was supported due to the following features; (a) symmetric with regard to the two prices and two quantities, (b) free of the units of measurement, and (c) yield a value of unity if the total revenues at two points are equal. For contrast, the y point elasticity of x is given by: Results a) Midpoint elasticity When using midpoint elasticity formula, base prices at the market and the resulting % changes are unlike conventional techniques of evaluating % changes. For case in point, under conventional techniques a price that rises from $10 to $12 is a 20% increase. This is worked out s the discrete change in price of $2 (= $12 - $10), divided by the initial value of $10. Though, using the midpoint elasticity formula, the discrete change is still $2 (= $12 - $10), except that the base value becomes 11 [($10 + $12)/2], rather than the initial 10. The results for the illustration a percentage change of 18.18 (18.18%). This approach is intended to generate identical elasticity evaluations over a given market segment, in relation to the rise and fall in variables. The method suits calculations for price elasticity of demand and demand curve. b) Arc elasticity Assume that the measure for the demand of parking lane. Let's say that after a halftime during the match prices are lowered, and quantity demanded changes from 80 units to 120 units. % change measured against the average = (120 - 80) (120 + 80)/2 = 40% The % change for the reverse trend (lets say in the start of the match will be 120 units to 80 units, would be -33.3%. The midpoint formula has an advantage that a shift from A to B is the similar to a shift from B to A in absolute value. (Implying the reverse in this case would be -40 %.) Assume that the change in the price of parking was from $30 to $10. The % change in price calculated against the midpoint would be -100%, as a result the price elasticity of demand will be (40%/-100%) or -40%. It is advisable to employ absolute value of price elasticity at the market, for the reason that demand curves (normal) are mostly negative. For our case, the demand for parking is 40% elasticity, hence inelastic. Demand and supply Supply and demand plays a vital role in the economy. Price is the central determinant of both the demand and supply, for example the higher the price of a good or a service the less the product is demanded. In circumstance where the price goes down, demand increases. The response of price and quantity demanded create an inverse relationship between the two. Whereas demand portrays the consumer decision making in purchases, supply is drawn on producer’s willingness to make profit. In a market setting, the law of supply and demand predicts that the price level tend to move toward the point that equalizes the quantity supplied and demanded. Therefore, equilibrium point is created; a point where quantity supplied at the market and quantity demanded at the same market is in balance, where the supply curve crosses the demand curve. At equilibrium, when demand exceeds supply there is excess demand and prices will increase. On the other hand, when supply exceeds demand there is excess supply and prices will decrease. Such instances where supply or demand exceeds one another are very common in the market and will cause shifts in price. But when supply and demand balances, there will be no change in price. The price which makes the supply and demand to balance is referred as market price or equilibrium price. The real life situation of equilibrium case is where government sets a minimum wage above the market wage; the result will be unemployment and could impact negatively on the economy of a country. In the evaluation of minimum wage laws, government should put into account those unemployed should be compared to the benefit to those who are employed and have higher wages. Price elasticity of demand This is the quantity measure of consumer response on the quantity of demand of a product as a result of changes in price. Price elasticity of demand is calculated as a proportionate or percentage change in the quantity demanded divided by a proportionate or percentage change in price. Price elasticity of several products is always negative, although some economists’ arguments appear to assume the sign which may result to some vagueness in economic projections. Only goods that tend to violate the law of demand such as Veblen goods, Giffen goods and necessities, are the ones that tend to have a positive price elasticity of demand (Case & Fair, 1999). The demand of a good is said to be inelastic, when price elasticity of such good is less than one (PED. Elastic price shows that a change in price will pose a great impact on the quantity of a good demanded. This is likely to lower the total revenues or expenditures. On the other hand, price inelastic is said to have a small effect on the quantity demanded hence, any rise in price will raise total revenue or expenditure. Interpretations of price elasticity values Perfectly inelastic demand perfectly elastic demand Effect on revenue The stadium management should consider a price change on parking lane and comprehend the likely effect a price change on the total revenue. Change in price tends to have 2 effects in general;  Price effect: a rise in price of a good is likely to increase revenue, and vice versa. Quantity effect: a rise price of a good is likely to lower the quantity sold, and vice versa. The management should determine the net effect before initiating an increase or decrease in prices; PED will always provide an answer: The proportionate change in total revenue is equal to the proportionate change in quantity demanded plus proportionate change in price. To maximize total revenue, the stadium management should produce the quantity of output corresponding to its elasticity price (Robert 2005, p.613). Effect on tax incidence Once demand is more elastic than supply, stadium management will bear a great proportion of tax than the fans. The combination of price elasticities of demand and supply will be employed during the evaluation of the burden of a tax will lie or to foresee where the tax is imposed. Significance of the concept of elasticity of demand a) To consumer For consumers to purchase different commodities, he has to keep in view the elasticity of different commodities. Mostly, a consumer will spend major portion of his/her income on the purchase of those commodities which have less elastic demand (Robert 2005, p.617). b) To monopolist A monopolist will change any price for his product because he has complete control on the supply of that product. He/she will charge higher price for those commodities which have less elastic demand and vice versa. c) Devaluation policy Devaluation means to lower the value of domestic currency in terms of foreign currency. As a result of devaluation, export becomes cheaper for the foreigners and imports become expensive for the resident (Parkinet al, 2002). An increase in exports and decrease in imports result in the improvement of the balance of payments. This policy is only possible when the elasticity of demand for exports and imports is high. d) To the government When government imposes taxes, elasticity factor is kept in view. The commodities which have less elastic demand, if tax is imposed on these commodities, government will get more income and vice versa. Conclusion From the above discussion it’s clear that price elasticity of supply and demand is perhaps the cornerstone aspect of economics and will tend to vary based on the market forces (supply and demand). Goods and services that are necessities will have not sensitive to changes in price as buyers will continue to purchase for such products regardless of price increases (Case & Fair 1999). On the contrary, a price increase on particular product believed to less o a necessity will put off buyers for the reason that opportunity cost of buying such product will be very costly. Annotated Bibliography Blanchard, O. 2005. Macroeconomics. New Jersey: Prentice Hall. The macroeconomics will tend to evaluate how aforementioned markets affect macro variables like level of employment in the area or a country, wage rates, aggregate income and the GDP and could trigger changes in the market force. Case, K. & Fair, R. 1999. Principles of Economics, 5th Ed. New York: Prentice-Hall. This book evaluated the market forces, supply and demand and their determinants. The book discusses about equilibrium at the market and how it’s created. More is elaborated on determinants of PED, where the author argues that the dominant feature in determining price elasticity of demand is the willingness and ability of consumers to suspend instant expenditure decisions following a price change waiting for a substitute good. Hillier, B. 2005. The Macroeconomic Debate. Oxford: Blackwell, pp.7-85. According to Hillier, demand for labour is said to be a derived demand, meaning that the production cost of employer is the wage, through which the firm reaps revenue. Additional labour force in the market or a firm could be determined by the marginal revenue product (MRP) of the employee. Levacic, R. & Rebmann, A. 1982. Macro-Economics. London: Macmillan publisher Under this theory are micro-level activities for both firms and individuals which could result into aggregate macroeconomic result through which the economy operates. For instance, a group of classical economists have argued that in most cases labour supply creates its own demand (Say’s law). But Keynes challenged this by asserting that aggregate demand of commodity may be in short supply during recession resulting to unreasonably high employment intensity as well as losses of possible production output. Parkin, M., Powell, M., & Matthews, K. 2002. Economics. Harlow: Addison-Wesley The book discusses on factors of price elasticity in a market, which comprise of; Necessity: the more necessary a product is, the lower the elasticity, as individuals will be forced to purchase irrespective of the price; Duration: the longer a price change holds for majority of products, the higher the elasticity, hence a decline in demand of the good; Brand loyalty: attachment of a certain product to a stronger brand name will create a more inelastic demand; Payment mode; where consumer are not the one paying from their own pockets, such case is likely to create a more inelastic demand. Robert, L. V. 2005. On Labour Demand and Equilibria of the Firm. Manchester School, vol. 73, no.5, pp.612-619 The book elaborates on the functioning and vibrant of the labour market are sought to be understood through labour economics. The labour market creates an interaction between the supply of labour (employees) and demand for labour (employers) initiating a pattern of wages and income. Market clearing is the hypothesis created at the market always especially where the quantity supplied balances with the quantity demanded. The equilibrium is formed through price adjustment at the market. Parkin, M. & Bade, R. 1982. Modern Macroeconomics. Indiana University press The book describes the modern macroeconomics and how it’s perceived by scholars. The author goes an extra mile of discussing the shifts in demand and supply could also be caused by the allotment of the monetary policy. For example, in case there is extra labour than demand in the market, the rate of wages would collapse pending hiring to commence. In places where savings are in excess with less consumption, the rate of interest declines until the public cut their savings and borrowing rate. Philip, A & Fischer, S. 1980. Rational Expectations and Economic Policy. Chicago: University of Chicago Press Philip and Fischer stress that the theory of rational expectations affirms that results do not vary systematically from what individuals expect them to be. Economic experts suppose that individuals act in a manner that maximises their utility or gains. The rule has been used to create efficient markets and permanency of income through the stabilisation of monetary and fiscal policies in the economy. The Keynesian theory assumes that a decline in tax boosts disposable income, making individual consume more given that temporary declines in tax are bound to be reversed, thereby having less or no effect on wealth. Read More