An Increase in the Price of Natural Gas - Assignment Example

Question 1 Period 1: A decrease in the price of natural gas is bound to reduce the supply as some of the suppliers won’t be willing to supply gas at a lower price. This is matched by the fact that technological advancement is also going to reduce to reduce the cost which would thereby determine the supply based on the strength on the price reduction and better technology due to technology advancement. Demand on the other hand is going to increase due to use of natural gas in different vehicles aided by the reduction in price and will look as follows The above graph shows the reduction in supply from S1 to S2 and an increase in demand from D1 to D2. The overall impact is such that quantity demanded supplied falls which increases the prices which is aided by the increase in demand for products resulting in a change in equilibrium quantity from Eq1 to Eq2 and price from Ep1 to Ep2 as shown in the graph above. Period 2: An increase in the price of natural gas along with a reduction in the demand for natural gas will have an impact on both the demand and supply as shown in the graph below An increase in the price matched by a decrease in demand will result in a shift in the demand and supply curve as both of them will fall. This will result in a reduction in the demand for natural gas from Eq1 to Eq2 and a increase in the price from Ep1 to Ep2 which will have an impact on the equilibrium to shift from one point to the other thereby having an impact on price and demand. Question 2 1. P = 12000 - .16Q P = 400 So, 400 = 12000 - .16Q Q = 72,500 cups 2. If price reduces by 25 cents so price is 375 Therefore, 375 = 12000 - .16Q Q = 72656.25 cups Total Revenue = 72500 * 4 = 290000 Revenue after reduction in price = 72656.25 * 3.75 = 272460.94 Reducing the price will result in a decrease in total revenues which should thereby not be undertaken and will result in a loss for the business. The price elasticity also shows that a reduction is price increases demand but only slightly. 3. Price Elasticity = Change in demand / Change in price = (800 – 1200) / 800 / (4.4 – 4.2) / 4.4 = -.5 / 0.45 = -1.11 Thus, the demand is unitary elastic and results in a change in demand as per the change in price 4. Change in price = 4.4 – 4.2 / 4.2 = 4.76% A 4.76% increase in price results in a increase in demand by 1% showing a positive relation between price and demand which shows that the demand in inelastic and is considered as a luxury goods whose demand increases when the price increases. The coffee house thereby needs to analyze the manner in which the total revenues increases and determine the optimal point which will help to fetch the maximum price and revenues. 5. Elasticity of demand = Percentage change in demand / Percentage change in price = 6.2 / 5 = 1.24 The relation shows a positive relation showing that the demand is inelastic and when the income increases the demand for coffee also increases. This shows further that the product is a luxury product as an increase in the salary results in an increase in coffee consumption. This is primarily due to the fact that the growth in the salary ensures certain section of the society which was unable to consume coffee starts to consume coffee. This shows the product to be a luxury one whose demand increases when the income increases. Question 3 1. Demand = 200000 – 500P Supply = -25000 +400 P For equilibrium Demand = Supply So, 200000 – 500P = -25000 + 400P P = 250 Q = -25000 + 400 * 250 = 75000 The graph looks as follows 2. The total revenue at the price of 250 is Revenue = Quantity * Price = 75000 * 250 = 18750000 3. The intercept for the demand curve which is Q = 200000 – 500 P 0 = 200000 – 500 P P = 400 When price is 250 supply is 75000 So, consumer surplus = ½ * 75000 * (500 – 250) = 9375000 The intercept of supply curve which is Q = -25000 - 400P So Producer Surplus = ½ * 75000 * (400 - 250) = 5625000 4. Having a price limit of 200 which is less than the present price will impact both the demand and the supply and will look as The new demand will be Demand = 200000 – 500P = 200000 – (500 * 200) = 100000 The new supply will be Supply = -25000 +400 P = -25000 + (400 * 200) = 55000 The supply will decrease and the demand will increase which will make the supply and demand curve to change and will look as 5. Price Ceiling of 200 will make the required changes in producer surplus and consumer surplus Consumer surplus = ½ * 75000 * (500 – 200) = 1125000 Producer Surplus = ½ * 75000 * (400 – 200) = 7500000 Dead Weight Loss = 11250000 – 9375000 = 1875000 6. Price ceiling which is less than the present price will have an impact on the demand and supply as more demand will take place which might result in black marketing as with the objective of earning more and more money the suppliers will aim towards increasing the price so that more and more revenues can be earned and will thereby have an impact on the overall perspective of demand and supply. Question 4 1. Before the imposition of tax the demand and supply curve looks as After the imposition of tax a change in witnessed in both the demand and supply and thereby makes the graph look as 2. The producer receives $20 i.e. out of 30 when the tax was not imposed the percentage in revenues = 66.67% The present price being charged is 36 Producer receives = 66.67% of 36 = $24 Taxes = 36 – 24 = 12 3. Revenue of government from tax = 12 * 81000 = 972000 4. The tax burden is borne both by the customer and the producer. When the price charged was $ 30 the producer received $20 Imposing a new price at $36 means money collected from customer is $6 and the rest $6 is borne by the producer. 5. The government when imposes a tax on the producer instead of the customer will lead towards similar effect but of lesser magnitude as the producer will look to pass on the burden to customer which will result in the following change The above chart shows a lower decrease in demand due to tax being borne more by the producer resulting in little change in equilibrium price and quantity where equilibrium quantity has decreased and price has increased. 6. The deadweight loss for the tax will be 6 * 81000 = 486000 as the amount which is passed on to the customer has resulted in a deadweight loss 7. The imposition of tax will thereby reduce the demand for the product as increase in the price will force certain section of the society to stop consuming the products. Question 5 1. The hair salons are operating in a monopolistic market form of market structure where there are many players and each member has a small percentage of the market share. The graphical representation for the same is as below The hair salon works on the monopolistic market structure as there are many players in the market and none of the player is able to influence or control the market prices. The overall market structure determines the manner in which different prices are determined by the competitive pricing policy and looks to attract customers based on pricing mechanism and service quality. 2. At the present juncture the hair salons are earning zero economic profits so an increase in the number of salons in the short run will further reduce the profit margins and increase the level of competition. In the short run the salons will experience high level of competition which will reduce the profits and increase competition. In the long run certain players who are earning losses will shut down operations as it is not possible to shut down operations in the short run. This will thereby bring a change and ensure that the same level of price and quantity equilibrium will be achieved in the long run. Read More