Practice Problems for Elasticity - Essay Example

Practice Problems for Elasti Elasti f Demand indicates whether revenue will increase or decrease. Second, substitute, cross-price elasticity f demand is calculated as the percent change in demand divided by the percent change in price f the substitute and will determine the magnitude f the shift in the demand curve. Price elasticity is always positive for two substitutes. Third, complement, cross-price elasticity f demand is calculated as the percent change in demand divided by the percent change in price. A change in price f a complement will determine the magnitude f the shift in the demand curve. Price elasticity is always negative for complements. Forth and last, income, a change in income causes a shift in demand. Income elasticity f demand is calculated as the percent change in demand divided by the percent change in income. This change determines the magnitude f the shift. Demand can increase or decrease with the increase or decrease in income. Along any straight-line demand curve, elasticity decreases from infinity to zero. In the range f the demand curve where elasticity is more than one, decreasing price increases revenue. In the rage where elasticity is less than one, however, decreasing price decreases revenue. My service selection is Pet Day Care and I have found it to price elastic...meaning that there are several substitutes. Low-end services like dog walking are good substitutes for drop-off pet day care centers. A fall in the price for someone to come to your home and let your dog out or walk or dog may likely decrease the demand for you take your pet to an "All-Day" daycare facility. The lower price f the "In-Home" service induces consumers to purchases these services versus those f a drop-off or "All-Day" facility. The cross-price elasticity f Pet Day Care with respect to drop-off or in-home service determines the magnitude f shift in the demand curve. Lowering the price f drop-off service would likely increase demand and revenue. Immediate substitutes or replacements f drop-off service may include in-home day care for you pet, and/or a walking service. Prices in this service industry have found the average price per day to drop-off your pet to be about $17.50 per day or $10 per half day with that price doubling for boarding or kennel services. Where as a walking service averages about $25 per week for 2 ten-minute daily walks Monday through Friday and in home services averaging $25 - $30 per day. Price adjustments have increased demand in the drop-off sector as having space resources readily available i.e. -warehouse space or open land have become increasingly available and by market standards, very cheap to acquire and maintain. This project was able to focus on the market structure f a Pet Day Care service. Each division represents a different market structure. I learned about perfect competition part day care, full day care, and in home pet day care. The changes depended on the type f pet care the pet owner went with. It was interesting to see how the changes and decisions that are made in the different types f care can affect the results f the prices and the cost/profits for the service. Microeconomics Price Elasticity f Demand 1.) If the price elasticity f demand for heroin is estimated to be about 0.4 this means that the demand is mostly inelastic because the elasticity demand is less than one. Being mostly inelastic means a percent change in price leads to a less than proportional percent change in quantity demanded. So if there is a 10% increase in price, it will lead to a 4% decrease in quantity demanded. 2.) If the price f heroin increases, given its inelastic demand, the suppliers' income will increase. This is proved to be true because mostly inelastic demand and total revenue are directly related. When the price is raised on heroin the percentage changed f quantity demanded is less than the percentage changed for the price in turn raising the total revenue f the heroin dealers. This policy has lead to increases in drug related crimes because more money is now up at stake. Heroin being a product that is mostly inelastic means that the buyers are willing to buy the product at almost any given price. The buyers need to have the product and will pay almost anything to get it. So when the demand is this high, crimes and other negative factors will increase when the price f that product increases for the fact that more money is now up for grabs. 3.) The price elasticity f demand for marijuana is estimated to be 1.5; this means that the price elasticity is mostly elastic because the elasticity demand is greater than one. Being mostly elastic means that a percent change in price leads to a more that proportional percent change in quantity demanded or E is greater than one. So if there is a 10% increase in price, it will lead to a 15% decrease in quantity demanded. Economics - Price Elasticity f Demand The four key concepts in this simulation focused on the following: Price Elasticity The percent change in demand quantity can be more or less than the change in its price. Relative elasticity/inelasticity f demand indicates whether the percent change in demand quantity is less than percent change in price. In the long-term, demand for any product tends to be more "price elastic" due to the availability f substitutes. Elasticity f Demand also indicates whether revenue will increase or decrease. Substitute Cross-price elasticity f demand is calculated as the percent change in demand divided by the percent change in price f the substitute and will determine the magnitude f the shift in the demand curve. Price elasticity is always positive for two substitutes. Complement Cross-price elasticity f demand is calculated as the percent change in demand divided by the percent change in price. A change in price f a complement will determine the magnitude f the shift in the demand curve. Price elasticity is always negative for complements. Income A change in income causes a shift in demand. Income elasticity f demand is calculated as the percent change in demand divided by the percent change in income. This change determines the magnitude f the shift. Demand can increase or decrease with the increase or decrease in income. 1) Was the product price elastic or price inelastic What was the impact f raising the price f the product or lowering the price f the product based this determination Along any straight-line demand curve, elasticity decreases from infinity to zero. In the range f the demand curve where elasticity is more than 1, decreasing price increases revenue. In the rage where elasticity is less than 1, however, decreasing price decreases revenue. My service selection is Doggie Day Care and I have found it to price elastic...meaning that there are several substitutes. Low-end services like dog walking are good substitutes for drop-off doggie day care centers. A fall in the price for someone to come to your home and let your dog out or walk or dog may likely decrease the demand for you take your pet to an "All-Day" daycare facility. The lower price f the "In-Home" service induces consumers to purchases these services versus those f a drop-off or "All-Day" facility. The cross-price elasticity f Doggie Day Care with respect to drop-off or in-home service determines the magnitude f shift in the demand curve. Lowering the price f drop-off service would likely increase demand and revenue. 2) Determine substitutes and/or compliments to drop-off Doggie Day Services. Immediate substitutes or replacements f drop-off service may include in-home day care for you pet, and/or a walking service. Prices in this service industry have found the average price per day to drop-off your pet to be about $17.50 per day or $10 per half day with that price doubling for boarding or kennel services. Where as a walking service averages about $25 per week for 2 ten-minute daily walks Monday through Friday and in home services averaging $25 - $30 per day. Price adjustments have increased demand in the drop-off sector as having space resources readily available (i.e. -warehouse space or open land) have become increasingly available and by market standards, very cheap to acquire and maintain. Supply and Demand effects, economics If we assume the fact that both the supply and demand curves (below) represent quantity responses to all possible prices for the grapes, or that the quantities consumers buy depends on price alone, we understand the price reduction f the grapes. This model analyses the effect f a change in supply on price, assuming demand is constant. As the supply f wine grapes increases, the new intersection point (E) f supply and demand on the verticle 'y' axis (price) is less. (S1, S1 - S2, S2) Understanding how a surplus f the wine grapes can affect the price f the product, we can also 'measure how responsive or sensitive, consumers demand f quantity is to a change in the price f a product, known as price elasticity'. Assuming a perfectly competitive market we can better determine the major factors affecting the price elasticity f demand and supply. From the information given, we can see that the price for premium quality grapes has dropped by as much as $1000/tonne. We can presume the buyer demand considering the substantial drop in price is relatively unresponsive and that the demand for the grapes is inelastic, - 'large price changes result in only small changes in the quantity demanded'. One f the determinates f elasticity f demand for the suppliers f grapes is substitutability. There are a large number f good substitute grapes available in the market and buyers have the luxury f being able to choose between a number f alternative stock. If one supplier 'X' decides to decrease the price f his grapes and a second supplier Y remains unchanged, the quantity demanded for Y will fall off quickly. The time period under consideration is a second factor affecting the elasticity f supply and demand. 'The longer the period under consideration, the more elastic is the demand'. (Jackson, MckIvor, 2005, p155) A major issue for the grape producers is the time constraints involved in trying to sell a perishable item. If a producer does not sell the grapes in a relatively short time period, they will spoil. This is an important influence on the price elasticity f supply. In the situation concerned Grape producers are unable to respond to an over supply f stock in the market, - known as the immediate market period. (b) Using a supply demand model f the market for grapes, explain the impact f price, quantity, and the total revenue for grape growers f a vine pull. The main factor affecting suppliers which has been discussed in part (a) and from the information in the articles concerned is a 'grape glut' or an overflowing surplus' f wine grapes into the market. We can analyze the effect f a national vine pull using a supply/demand model. The model assumes that demand is constant which we could also presume would be the case for the wine grape consumers in the short term. A vine pull essentially leads to a change in the quantity f wine grapes supplied which is distinct from the actual change in supply. A change in supply parallels a change in demand which in the market period or short run grape growers have little control over. The model shows that a change in the quantity supplied is simply a change from one point on the quantity axis to another, or a direct supply curve shift left. From a price perspective, the model shows that reducing the quantity f grapes in the market, increases the price f the product (E). Having assumed the price f grapes is increased, in terms f total revenue, we need to work out the price elasticity f demand using the price elasticity formula. Ed = % change in Q demanded / % change in price f product X (Ed is the elasticity coefficient, - the degree to which elasticity is measured) If consumers are relatively insensitive to the vine pull and the reduction in quantity f grapes remains constant, the grapes can be considered inelastic. Using the total revenue test, 'we observe what happens to total revenue - total expenditure from the buyers viewpoint, when product price changes'. If demand is inelastic, a price increase will increase total revenue. The growers are producing less stock that will effectively drive the price f the product up while not affecting the demand f suppliers. On the other hand if buyers become sensitive to the increase in price and reduce the quantity purchased, the demand is considered elastic and total revenue will decrease. From the formula, Ed greater than 1 'elastic' & total revenue decrease Ed less than 1 'inelastic' & total revenue increase c) Some grape growers are calling for a price support scheme to save the industry. Discuss using an appropriate diagram, how a price support or floor scheme will benefit grape growers. What steps will the government have to take to deal with the consequences f a price floor From the viewpoint f an economist should such a scheme be supported 'A Price floor is a government-imposed limit on how low a price can be charged for a product.' Using a demand and supply model, the effect f a price support or price floor effectively eliminates the possibility f a price reduction below the minimum price set, irrelevant f the quantity available. The model also shows however that the price floor does not eliminate the issue f excess supply with demand quantity ending at a certain point on the set price line. For the producers f wine grapes such a scheme would bring immediate relief to the price demanded for the grapes but would not solve the issue f surplus stock. Such a scheme we could presume to favor grape producers f quality stock although depending on supply/demand, buyers may be able to demand the legal minimum price set, while less favorable stock may not be considered a purchasable product at all. Supply & Demand Market supply and demand analysis is a fundamental aspect in any business today to decide how much a good or service will be priced, and is also the basic tool f microeconomic analysis. In Australia's capitalist economy the consumer has the right to make the choice on which good or service they wish to purchase, this is also referred to as Consumer Sovereignty (Layton, Robinson & Tucker., 2002, p.58). This concept played a large role in the 2003 Rugby World Cup, in that the customer was able to choose the match they watched and the category they wished to sit in, the choice bring Category A, B or C. 'A' being the most expensive with the most number f seats and 'C' being the cheapest with the least amount f seats. Non-Price Determinants In deciding the prices for Categories at the Rugby 2003 World Cup, Officials would have taken into account the popularity f the match being played. In that a game between Argentina and Romania, would not attract spectators the way an Australia vs. England Grand Final would. This factor is the non-price determinant that indicates to the officials the possible price f tickets and also attributes to the shift in demand for each match. If the demand curve is shifted to the left, demand will decrease, if it is shifted to the right, demand will increase (McTaggart, Findlay, & Parkin., 1992). This is clearly seen threw each f the examples given. Figures 1, 2 and 3 show a shift to the left due to the lack f popularity for a game between what most would consider lower grade teams (Argentina and Romania), it also shows a lowering in price, hence the small amount charged for this game. Figures 4, 5 and 6 shows a dramatic shift to the right, as the popularity f a grand final with Australia participating, would boost consumer interest considerably, thus resulting in an extremely high price. Therefore, it is evident that the non-price determinant f popularity has a significant effect on each category in all matches in both the price f tickets and the demand for them. Income Elasticity f Demand Another factor that must be taken into consideration when analyzing the amount f ticket sales is the Income Elasticity f Demand. Firstly, there are two types f goods, normal good and inferior goods. Normal goods are purchased more as the consumer's income rises, whereas inferior goods are purchased less (Wardle., 1982). This becomes evident threw the Income Elasticity f demand results. Works Cited Camp Bow Wow. (2007). Premier Doggy Day and Overnight Camp. Retrieved on May 11, 2007 from http://www.campbowwowusa.com/. http://www.knowledgeproblem.com/archives/001644.html 'Wine bankruptcies in Australia' http://www.torbwine.com/pa/2006/entireypredictable.shtml 'It was entirely predictable' Jackson, J, and MckIvor, R, 2005, Micro Economics 7th Edn, McGraw - Hill Australia Pty Ltd Layton, A., Robinson T., & Tucker, I.B. (2002). Economics for today. Victoria: Nelson Australia Pty Limited. McTaggart, D., Findlay, C., & Parkin.M. (1992). Economics, Sydney: Addison Wesley Longman Australia Pty Ltd. My Pet Business. (2007). Introducing The My Pet Business. Retrieved on May 11, 2007 from http://www.mypetbusiness.com/. Wardle, H.T., (1982). Introductory Economics, New York: Elmsford. Read More