...Businesses are available to offer its services and products to the consumer. In order to have a profitable business, the business must maintain close awareness of the cost and demand of the product and adjust to the rise or fall in price. Price Elasticity of Demand: Paint In our scenario I am a painter. In my business we have to be very conscious of how much paint costs because of course that directly impacts the price of the services you offer. In this case, the price per gallon of paint has risen from $3.00 to $3.50. In the same timeframe, our business has gone down somewhat. We had been using approximately 35 gallons a month, and now only 20. These changes are drastically impacting my business. We will attempt to analyze these changes by computing the price elasticity of demand for paint, determine if the demand for paint is elastic, unitary elastic, or inelastic, and finally interpret our findings. First we need to define price elasticity. “In precise terms, price elasticity of demand is defined as the percentage change in quantity demanded divided by the percentage change in price.” (Skaggs, Neil. 2010) The percentage change, or “price elasticity,” is an attempt to show us how the price of a good impacts the demand for the product, or paint in our case. First we will calculate the percentage change in the cost of each gallon of paint. We add our old cost of $3.00 and the new cost of $3.50 together and we get $6.50 and divide that number by 2, which equals 3.25. ...
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...measure elasticity of demand and elasticity of supply. 2. Determine the relationship between demand elasticity and total revenue. 3. Understand the factors that determine elasticity of demand and elasticity of supply. Punchline • Imagine that some event drives up the price of gasoline (think about two examples) • How would consumers respond to the higher price? • By how much would consumption of gasoline fall? Answer to the gasoline question • Many studies have examined consumers’ response to gasoline prices. • Consumption responds more in the long run than it does in the short run. • A 10% increase in the gasoline prices reduces gas consumption by about 2.5% after a year and about 6% after five years. Roadmap 1. Elasticity of demand 2. Measurement of price elasticity 3. Elasticity and total revenue 4. Determinants of price elasticity of demand 5. Other demand elasticity measures 6. Elasticity of supply 7. Determinants of price elasticity of supply Elasticity of demand • The price elasticity of demand is a measure of how much consumers respond to changes in price. • Total revenue that one receives from selling a good is the price of the good times the quantity sold: TR = P*Q • Seller’s dilemma: raise or lower the price? • Can be solved by knowing the elasticity of demand. Measurement of price elasticity • Problem: we cannot measure consumers’ responsiveness to changes in price by looking at absolute currency changes in price and absolute changes in quantity demanded...
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...• Explain why the demand for the good or service provided by a firm is elastic or inelastic. How does the elastic or inelastic demand influence pricing decisions by the firm to maximize profit? What are the impacts of elastic demand and inelastic demand on total revenue? McConnell, Brue & Flynn (2014), talk about the demand law, in which consumers will tend to buy the product with the cheaper price. So to understand the response of consumer to a price change, we need to measure its price elasticity of demand. Price elasticity helps a firm or business to understand how changes in price of a product will impact the total sales of the product. This allows us to determine the prices of different products that will yield maximum profit. Elastic Demand: if the percentage change in price of a product causes a larger percentage change in the quantity demanded. The types of services in this category are normally that of luxury, where customers can live without buying them, should a price increase occur. Inelastic Demand: Is the opposite, were a change in price causes a lesser percentage change in demand. The types of services or products that would normally fall under this category would be those of necessity. So regardless if a price hike, the consumer will still buy the service or product. Maximizing profit: For a company to maximize profits, it must either sell more or increase prices. So if a company increase the price of a product and yielded a less demand in quantity, then...
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...3 Quantitative Demand Analysis Overview . The Elasticity Concept Own Price Elasticity Elasticity and Total Revenue Cross-Price Elasticity Income Elasticity II. Demand Functions Linear Log-Linear III. Regression Analysis The Elasticity Concept How responsive is variable “G” to a change in variable “S” If EG,S > 0, then S and G are directly related. If EG,S < 0, then S and G are inversely related If EG,S = 0, then S and G are unrelated The Elasticity Concept Using Calculus An alternative way to measure the elasticity of a function G = f(S) is If EG,S > 0, then S and G are directly related If EG,S < 0, then S and G are inversely related If EG,S = 0, then S and G are unrelated Own Price Elasticity of Demand Perfectly Elastic & Inelastic Demand Own-Price Elasticity and Total Revenue Elastic Increase (a decrease) in price leads to a decrease (an increase) in total revenue. Inelastic Increase (a decrease) in price leads to an increase (a decrease) in total revenue. Unitary Total revenue is maximized at the point where demand is unitary elastic Elasticity, Total Revenue and Linear Demand show graph Elasticity, Total Revenue and Linear Demand show graph Elasticity, Total Revenue and Linear Demand show graph Elasticity, Total Revenue and Linear Demand show graph Elasticity, Total Revenue and Linear Demand show graph Elasticity, Total Revenue and Linear Demand show graph Elasticity...
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...Microeconomics and the laws of supply demand ECO/365 Supply and Demand Simulation Since the early years of commerce, supply and demand have been a huge factor in the capitalist business system. For this assignment I was asked to take part in a simulation as a source for my paper. In the simulation I had to take part of a series of important financial decisions for a fictitious apartment management company named GoodLife and see how each decision would be impacted by different economic factors. In this simulation, I was able to see that the microeconomics concepts could be labeled in the changes of supply and demand as well as the equilibrium in the apartment market. That is because the factors would only affect a small part of the apartment market in which the company on this scenario operates. The macroeconomics concept could be labeled with the price elasticity and the price ceiling. This is because it has a broad impact bigger than the local apartment market. The simulation taught me that any shift on the supply curve or demand can impact significantly the economics status of a company. For example, if the demand curve shifts to the left, it will show me that there is a decrease in the demand of people looking for apartments and in turn will cause that less apartments be rented. When this happens it forces GoodLife to reduce their prices to make up for the income gap. This means that the equilibrium price is lower because the demand decreased even though the supply...
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...response to the demand of a product or service following a change in price, sales may increase when a price goes down. Sales may also decrease when the prices goes up. A2. The response or change in demand when the price of either a substitute product or complementary product increases or decreases. If two products are substitutes and the price of one of the substitutes increases we would expect to see purchases increase for the other substitute. In the case of complements as the price rises in one we would expect to see the purchases decrease for both. A3. Income elasticity is the measure of the rate of response of quantity demand due to an increase or decrease in a consumer’s income. For most goods an increase in income creates an increase in demand for items that are considered an indulgence, like name brand clothes, new cars and electronic equipment. Equally the demand for these goods decreases if income decreases. These goods whose demands vary based on income are called superior or normal goods. Most products are considered normal goods, however there are exceptions. When incomes increase to a certain point the demand for used or less popular items like second hand clothes and used cars decreases. These goods that vary inversely with money income are called inferior goods. B. The coefficient for elasticity of demand measures the relationship between two variables. The formula used is percentage in change of quantity /percentage change in price. Q/P. if the numerator...
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...Demand Estimation Doris Ard Dr. Muhammad Islam Economics 550 7/19/2014 Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April. Note: The following is a regression equation. Standard errors are in parentheses for the demand for widgets. QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2 = 0.55 n = 26 F = 4.88 Your supervisor has asked you to compute the elasticity for each independent variable. Assume the following values for the independent variables: Q = Quantity demanded of 3-pack units P (in cents) = Price of the product = 500 cents per 3-pack unit PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarkets are located = $5,500 A (in dollars) = Monthly advertising expenditures = $10,000 M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000 1. Compute the elasticity for each independent variable. Note: Write down all of your calculations. QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M QD = -5200 - 42(500) + 20(600) + 5.2(5500) + .20(10,000) + .25(5,000) QD = -5,200 - 21,000 + 12,000 + 28,600 + 2,000 + 1,250 = 17,650 P =...
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...AND DEMAND SIMULATION Supply and Demand Simulation Name University Supply and Demand Simulation Supply and demand is crucial concept in both macroeconomic and microeconomic settings. The week two simulation showed how a fictional apartment management company in the city of Atlantis is impacted by various economic factors. The microeconomic concepts can be categorized as changes in supply and demand and equilibrium, because these topics only affected the small apartment market in which the company operates. Macroeconomic concepts can be categorized as price elasticity and price ceilings because they have a broad impact on the overall region beyond the local apartment market. The simulation showed that a shift in the supply curve or the demand curve could cause significant changes to the economic environment. For example, if the demand curve shifted to the left, it would show a decrease in demand from consumers and cause fewer apartments to be filled. This situation occurred in the simulation due to a widespread desire for property ownership and forced the management company to lower prices to compensate. The equilibrium price became lower because demand decreased, while supply and quantity remained consistent. Similarly, if the supply curve were to shift to the right, it would indicate an increase in available apartments to rent. This situation could occur if the management company expanded the building to accommodate more units. Assuming there was no change in...
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... A1. Elasticity of Demand is the consumers response or sensitivity to a change in price. It is classified as elastic, inelastic, or unit elasticity. Elastic demand is when a specific percentage change in price results in a larger percentage change in quantity demand. Inelastic demand is when a specific change in price produces a smaller percentage change in quantity demand, Unit elasticity is when the percentage in change in price is the same as the percentage change in demand. A2. Cross Elasticity of Demand is the ratio of percentage change in quantity demand of one good to the percentage in the price of some other good. A positive coefficient indicates the tho products are substitutes a negative coefficient indicates the two products are complementary. A zero or near zero cross elasticity means the products are considered independent. A3.Income Elasticity of Demand is the ratio of the percentage change in the quantity demand of a good to a percentage change in consumer income; it measures the responsiveness of consumer purchases to income changes. A positive coefficient means more of the product is in demand as income rises, they are known as normal goods. A negative coefficient mean purchasing of a product decreases as income rises means the product is an inferior good. B. Explain the elasticity coefficients for each of the three terms defined in part A. B1. Elasticity of Demand. If the coefficient is greater then 1 it is Elastic Demand , if the coefficient...
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...Supply and Demand Simulation Name University Supply and Demand Simulation The supply and demand simulation is based on an apartment management company which is located in Atlantis and how various economic factors impact it. The supply and demand concept is very important and critical in microeconomics as well as macroeconomics. The microeconomics concept is classified within the changes of the equilibrium and the supply and demand concept in which the apartment community operates within. While in the macroeconomics concept it is classified as price ceilings and elasticity, which shows that there is a large impact on the overall apartment market locally. The supply curve and demand curve showed that there could be a significant change within the economic environment if there were to be any changes within them. Examples of what any shift or change to the supply curve and demand curve have very different results depending on the shift. If the supply curve shifted to the right, it would result in an increase in apartments available for renting. If the apartment management company could accomplish this by expanding the apartment buildings to allow for more units to be occupied. If the demand curve shifted to the left this would indicate a decrease in the demand of its consumers and result in fewer apartments being occupied. The management company faced this in the simulation and caused for them to lower the prices to compensate for the widespread desire for property ownership...
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...Extensions of Demand and Supply Analysis The Price System (market system): an economic system in which relative price change to reflect changes in supply and demand. In fact prices are the signals whether the resource is relatively scarce or abundant. Market is the exchange arrangements of both buyers and sellers under the forces of supply and demand The majority of exchanges are voluntary exchanges in markets. Voluntary exchange: is the act of trading between individuals to make both parties better off. The term of exchange is usually the price paid for desired products and is determined by supply and demand Transaction costs: the costs of negotiating and enforcing contracts, acquiring and processing information about alternatives. This means all the costs involve with the exchange. Some of the effects of the market mechanism * Prices are determined by the forces of demand and supply and provide signals about what should be bought and what should be produced. * Resources are used to their highest-valued uses by means of prices * Transactions costs are reduced because the organized markets imply lower transaction costs * Using the role of specialized individuals (middlemen) facilitates Exchange activities, which brings the buyers and sellers and therefore lowering transaction costs. The impact of Changes in demand with supply stable: - Increase in demand holding supply curve constant means that when demand curve shifts from D1 to D, equilibrium price increases...
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...Economic Factors affecting the demand, Supply and Price of a commodity Introduction: Supply and demand are two important concepts in economics and supply and demand are considered to be the backbone of a nation’s economy. Demand is generally referred to as the quantity of product or services required by the consumers. The quantity of product or services referred to and the volume of product the consumers are ready to buy at a specific price. The demand relationship is generally referred to as the relationship between the price and quantity of products or services demanded nu the consumers. Supply generally represents the how much product or services a market can offer to the consumers. The product or services supplied refers to the amount...
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...Everyone’s Gasoline Problem. We are all familiar with fluctuating prices of gasoline at the pump. Why does this happen? Research the recent history of gasoline pricing in your area, and attempt to relate any fluctuations you observe to documented supply and demand factors outlined in our book. Be sure to cite any references used. * Gasoline prices rise and fall depending on supply and Demand. Gas prices are impacted by a number of factors, each individually placing its own pressure on our overall energy system. Some affect the price of crude oil and others affect the cost of producing and marketing gasoline, but combined, these factors greatly impact the fluctuation of gas prices that we experience on a daily basis. Changes in crude oil prices - Crude oil prices are determined by worldwide supply and demand, with significant influence by the Oil Producing and Exporting Countries (OPEC) as they determine how much oil to produce and sell to other countries. The more crude oil OPEC chooses to produce and release, the lower the price. Additionally, because oil is traded in a world market, events in remote areas affect the price of crude oil for almost everyone. In recent years, worldwide events that have impacted gas prices include: Decisions by the OPEC cartel to raise production quotas slowly and reluctantly after having reduced them in 2002. * An increase in worldwide demand for oil, including unexpected demand growth in China, India, and other quickly developing nations....
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...1. Demand, Supply, and Adjustments to Dynamic Change Note: The authors recommend that this feature be read along with Part I, Elements 6, 7, and 11 of Common Sense Economics. Common Sense Economics highlights how markets work and their impact on the allocation of resources. This feature will investigate this issue in more detail. It will use graphical analysis to analyze demand, supply, determination of the market price, and how markets adjust to dynamic change. Demand The law of demand states that there is a negative relationship between the price of a good and the quantity purchased. It is merely a reflection of the basic postulate of economics: when an action becomes more costly, fewer people will choose it. An increase in the price of a product will make it more costly for buyers to purchase it, and therefore less will be purchased at the higher price. The availability of substitutes—goods that perform similar functions—underlies the law of demand. No single good is absolutely essential; everything can be replaced with something else. A chicken sandwich can be substituted for a cheeseburger. Wheat, oats, and rice can be substituted for corn. Going to the movies, playing tennis, watching television, and going to a football game are substitute forms of entertainment. When the price of a good increases, people will turn to substitutes and cut back on their purchases of the more expensive good. This explains why there is a negative relationship between price and...
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...chapter explored the numbers behind the laws of demand and supply. The law of demand tells us that an increase in price decreases the quantity demanded, ceteris paribus. If we know the price elasticity of demand for a particular product, we can determine just how much less of it will be purchased at the higher price. Similarly, if we know the price elasticity of supply for a product, we can determine just how much more of it will be supplied at a higher price. Here are the main points of the chapter: • The price elasticity of demand—defined as the percentage change in quantity demanded divided by the percentage change in price—measures the responsiveness of consumers to changes in price. • Demand is relatively elastic if there are good substitutes. • If demand is elastic, the relationship between price and total revenue is negative. If demand is inelastic, the relationship between price and total revenue is positive. • The price elasticity of supply—defined as the percentage change in quantity supplied divided by the percentage change in price—measures the responsiveness of producers to changes in price. • If we know the elasticities of demand and supply, we can predict the percentage change in price resulting from a change in demand or supply. Applying the Concepts After reading this chapter, you should be able to answer these four key questions: 1. How does the price elasticity of demand vary over time? 2. How does an increase in price affect total expenditures? 3. Where do I find...
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