Essay Questions and Problem Solving
There is a direct relationship between the price of a good and its demand. Good’s demands and prices exhibit a type of relation, which can be positive or negative depending on the type of good. Apart from prices, some elements such as advertisements and income affect the demand to changes in its prices. Elasticity, therefore, is an evaluation of the level of responsiveness of a good’s demand of a good to changes in various factors, such as price, income, as well as advertisement. This economic ratio is significant and can be calculated for changes in demand as well as supply. For demand, the phenomenon may be defined as a measure of how a given good responds to various changes of the price.
Based on price elasticity of demands, goods can be classified as inelastic, unitary elastic, elastic, perfectly elastic, or perfectly inelastic depending on the degree of responsiveness of the good to changes in price. Perfect elasticity is used to describe an extreme case when ratio between demand and price is very high. In such case, any negligible change in price makes the good’s demand to change infinitely. On the other hand, perfect inelasticity describes situations when great changes in prices of the given good to change insignificantly. In this case, the demand of the good only changes by a very slight margin despite the rocket changes in price. Other categories of elasticity of demand fall within these two.
There are four basic types of elasticity namely (1) price elasticity of supply, (2) cross-price elasticity of demand, (3) income elasticity of demand, and (4) price elasticity of demand all measuring different levels of responsiveness of a good. Price elasticity of demand describes how demand of the given good changes with changes in price and is mathematically calculated by simply expressing changes of the good’s demand to changes in its price as a ratio. The elasticity of supply is calculated to determine the responsiveness of changes in supply of the given good to changes it is prices. Income elasticity of demand describes the effects of changes in consumer income to the overall demand of the good. Lastly, cross elasticity of demand measures the responsiveness of the demand given due to changes in prices with respect to another similar good.
In business, elasticity has many applications ranging from price determination to forecasting and determination of costing strategies. For instance, the business communities use elasticity to determine the product’s cost as well as pricing strategies. It is also used to determine how much goods the company should supply in the market. This is essential for maximizing profits while reducing costs. Elasticity is affected by many factors, such as number of uses of the good, availability of substitutes, durability of commodity, nature of commodity, as well as consumer’s income among others.
The following information are provided
Initial Supply = 3000 pens
Initial unit price = AED 10
New supply = 5000 pens
New unit price = AED 22
Let S1 , S2 , P1 , and P2 represent initial supply, initial unit price, new supply, and new unit price respectively.
It is expressed by the ratio between changes in quantity supply to changes in unit price of the product. The midpoint method can be used to calculate this ratio by the use of the formula below. Let ES represent the price elasticity of supply of pens
Ratio of price elasticity of supply is calculated using midpoint as follows;
S1 = 3000
S2 = 5000
P1 = 10
P2 = 22
Therefore, price elasticity of supply of pens is 166.67
The following information are given
Qs = – 400 + 2P Market Supply
Qd= 5,600 – 4P Market Demand
- Equilibrium rental rate and the equilibrium apartments rented
At equilibrium level, the amount of apartments supplied equals the amount of apartments demanded by the people expressed using the equation below
Therefore, equaling the market supply to market demand gives the equilibrium prices and quantities as follows;
Therefore, equilibrium rental rate is $1,000
Substituting equilibrium price into the demand equation gives the equilibrium quantity demanded
Therefore, the equilibrium apartments rented is 1,600 units
- With the $ 850 per month ceiling price;
- Quantity demanded =
Therefore, quantity demanded is 2,200 apartments
- Quantity supplied =
Therefore, quantity supplied is 1,300 apartments
- Apartment shortage = 2,200 – 1,300 = 900
Therefore, apartment shortage is 900 units
- With rent price control;
- Consumer surplus = new demand – equilibrium demand = 2,200 – 1,600 = 600
Therefore, consumer surplus is 600 apartments
- Producer surplus = new supply – equilibrium supply = 1,300 – 1,600 = -300
Therefore, producer deficit is 300 apartments