Demand means that the willingness of a buyers to buy a goods and able to buy a goods at a different price levels. The law states that the demand curve is a downward sloping graph which shows that there is a negative relationship between the price of a product and the quantity of a product. When a price of a product rises, the quantity demanded will decrease. On the other hand, when the price of a product falls, the quantity demanded will increase.
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Demand is a shift either rightward or leftward in the demand curve. Demand curve will shift leftward if the consumers decide to buy less, and the demand curve will shift rightward if the consumers decide to buy more. Decrease in demand will cause the demand curve to shift leftward. There are many determinants that cause the demand curve to shift.
Price of coke $
Figure 5.1
D0
D1
Quantity of coke
One of the determinants that cause the demand curve to shift is expectation. For example, if the price of a coke expected will fall next month, the quantity demand will also decrease. So, this is as shown in figure 5.1. As the demand decrease, the demand curve will definitely shift leftward from D0 to D1.Besides, the price of substitutes and complements good will cause the demand curve to shift. Complementary goods are good that are used together. For example, petrol and car. If the price of petrol rise, this will cause the quantity demand for car decrease. Substitute good are good that can be replaced with another good. For example, butter and margarine. If the price of butter fall, the quantity of margarine will definitely shift leftward. Besides, the taste and income will also cause the demand curve to shift.
Quantity demand is a movement upward or downward in the demand curve. The only factor that will cause the movement is the price of the goods itself. For example, the price of an apples decrease from $2.50 to $1.90. This will cause the demand curve to move downward (from point A to B). Besides, the quantity demand definitely will increase from 4 to 7 as it applied the law of demand. As the price of an apple decrease, the quantity demanded will increase. This is shown in Figure 5.2.
Price of an apple $
2.50 ——— A
1.90 ————————— B Figure 5.2
0 Quantity for apples
4 7
Part B
Income elasticity of demand means that the percentage change in quantity demanded dividing the percentage change in household’s income.
There are 3 types of degrees of income elasticity of demand (YED). If the income elasticity of demand is greater than 0, then this elasticity is a positive YED. But this positive YED is categorized into two types. First, if the quantity demanded of a good rise a smaller amount of percentage compare to the income of the household’s, this is known as a normal good. A normal good normally does not responsive to the changes in the quantity demanded of the good. This is also known as income elastic since (0<YED<1). During the expansion of economics when most of the consumers household’s income rise, then the quantity demanded for the normal goods will rise. For example of the goods are drinks, food, building, and clothes. If a good is a luxury goods, then the quantity demanded of the percentage rises larger than the household’s income. Expensive jewelry and branded handbag is the example of luxury goods. This is also known as income elastic since (YED>1).
Furthermore, if the YED is lesser than 0, this means that if the household’s income rise, then the quantity demanded will fall. This is known as inferior goods (YED<0). For example, the high content fats from the ground beef is an example of inferior good.
If the YED is exactly 0, this is known as a necessity goods. Necessity goods means that the quantity demanded will not change even though the household’s income rises. For example, sugar, spices and oil.
Question 6
Part A
A consumer surplus means that the differences between the willingness of the consumers to pay at the maximum price of the goods and the price that the consumer actually pay for the good. The demand curve shows that the willingness of the consumer to pay for the goods at different prices. Figure 6.1 shows Timothy’s demand curve for coke. If the price of a coke is $3.00 per cup, Timothy will buy 4 cups of coke per week. If the price of a coke is $2.00 per cup, Timothy will buy 5 cups per weeks. So, the additional consuming by Timothy is known as marginal benefit. The difference between the maximum price a consumer agreeable to pay and the price the consumer actually pay are known as consumer surplus. This is shown in Figure 6.1.
Price of a coke (per cup) $
7.00
3.00
Figure 6.1
2.00
Demand
Quantity (cups per week)
0 4 5
Producer surplus means that the price the producers willing to receive compare to the amount that the producers receive. Firms will supply an extra unit of a product only if they obtain a price equal to the extra cost of producing that unit. Marginal cost is the extra cost to a firm of producing one more unit of a good or service. For example, Haber Tea is willing to supply 50 cups of chai tea at the price of $2.00 per cup, so the 50th cups must have a marginal cost of $2.00. Besides, the Haber Tea is willing to supply 40 cups of chai tea at the price of $1.80 per cup. So, the marginal cost for 40th cups is $1.80. This $0.20 is the producer surplus on each cup of chai tea. So, the total amount of producer surplus in a market is equal to the area above the market supply curve. This is shown in Figure 6.2.
Price of chai tea (per cup)
2.00 Supply
1.80
Figure 6.2
Quantity (cups per week)
0 40 50
Part B
The three economics concepts are scarcity, choice and opportunity cost. Scarcity requires trade-offs. Scarcity exists because we have unlimited wants but only limited resources that available to satisfy those wants. Services and goods are scare. Besides, economics resources or known as factors of production such as capital, natural resources, workers, and entrepreneurial activity are used to make them. Time are also included as scare. Economics choices are needed when the resources are scare and have alternative uses. When the choices are make this will help them to solve the problem. The solving of an economic problem gives rise to an advantage (what is a gained) and a cost (what is given up). The choices that are sacrificed when one action is taken, is known as opportunity cost. For example, a bakery produces cakes and pie to sell to the costumers every day. But he only willing produces 500 cakes if he produces none of a pie. But if he produces 400 of cakes, then he willing to produces 100 of pies. So, the opportunity cost is 100 pieces of cakes. If he bakes 200 pieces of cakes then the opportunity cost for pies is 200.This is as shown in Figure 6.2.
Quantity of cakes
500
400
200 Figure 6.2
Quantity of pies
0 100 300
Question 3
Part A
There are many reasons why supply of a product increases. The first reason is improvement of technology. Technology means that the production method used to combine resources of all kinds, including labour, to produce services and goods. When the firm is able to produce more output using the same amount of the input, this is known as positive technology change. Besides, the productivity of workers or machines increases, this will caused the supply to increase. This is shown in Figure 3.1.
The second reasons why the supply of the product increases is the price of the inputs. If the price of the input decreases, then the output for the production will increase. This will cause the supply curve to shift rightward. This is also shown in Figure 3.2.
Furthermore, the number of firms in the market will also determine the supplier to produce more. For example, if the number of firms in the market increases, definitely the supplier will produce more. Because the supplier having a tough fight with the other suppliers to sell the goods. Figure 3.1 describe in the increase of supply.
Price
S0
S1 Figure 3.1
Quantity
0
Question 2
Part A
There are many determinants of price elasticity of supply. The first determinant is degree of substitutability. When the price of the good rises, it become more beneficial to produce more of it. The greater the degree of the substitutability of factors of production process of one good and the production processes of other goods, the greater the elasticity of supply of that good. For example, land that are used to produce oat can be use easily if the price of oats as rise. The greater the substitutability of land and oat will increase the quantity of oat supplied in response to any given increase in price. But, if the price of handmade craftwork were to rise, the quantity produced might increased too.
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The second determinant of price elasticity of supply is time period. The time period are divided into two types of group; short run and long run. Short run means a period of time in which at least one factor of production are fixed. The place capacity of individual producers and of the industry is assumed fixed. Hence, the short run is a phase of time that is not long enough to let the quantities of all the factors of the production to be changed and some expenses are unavoidable which means they are fixed. For example, the supply in tomatoes is shown by Ss in Figure 2.1. The increase in demand is met through a bigger quantity adjustment (Q1 to Q2) and a smaller price adjustment (P1 to P2) than in the market phase; price is as a result lesser than in the market phase. The long run means that a period of time that all the necessary adjustments to factors of production can be made. All factors are variable in long run. For example, in tomatoes industry, the individual farmer can use extra machine. Further, more grower may be attracted to tomato production by increased the demand and increase the price of tomatoes. These adjustments means an even bigger supply response; that means the supply curve SL is more elastic. The smaller price that result the price (P0 to P1) but the a bigger result (Q0 to Q1) in response to the assumed raise in demand. This is shown in Figure 2.2.
Price Price
S
S
P2 P2
P1 P1
D1 D2 D1 D2
Quantity Quantity
0 Q1 Q2 0 Q1 Q2
Figure 2.1 Figure 2.2
Part B
Price ceiling means that a maximum price, when set by the government, to impose the officially required price that cannot be exceeded. The serious economic consequences may follow when the maximum price is set below the equilibrium market price. Meanwhile, price floor means that a minimum price that was set by the government. A price floor imposes a lower level which means the price is not allowed to fall at certain level. The most common reason for imposing the price floor is to strengthen the income of suppliers above the level that would, or else overcome in a freely operating market. What do the economists mean by price ceiling and floor stifle the rationing function of prices and distort resource allocation? When the uncontrolled price in market, the price of the good rise and fall in the market due to the imbalance of quantity supplied and demand of a good. If the producer find themselves at a given price is more than the output than the consumers are willing to pay, the price of the good will fall. Likewise, if the producers are not supply enough good in the market, the price of the good will definitely rise. So, the government had set the price floor and ceiling to prevent the price movement. For example, rent, government had set the price ceiling in order to prevent the increase the price of the rent. If the rent is too high, only the rich people will afford to rent, meanwhile the poor don’t so the government has impose the price ceiling to the rental so that the y won’t excess the price that the government already imposed. In the other hand, price floor means that the government set the minimum price in order to support the supplier. For instead, farmers. This is to support the income of the farmers in the country.
Part B
There are many ways that the businesses use the concept price elasticity to decide on their pricing strategy. First, is the pricing of the substitute goods. If the competitor reduce the price of a competitor product, the firm will used the cross-price elasticity to determine the quantity demanded of the product and the total revenue the firm will receive. For example, two company selling hamburger as their product. In order to attract more customers, the two companies are competing to reduce their price in order to attract more customers. Meanwhile, businesses normally use pricing strategy for complementary goods to decide their product price. For example, the cinemas are selling popcorn and soft drink rather than tickets which are strongly complements goods. So, this will have a negative value for elasticity. Besides, advertising and marketing is one of the strategy for businesses to decide their product price. In highly competitive markets where brand names carry wide-ranging value, many businesses spend huge amounts of money every year on convincing advertising and marketing. This decrease the size of the substitution effect following a price change and makes demand less responsive to price. The effect is that firms could be able to charge a higher price, increase their total revenue and turn consumer surplus into higher profit.
Relation between two complement goods
Price of Good B
An increase in the price of good B will lead to decrease in
P2 demand for good A
P1
Demand for Good A
Quantity
0 Q2 Q1
Relation between two substitute goods
Price of Good Y
Demand for Good X
P2
P1 An increase in the price of good Y will
leads to the increase of good X
Quantity
0 Q1 Q2
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