1-Explain the laws of
demand and supply, and identify factors that cause demand and supply to shift.
Law
of supply demand refers to the correlation between the changes of demand-
supply and the price. According to laws, the price of a good is in which it
crosses with the curve of demand and supply. Price and the demanded quality
have an inverse proportion and the laws which are used as an analysis by
managers in order to see the overall picture, examine that when the quantity of
good is launched more than it is demanded, the price falls. Except the price,
there are several factors that affect demand. These factors are divided into
two as rightward shift-increases the demand- and leftward shift-decreases the
demand-. Several goods have a direct proportion with income such as airline
tickets and luxury hotel reservation. In the contrary case, several goods such
as bus ticket and generic jeans, income of consumers have an indirect
proportion with the demands of these goods. Advertisements, both informative
and persuasive affect directly and increase the demand. Besides, the
composition of population (i.e medical services and elder people), the
expectations of the consumers and other factors that directly affect the
ability of consumers to purchase a good are accepted as shifters of demand.
Technologic and governmental regulations and accordingly taxes affect the
supply of a good and may decrease the correlation.
2- Calculate consumer
surplus and producer surplus, and describe what they mean.
The
consumers may pay different prices to a certain good or service because there
are individual preferences and those make some goods special for some people.
But in the market there is a certain price for a good. When a consumer may pay
more than this determined price, he gain a sort of advantage with this good
which refers to consumer plus. To sum up, this term indicates the difference
between the price that is accepted to be paid by the consumer and market
equilibrium price. The calculation of
consumer surplus begins with a graphic for demand and supply curve. The sold or
demanded quantity of product is added to the graphic. By adding the price as
well on the graphic, there is an area on the graphic between the price and
demand curve indicating the consumer surplus. Secondly, producer surplus means
that when the producers accept a certain price for a good and that good is sold
at a higher value than expected, there is a sort of advantage for the
producers. To sum up, it is the difference between the expected price for
producers and the selling price.
3-Explain price
determination in a competitive market, and show how equilibrium changes in
response to changes in determinants of demand and supply.
After
understanding the basics of demand and supply, it is important to analyze how
the price is determined in a competitive market. There is a quantity demanded
and quantity supplied in the graphic which shows the determined price in the
market. When the highest price is applied, production is encouraged but the
consumption is discouraged. The result may be a producer surplus and producers
may begin to cut the price for consumers in order to decrease the quantity
supplied. By applying price cutting there is an equilibrium price in the market
which brings equality between the demanded and supplied quantities. Equilibrium
in the market shows the stability as it is not changed in case of remained
demand and supply. Therefore, as there are several shifters for demand and
supply, the equilibrium may be changed. Hence the curve between demand and
supply represents the process in price determination to find the point of
intersection with equilibrium price and quantity.
4- Explain and
illustrate how excise taxes, ad valorem taxes, price floors, and price ceilings
impact the functioning of a market.
In
the market equilibrium, the interaction in the market determines the price of a
good or service in the market. In order to sustain the balance in the market,
the quantity and the price of the good may be a shortage or a surplus that
refers to equilibrium price. The excise tax is applied by the state for each
item. For example when the tax is $2 per unit and the producer products 100
units, the tax becomes $200 which is added as a cost to the firm and decreases
the supply as a left shifter. In particularly real estate and property market,
ad valorem taxes are applied as a percentage of value separately from the
item’s quantity or size. Ad valorem means “according to value”. Price ceilings
show the maximum and legal price that may be applied in the market. The ceiling
is affective in case of remaining under the level of equilibrium price. Thus
low price may encourage consumers to buy more. Price floors refer to the
minimum legal price which may be more affective in case of determining above
the equilibrium price.
5- Apply supply and
demand analysis as a qualitative forecasting tool to see the “big picture” in
competitive markets.
Demand
and supply forecasts are divided into two categories: qualitative and
quantitative techniques. Qualitative forecasts are analyzed by individuals in
competitive markets to see the overall picture. The qualitative forecasting
tool predicts trends in the competitive market such as changes of company’s
products and related products such as complements and substitutes. After
applying supply and demand analysis to see the overall picture, detailed
information is used to determine how the price changes and the sales are done
and revenues are changed by evaluating additional tools.
6- Apply various
elasticities of demand as a quantitative tool to forecast changes in revenues,
prices, and/ or units sold.
The
analysis of elasticity is used to determine the magnitude of a change. Firstly
it is important to analyze the term of elasticity which measures the
responsiveness among variables. There are two important elasticities: positive
or negative and more than 1 or less than 1 at value. In the analysis, the sign
of elasticity shows the relation between G and S. When the elasticity is
positive, S and accordingly G increase. In the second case, the elasticity is
more or less than 1 and determines the changes in S. Price elasticity of demands as PED is used in
economics to show the responsiveness of demanded good. PED is mostly negative
and when PED is less than 1, the demand of a good or service becomes inelastic.
When the price elasticity of demand is 1, the price is determined as maximum
revenue.
7- Illustrate the
relationship between the elasticity of demand and total revenues.
When
a firm has a decreasing demand curve, the revenue becomes the price of a good
or service depending on the quantity purchased. It means that; total revenue =
price and quantity purchased. When the firm believes that it is beneficial to
increase the price of this good, there are two apparent effects: quantity and
price effect. The revenue may increase with each sold unit or fewer units sold
depending to higher price decrease the revenue. Consequently, this analysis
show managers and economists that what is happening in the total revenue
depending on the price and quantity. Global businesses use the revenue analysis
in order to understand the cash flows.
8- Discuss three
factors that influence whether the demand for a given product is relatively
elastic or inelastic.
After
the examination of own price elasticity, important three factors affecting the
demand should be analyzed: available substitutes, time and expenditure share. When
the substitutes increase, elastic of demand increases as well. Therefore, when
the price increases, consumers substitute to other products. On the contrary
case, when there are few close substitutes of a good or a service, the demand
becomes relatively inelastic. In the second factor, the demand becomes
relatively inelastic depending on its time, when there is a short time demand
of a good or service becomes inelastic. Time allows people to search for available
substitutes. For example, when a consumer should fly to Canada and has a
limited time to find a ticket, the price is not important as the limited time.
By giving enough time to the consumers, they can search for alternative goods.
In short-term cases, all the price elasticities are less than 1 at value and in
the contrary cases, when there is a long-term case; the price elasticity is
more than 1 despite of the fact that there are exceptional cases such as
tobacco and alcoholic goods. In the last factor, goods which are the interest
of a minority of consumers become more inelastic. In the exceptional case, if
that good, no matter it is popular or not, may be extremely important for the
consumer and thus, it price may rise.
9- Explain the
relationship between marginal revenue and the own price elasticity of demand.
Marginal
revenue is the change of revenue depending on the output. It is the term refers
to the measurement of change in total revenue by the change in the quantity
sold. It is also important to analyze the production process to understand the
marginal revenue. The elasticity of demand is found by the calculation of
change in demand. The relation between these two terms may be defined with a
formula as MR = P * [ ( 1 + E ) / ( E ) ]. MR is the marginal revenue and the p
is the price of a good or service and E is the price of elasticity of demand.
Hence the result affects the decisions of price and quantity. If the case is
understood by the managers, they can easily understand how consumers may react
to the prices of their goods.
10- Show how to
determine elasticities from linear and log- linear demand functions.
The
linear demand curve, the elasticity focuses on price and quantity as it is
calculates so the price elasticity is not the same as the slope. Demand in the
linear case is at high value as elastic and vice versa. To understand linear
demand curve is important to analyze the basics of the market for a successful
process. A demand mostly shows the further step in the business as it predicts
the consumer behavior for a good. In the real examples, the curves are mostly
nonlinear because demand is mostly about the elasticity of demand or the
consumers’ reactions over the change of price for a good. The relation between
the demand and price are mostly changeable. In the log-linear demand examples,
the non-linear factors are analyzed such as price, income, advertising and
other shifters. Log-linear curves have elasticities.
11- Explain how
regression analysis may be used to estimate demand functions, and how to
interpret and use the output of a regression.
Regression
analysis is used to understand the relation between two or more variables. If
it is applied by only one variable, it is a single-variable regression. In
regression analysis, one variable should be dependent and others should be
independent. Besides consumer surveys and experiments, regression analysis is
used to estimate demand functions in the field of econometrics that focuses on
the usage of statistics and theories against economic problems. In the first
step, it is important to identify the relevant variables of the case and to
obtain adequate data for these variables. There is a regression model with
several parameters. Results are found by the experts in order to make decisions
in the case. The model shows the relation between variables and factors in
regression equation.
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