Competency 309.1.2 Supply and Demand

Part A
In regard to elasticity of demand, demand for a product is elastic in
case a small change in the price of the product is usually accompanied
by a vast change in quantity of the product demanded. On the contrary,
in case a vast change in price accompanies a small change in the
quantity demanded, then such a product is said to have an inelastic
demand. On the other hand, a product has unit elasticity if a change in
price is accompanied by a similar change in the quantity demanded of the
product (Boyes & Melvin, 2008).
Part B
Cross-price elasticity of demand measures the responsiveness of quantity
demanded for commodity X following a price change of a related commodity
Y. With respect to substitute commodities, an increase in the price of
one commodity leads to an increase in quantity demanded for the rival
commodity. Therefore, the cross price elasticity for substitute
commodities is positive (Lipsey & Harbury, 1994). Conversely, a change
in the price of one complementary commodity leads to a change in the
quantity demanded of another complementary product in the opposite
direction. This implies that the cross price elasticity for
complementary products is negative. The measure is highly negative when
there is a strong complementary relationship between two commodities
Part C
Income elasticity of demand assesses the association between a change in
the quantity demanded of a commodity and a change in income. For a
normal good, as income increases, more of the good is demanded at every
price level (Boyes & Melvin, 2008). This implies that a normal good has
a positive income elasticity of demand. In the case of inferior goods,
an increase in income leads to a fall in the quantity demanded of the
commodity. This implies that an inferior good has a negative income
elasticity of demand.
Part D
For substitute commodities, an increase in the price of one commodity
leads to an increase in quantity demanded for a rival commodity.
Besides, a small price change one substitute product is likely to cause
a large change in the quantity demanded of the other rival commodity
(Lipsey & Harbury, 1994). This implies that the demand for substitutes
will be relatively elastic. For example, comparing the price of coffee
and that of tea, in case the price of coffee increases by a small
change, then the quantity of tea demanded will be more than
proportionate to the change in the price of coffee.
Part E
The proportion of income devoted to a good usually depends on the
necessity of the commodity. For instance, a Giffen good and an inferior
good will have different proportions of income devoted to them because
of their necessity. Consider monthly expenses on flour and cigarettes
the percentage of income dedicated to flour every month is 6% while that
dedicated to cigarettes every month is 0.1%. Since flour is considered
as a necessity, an increase in price by 6% will lead to the consumer
spending more than 6% of his income in order to maintain his consumption
level. In the case of cigarettes, a change in price by 0.1% will cause a
less than 0.1% change in the quantity of cigarettes demanded the demand
for cigarettes is inelastic. Therefore, the proportion of income
dedicated to cigarettes will not change after the price increasing by
0.1%.
Part F
A person is likely to respond differently to a relatively large increase
in the price of a commodity in the long run and in the short run. In the
short run, the consumer is not capable of adjusting his demand emanating
from a price increase since the consumer is habituated to a commodity.
However, in the long run, a rational consumer is capable of adjusting
the demand of a commodity emanating from a relatively large increase in
the price of the commodity (McEachern, 2012). This emanates from the
time available for the market to adjust to the price change. For
example, consider a relatively large increase in the price of petrol. In
the short run, it is not feasible to immediately change the quantity of
liters used, but it is feasible to conveniently change petrol
consumption, in the long run, in order to cope up with the price
increase. Hence, a person will respond differently to a relatively large
price increase in the long run and in the short run.
Part G
Using the elasticity of demand graph and total revenue, a change in the
price by 10 units causes a change of quantity demanded by one unit for
every level. The following is a table showing price range and quantity
change.
Price range Price change Quantity change from Quantity change
0-10 10 9-8 1
10-20 10 8-7 1
20-30 10 7-6 1
30-40 10 6-5 1
40-50 10 5-4 1
50-60 10 4-3 1
60-70 10 3-2 1
70-80 10 2-1 1
This implies that the elasticity of demand graph has inelastic
elasticity for every price range. Therefore, there is no price range on
the demand curve depicting unit elasticity and elastic elasticity.
A price range range indicating unitary elasticity will not have an
impact on the total revenue for a price change will change the quantity
demanded by the same proportion. For a price range indicating elastic
elasticity, a price change will cause a change in quantity demanded that
is higher than the price change. Therefore, a price range indicating
elastic elasticity will have an impact of increasing the total revenue
through decreasing the price. On the other hand, a price range showing
inelastic elasticity will have an impact of changing the total revenue
by a small margin after price change.
References
Boyes, W., & Melvin, M. (2008). Microeconomics. Boston: Houghton Mifflin
Co.
Lipsey, R. G., & Harbury, C. D. (1994). First principles of economics.
Oxford: Oxford University Press.
McEachern, W. A. (2012). Microeconomics: A contemporary introduction.
Mason, OH: South-Western Cengage Learning.
COMPETENCY 309.1.2: SUPPLY AND DEMAND PAGE * MERGEFORMAT 6
COMPETENCY 309.1.2: SUPPLY AND DEMAND

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