Demand and Supply
[Name of the Writer]
[Name of the Institution]
[Dated]
Demand and Supply
Q1. Demonstrate and explain how a demand and supply framework can be used to understand the reasons behind a real world example of a price change
In a supply and demand framework price, and the quantity of the product are considered as endogenous variables, while everything else is considered t be exogenous (Käki, Salo, & Talluri, 2012, p. 93). We are going consider the example of beer.
The graph below provides a brief illustration of a Shift in supply of Beer in Britain
Figure 1: A Shift in the Supply Curve of an Individual Firm
From the graph it could easily be seen that an increase in the marginal cost results in the production of less output …show more content…
Provide an interpretation of each of the numerical values.
Price Elasticity of Demand Price elasticity of demand helps in measuring the change in the quantity demanded relative to the change in the price of the good, which in this case is the beer (Thimmapuram, P. & Kim, 2013, p. 396). The formula for calculating the price elasticity is:
Price Elasticity = (% Change in Quantity) / (% Change in Price)
In the case of the beer let us assume that the price of the beer increases by 50%, as a result the purchases of the beer falls by 25%. So, using the formula given above the price elasticity of demand for the beer is:
Price Elasticity = (-15%) / (30%) = -0.50 Thus, it could be said that the every percentage increase in the price of gas, the quantity of the gas purchased decreases by half a percentage point.
Income elasticity of demand It is the measure of how much the demand for a product changes with the change in the income of the consumers, keeping all the factors constant (Ho et.al, 2013, p. 410). Formula used for the calculation of income elasticity …show more content…
Degree of necessity: Greater the necessity for the good, the lower will be the level of elasticity, because the consumers will always buys the necessity products regardless of their price.
(iv) Explain why the information in part b(i) is useful to a business which produces this good or service.
Importance of Price Elasticity of Demand for Beer producer
For the producer of Beer price elasticity of demand is taken into consideration while taking the decision regarding the pricing of the beer. Due to the fact that change in the price of beer will result in changing the quantity demanded, which is completely dependent on the coefficient of price elasticity (Ruhm et.al, 2012, p. 860). This change in the quantity demanded result in rise in price of beer by the producer, which have an impact of the total expenditure of the consumers, and therefore have a direct impact of the firm’s
[Name of the Writer]
[Name of the Institution]
[Dated]
Demand and Supply
Q1. Demonstrate and explain how a demand and supply framework can be used to understand the reasons behind a real world example of a price change
In a supply and demand framework price, and the quantity of the product are considered as endogenous variables, while everything else is considered t be exogenous (Käki, Salo, & Talluri, 2012, p. 93). We are going consider the example of beer.
The graph below provides a brief illustration of a Shift in supply of Beer in Britain
Figure 1: A Shift in the Supply Curve of an Individual Firm
From the graph it could easily be seen that an increase in the marginal cost results in the production of less output …show more content…
Provide an interpretation of each of the numerical values.
Price Elasticity of Demand Price elasticity of demand helps in measuring the change in the quantity demanded relative to the change in the price of the good, which in this case is the beer (Thimmapuram, P. & Kim, 2013, p. 396). The formula for calculating the price elasticity is:
Price Elasticity = (% Change in Quantity) / (% Change in Price)
In the case of the beer let us assume that the price of the beer increases by 50%, as a result the purchases of the beer falls by 25%. So, using the formula given above the price elasticity of demand for the beer is:
Price Elasticity = (-15%) / (30%) = -0.50 Thus, it could be said that the every percentage increase in the price of gas, the quantity of the gas purchased decreases by half a percentage point.
Income elasticity of demand It is the measure of how much the demand for a product changes with the change in the income of the consumers, keeping all the factors constant (Ho et.al, 2013, p. 410). Formula used for the calculation of income elasticity …show more content…
Degree of necessity: Greater the necessity for the good, the lower will be the level of elasticity, because the consumers will always buys the necessity products regardless of their price.
(iv) Explain why the information in part b(i) is useful to a business which produces this good or service.
Importance of Price Elasticity of Demand for Beer producer
For the producer of Beer price elasticity of demand is taken into consideration while taking the decision regarding the pricing of the beer. Due to the fact that change in the price of beer will result in changing the quantity demanded, which is completely dependent on the coefficient of price elasticity (Ruhm et.al, 2012, p. 860). This change in the quantity demanded result in rise in price of beer by the producer, which have an impact of the total expenditure of the consumers, and therefore have a direct impact of the firm’s