Concordia University Department of Economics
ECON 201 – INTRODUCTION TO MICROECONOMICS
Assignment #1
Written by: Jad El-Rifai, 3981401
Wednesday February 11th 2004.
1. The market market forces forces of Supply Supply and and Demand. Demand. a. Plotting Plotting the Demand Demand and supply supply Curve Curve.. The following Table Illustrates the values used in the plotted graphs. Price Per Unit ($)
Quantity Demanded
Quantity Supplied
8 6 4 2 1 0.5
1 2 3 4 5 6
10 8 6 4 2 0
The resulting graph is illustrated below. Demand and Supply Curves for Comic Books 9
8
7
k 6 o o b c i m5 o c h c a e f 4 o e c i r P 3
Demand Supply
2
1
0 0
1
2
3
4
5
6
7
8
9
10 10
Quantity of comic books
b. Findi Finding ng the the Equili Equilibr briu ium m point point Plotted on the graph, as well as seen clearly in the table, the equilibrium is established for the price of $2.00. In fact, at this price, the supply equals the demand at 4 units.
c. The Law Law of Deman Demand d and the the Law of Supp Supply ly (Price (Price Increa Increase) se) According to the Law of Demand, if all other things remain constant, an increase increase of price (from the equilibrium equilibrium price of $2) to $6 would decrease decrease the quantity of comic comic books demanded to 2. Similarly Similarly,, also provided all other things remain constant, the Law of Supply dictates that the number of comic books supplied would rise to 8. This creates a situation of excess supply, or surplus, and would lead to an increased inventory size for the suppliers. d. The Law Law of Demand Demand and the the Law of Supply Supply (Price (Price Decre Decrease) ase) The Law of Demand and the Law of Supply apply also in this case of price decrease under the price of equilibrium of $2. Ceteris Paribus, the decrease in price to $1 would raise the quantity demanded to 5 and drop the quantity supplied to 2. This creates a situation of excess demand (shortage) and reduces the size of suppliers’ inventory. inventory. e. The effe effect ct of of incom incomee on the demand demand curve. curve. Incom Incomee is a deter determi mina nant nt of deman demand. d. Th Thee Incr Increa ease se of incom incomee would would increase the demand for comic books, which are considered to be normal goods. To obtain the new demand values, 3 units must be added for every price. The results are displayed in the table below. below. Price Per Unit ($)
Quantity Demanded
Quantity Supplied
New Quantity Demanded
8 6 4 2 1 0.5
1 2 3 4 5 6
10 8 6 4 2 0
4 5 6 7 8 9
This increase of demand shifts the demand curve to the right, as illustrated in the updated graph below. This graph is the same as in (a) but the shifted demand curve has been added as a dotted line.
Demand and Supply Curves for Comic Books 9
8
7
k 6 o o b c i m5 o c h c a e f 4 o e c i r P 3
Demand Supply Shifted Demand
2
1
0 0
1
2
3
4
5
6
7
8
9
10 10
Quantity of comic books
f. Updated Equilibrium after Curve-Shift As seen from the updated table and the updated graph, the demand meets the supply at the quantity of 6. The equilibrium price is therefore $4.
2. Elasticity Elasticity and its appli application cationss a.
Calculating Price Elasticity of Demand
Examples of for calculating each value in the table. i. To calculate calculate (a) it’s it’s simply simply the differen difference ce between two two rows in the the price column the total divided by the amount in the first row, i.e. (a) = (12-10 (12-10)/1 )/12 2 = 0.167 0.167 ii. To calculate calculate (b) it’ it’s simply the differenc differencee between two two rows in in the quantity column the total divided by the amount in the first row, i.e. (b) = (2-3) (2-3)/2 /2 = -0.5 -0.5 iii iii. Th Thee pri price elas elastticit icity y of dema demand nd is the ratio atio betw betwee een n the % difference in quantity and the % difference in price. In other terms, (b) divided by (a). i.e. (c) = -0.5/0.167 = -3 iv. iv. The slope slope of demand demand is the the rise over over the run run of the demand demand curve curve,, which means, the difference in price, divided by the difference in quantity between any two given points. Since the demand curve is linear, it has a constant slope. (d) = (12-10)/ (12-10)/(2-3) (2-3) = - 2 v. The total total revenue revenue is the price price of one item item multip multiplie lied d by the total total number of items (quantity). (e) = 12x2 12x2 = $24. $24.00 00 The results of all the calculations are displayed in the table below. Price Per Unit ($)
Quantity Demande d
% change in price (a)
% change in quantity (b)
Elasticit y of demand (c)
Slope of Deman d (d)
Total revenu e (e)
12 10 8 6 4 2
2 3 4 5 6 7
0.167 0.200 0.250 0.333 0.500 -
-0.500 -0.333 -0.250 -0.200 -0.167 -
-3.000 -1.667 -1.000 -0.600 -0.333 -
-2 -2 -2 -2 -2 -2
$24.00 $30.00 $32.00 $30.00 $24.00 $14.00
The negative values have been left as so to illustrate the direction of the respective curves. However, for the rest of the answers, the absolute value of these numbers will be considered.
b.
What is Price Elasticity of Demand?
Price elasticity of demand is a measure of the responsiveness of the quantit quantity y demande demanded d to the change change in its price. price. The price elastici elasticity ty of demand is different for each point of the demand curve. Therefore, each price range has a different elasticity. elasticity. The behavior for the $10 to $12 range is elastic, because Ed is superior to 1. At the $8 price, Ed is one and therefore the behavior is unit elastic. For a price of $6 and below, the beh behav avio iorr is inel inelas asti ticc sinc sincee Ed is betw betwee een n 0 and and 1. As for for prod produc uctt classification, we could say that this product is inelastic with regard to price due to the high slope of demand. We could therefore assume that this product is deemed somewhat of a necessity. necessity. c. Relat Relation ionshi ship p bet betwe ween en the the Slope Slope of Deman Demand d and and the the Elast Elastici icity ty of Demand The main difference between the two curves is that the Elasticity of demand is a ratio of the percentage percentage difference, difference, where the slope is just the ratio of the differences. Although the slope is constant and the Elasticity is variable, the two curves are related to each other by an equation that factors in the price and the demand. Following is an explanation of how the relati relations onship hip between between the Slope Slope of demand demand (Sd) (Sd) and Elasti Elasticit city y of demand (Ed) is obtained.
Q − Q0
Ed = (b) / (a) =
Q P − P 0
and Sd =
P − P 0 Q − Q0
P
If we multiply Ed by
Q
we obtain
Q − Q0
P − P 0 P of Sd. Therefore, we could say the following: P Sd = = |-2| = constant Q × Ed
which is the inverse
To verify whether this relationship is accurate, it is tested below for a random point of the demand curve. For Q = 6 and P =4, Sd =
4 6 × 0.333
=
4 2
= 2. The test is successful and the
relationship is verified. d.
Maximizing total revenue . Thee tota Th totall reve revenue nue is maxi maximi mize zed d at the the unit unit-e -ela last stic ic level level.. Wher Wheree the the elasticity of demand is equal to 1, the price reaches the top value of $32.00.
