Question

STAGE I

Describe your idea for a business. Explain how both the laws of demand and supply are integral in how much consumers will pay and how much you are willing to sell at a prescribed price. Illustrate a supply and demand schedule as a supplement to your explanation.

STAGE II

From your demand curve constructed in STAGE I, label a series of prices and quantities explaining the elasticity ranges along the curve. Also, calculate three elasticity points along the graph explaining their “meaning” to accompany your illustration.

After defining and calculating elasticity, create a total revenue schedule. On the schedule describe how and why revenues increase, decrease or remain constant based on the elasticity of demand.

STAGE III

Explain what factors specific to your marketcontribute to the elasticity of supply concerning your product/service. Provide detailed analysis here with an accompanying supply curve illustration.

STAGE IV

Now explain how consumer and producer surpluses are created using your supply/demand models constructed in Stages I and II. Make sure you define the relevance of each surplus and calculate their value. Also, explain what happens to surplus (for both producer and consumer) when a sales tax is imposed. Again, make sure you have an illustration accompanying your analysis.

STAGE V

Your market (“consumers”) seems to possess marginal utilities for both your product/service and another product or service which complements what you sell. Consequently, you must come up with “marginal” numbers and corresponding prices to complete Stage V.

Once you’ve identified these amounts, and based on Marginal Utility analysis, determine which of the two goods/services (yours or your competitors) consumers should purchase more of and why.

Answer 1

STAGE I

Business is depends on demand and supply of the particular good if they does not match they can create shortage or surplus in the market. Law of demand states the relationship between price and quantity demanded which says that higher the price, lower the quantity demanded and lower the price, higher the quantity demanded keeping other things same. Law of supply aslo states the relationship between price and quantity demanded which says that higher the price, higher the quantity supplied and lower the price, lower the quantity supplied keeping other things same.

I have taken demand and supply schedule attached below in which you can see price , quantity demanded and quantity supplied is given.

From the above table you can see that at $6 , consumers willing to buy 2 quantity and seller willing to sell 7 quantity. Similarly table can be followed and at price $4.5 both consumers willing to buy 4 quantity and 4 quantity is willing to sell by sellers . So this can be the equilibrium price and quantity. From the above table you can see that when price is higher demand is less and supply is high, similarly when price is less demand is high and supply is less. You can also see this with the graph plotted above on the basis of demand and supply schedule. Demand is negatively sloped and supply is positively sloped.

STAGE II

From the above graph attached in stage I, you can see i have marked 5 points on demand curve A, B , C , D , E

Now we calculate elasticities

Using midpoint formula -

Percentage change in Quantity demanded =

Percentage change in Price =

Ed = % change in Quantity demanded / % change in Price

Ed from Point A to B = 4.44 by using above formula ( ELASTIC demand )(Ed >1)

Ed from point C to D = 1 ( UNITARY elastic)(Ed = 1)

Ed from point D to E = 0.375 ( INELASTIC demand) ( Ed <1)

I have attached image regarding Total revenue and elasticity

Above image eplains that, when with price decrease TR ( total revenue) increases(A to B) , Elasticity of demand (Ed) is ELASTIC, when with price decrease TR is constant(C to D) then Ed is UNITARY and when price decreases TR decreases(D to E) then Ed is INELASTIC.

STAGE - III

Factors that determine elasticity of supply are as follows -

1. Time Period - when time period is short Es(elasticity of supply) is inelastic and when it is long Es is elastic.

2. Nature of commodity- If goods are perishable Es is inelastic and when goods are durable Es is elastic.

3. Scale of production- If small scale of production is there Es is inelastic and if there is large scale of production Es is elastic.

4. Technique of Production- If advanced technique is used then Es is elastic , and if less advanced or labor intensive technique is used Es is inelastic.

5. Size of the firm- If size of the firm is large Es is elastic, if size of firm is small Es is inelastic.

6. Natural factors - If natural factors affect production then Es is inelastic.

7. Mobility of factors of production - If factors of production are mobile then Es is elastic and if factors of production are less mobile then Es is inelastic.

STAGE - IV

You can see Producer and consumer surplus at equilibrium price and quantity attached below in the graph

Now assume there is sales tax so this lead to supply shift to the left and we have new CS and PS . and this imposition of tax creates some DWL (dead weight loss) to the society . YOu can see image below

With the imposition of tax , our total surplus decline as it has created some dead weight loss in the society. CS decline and PS increase but over all surplus decline.