Question

1. Here is the demand for coconuts:

P            3               4             5             6            7            8            9             10           11           12           13

Q_D          1100      1000      900      800      700      600      500        400        300        200        100

And here is supply

P            3            4            5               6          7            8          9            10           11         12          13

Q_S           100        200        300        400        500        600        700        800        900        1000       1100

Identify the equilibrium price, quantity, consumer and producer surplus and show them on a graph. The graph should be pretty simple here, the main issue is finding the numbers for consumer and producer surplus. Again, let me reiterate: I WANT NUMBERS FOR CONSUMER AND PRODUCER SURPLUS! Furthermore, I want you to do this the way that I do (in other words, calculate it like it's a bunch of rectangles. Don't do the triangle thing that they do in the videos. Also, when doing this keep in mind that the width of these rectangles will not be 1 so be careful. (What is it....? )

2. Which do you think is more elastic: demand for coffee or demand for Starbucks coffee? Show the demand for both. (Make sure to say which one is more elastic, so I know that you know.)

Answer 1

1)

Consumer surplus is area of rectangle B + C + L + D + M + T + E + N + V + Z and area of triangle A + K + S + Y + $ whose sum is (1,000 - 900) * (4 - 3) + (900 - 800) * (5 - 3) + (800 - 700) * (6 - 3) + (700 - 600) * (7 - 3) + (1/2) * (1,100 - 1,000) * (4 - 3) + (1/2) * 1,000 - 900) * (5 - 4) + (1/2) * (900 - 800) * (6 - 5) + (1/2) * (800 - 700) * (7 - 6) + (1/2) * (700 - 600) * (7 - 6) respectively = 1,250

Producer surplus is area of rectangle F + O + V + £ + G + P + W + H + Q + Iand area of triangle % + " + X + R + Jwhose sum is (300 - 200) * (4 - 3) + (400 - 300) * (5 - 3) + (500 - 400) * (6 - 3) + (600 - 500) * (7 - 3) + (1/2) * (200 - 100) * (4 - 3) + (1/2) * (300 - 200) * (5 - 4) + (1/2) * (400 - 300) * (6 - 5) + (1/2) * (500 - 400) * (7 - 6) + (1/2) * (600 - 500) * (7 - 6) respectively = 1,250

2) Elasticity of demand is calculated as %change in quantity demanded / %change in price

If %change in quantity demanded > %change in price, demand is elastic otherwise demand is inelastic. Demand for coffee must be more elastic starbucks coffee as it ic considered to be luxury goods and consumers can reduce its demand when its price rises while it may not be possible for consumers to reduce the demand of normal coffee as it is a necessary good and hence inelastic demand. In the diagram below, demand for stormland is more inelastic than other demand curve.