Question

1. How is a change in demand different from a change in quantity demanded?
2. Using supply and demand analysis explain what would happen in the market for SUVs if the relative price of gasoline increases.
3. How does rent control on apartments distort the allocation of resources?

4. How can elasticities be used to improve business or firm performance?

Answer 1

1.

There are many factors that affect the demand for the good. We know that the law of demand states that the quantity demanded of a good is inversely related to prices of the goods other things being constant. Thus, a change in price changes the quantity demanded, and due to that, here is a movement along the same curve up or down depending on whether the price has increased or decreased.

On the other hand, there are other factors like the income of consumers, tastes, and preferences of the consumers, prices of related goods that affect the demand of the good. Thus, changes in these factors will change the demand for the good and the demand curve will shift right to left depending on the fact that the demand has increased or decreased.

2.

We know that SUVs and gasoline are complementary goods. This means that their use depends on one another and they are used together. Thus, if the prices of gasoline increases, the demand for gasoline and SUVs both will decrease. Since both are complementary goods, they are demanded together. We know that the change in prices of the related goods shifts the whole demand curve. Here as the prices of gasoline increased, the demand for SUVs decreased which will shift the demand curve to the left. The supply curve being the same, a shift in the demand curve to the left will decrease both the equilibrium quantity and equilibrium price of SUVs.

3.

Ret control puts a price ceiling on the rent that was charged in the market. A binding price ceiling is set below the equilibrium price level. When the rent control sets the rent below the equilibrium level, the quantity supplied decreases and the quantity demanded increases. Here, the quantity demanded exceeds the quantity supplied of rental apartments in the market which creates a shortage of rental apartments in the market and many people will be homeless.

4.

Price elasticity of demand is the responsiveness of change in quantity demanded due to a change in prices of the goods.

This means that if the demand is more responsive to the change in prices, then the demand is more elastic. If the demand is less responsive to the change in prices, the demand is less elastic. It is given by the following formula:

Price elasticity of demand = % change in quantity demanded / % change in price

If the value of price elasticity of demand is more than 1 then it would be called elastic demand.

If the value of price elasticity of demand is less than 1 then it would be called inelastic demand.

If the value of price elasticity of demand is equal to 1 then it would be called unitary elastic demand.

Thus, a firm can make use of the elasticities of demand in different sections of the market by charging them different prices for the same good to gain maximum profits. For example, if the market for a good is divided into two types of customers, one who have elastic demand for the good and one whose demand for the good is inelastic. Thus the firm should charge higher prices to those customers who have inelastic demand for the good (since their demand won't change much with the change in prices) and should charge lower prices to the customers who have elastic demand for the good (since their demand will change by a larger amount than the change in prices).

This way, the firm can make maximum profits with the help of different elasticities of demand.