Question

Answer the questions in the context of price elasticity. Answer parts A, B and C independently.

The price elasticity of demand of product X is 0.6. The equilibrium price of product X is P1 and the equilibrium quantity is Q1.

A.   The economy is very weak recently and the suppliers of product X are making less profit than before and some of the suppliers are even having a loss. As a result, many suppliers of product X are closing down their business and leaving the market.

Draw a diagram and explain what will happen to the equilibrium price and equilibrium quantity of product X when many suppliers leave the market.

B.   CC Group is one of the product X suppliers staying in the market. Suppose you are the sales manager of CC Group. In one meeting your boss says, “The price of product X was up yesterday and we sold fewer units as a result. But our total revenue on product X was up. I don’t understand why.”

Use the theories in price elasticity to explain to your boss about his observation.

C.   Your boss then asks you, “How many percent should the price of product X rise to cause a 20% decrease in quantity demanded?”

Calculate the answer for your boss. (All percentage changes are from mid-point method).

Answer 1

The price elasticity of demand is a common state of mind in every consumers. The price elasticity of demand state that, when changes happens on price of a product the desire for that product will also change.

In simple words, If increase the price will decrease the desire of customers upon that perticular product and vice versa.

There are also exceptional cases;

1) In the case of  Medicine it will not work. If it is necessary for us we will not bothered about price we will definitely buy that.

2) If the price of salt will become decrease we will not buy kg's of salt .

A) If the suppliers of product 'X' not able to get profit some one getting loss also they will definitely close down their business This closure will cause less supply of product and more demand. In this stage the existing product have high price. In clear, a decrease in supply will cause the equilibrium price to rise and demand will decrease.

Hear suppliers leave from the market denotes the supply of the product X will decline in diagram that shows the movement of supply curve to left side ( leftward shift). This will create a high price and it ultimately creat low quantity of demand. The below mentioned graph shows that ;

P : price , Q : quantity , DD : demand curve , SS : supply curve , E : Equilibrium , E0 : changed equilibrium , P1 : Changed price , Q0 : changed quantity of demand.

B) There is no issues in it. The manager are in a consussion beacouse due to the increased price the sales of that product are very less but still how they attain high revenue. This case we can understand using simple matematics.Yesterday the price of product X is 1 and that day 100 consumers buy that product company got money of 100. But next day the price of X is rised to 2 due to that only 51 consumers demanded it . In this case the numbers of consumers become less ; But they got money of 102 . ultimately it's an increase.

C) Sorry for the inconvenience. I dont have the subject knowledge.