Question

Suppose that two concurrent changes occur in each of the following markets. In each case, indicate what will happen to the price and quantity traded as a result.

Changes affecting demand

1. Incomes decrease.

2. The price of a substitute product increases.

3. The price of a complementary product increases.

4. Population increases.

5. Buyers expect the price to fall in the future.

Changes affecting supply

A. The price of inputs (resources) falls.

B. The price of a substitution in production increases.

C. Technological improvement occurs.

D. The number of suppliers decreases.

E. Sellers expect the price to fall in the future.

a) Assume that changes 1 and E occur, and the market is for an inferior product.

Equilibrium price:  (Click to select)  indeterminate  increase  decrease  no change

Equilibrium quantity:  (Click to select)  increase  decrease  indeterminate  no change

b) Assume that changes 2 and B occur, and the market is for a normal product.

Equilibrium price:  (Click to select)  decrease  increase  indeterminate  no change

Equilibrium quantity:  (Click to select)  increase  indeterminate  decrease  no change

c) Assume that changes 3 and E occur, and the market is for a normal product.

Equilibrium price:  (Click to select)  increase  indeterminate  decrease  no change

Equilibrium quantity:  (Click to select)  increase  indeterminate  decrease  no change

d) Assume that changes 5 and C occur, and the market is for a normal product.

Equilibrium price:  (Click to select)  decrease  increase  indeterminate  no change

Equilibrium quantity:  (Click to select)  increase  decrease  indeterminate  no change

Question 2:

a. If price elasticity of demand is -0.5 and price decreases by 2 percent, quantity demanded will   (Click to select)  decreases  increases  by  (Click to select)  > 2 percent  −2 percent  < 2 percent  .

b. If price elasticity of demand is -1.3 and price increases by 2 percent, quantity demanded will  (Click to select)  increases  decreases  by  (Click to select)  −2 percent  > 2 percent  < 2 percent  .

Question 3.

Refer to the demand schedule below:

Price ($)	Quantity demanded
80	0
70	50
60	100
50	150
40	200
30	250
20	300
10	350
0	400

Price increases from $30 to $40.

Demand is  (Click to select)  unit-elastic  elastic  inelastic  , and total revenue  (Click to select)  increases  stays the same  decreases  .

Answer 1

a.) Assume that changes 1 and E occur, and the market is for an inferior product.

1.) Income decreases

E.) Sellers expect the price to fall in the future.

Shift in demand curve:

1.) Income decreases and the good is an inferior good: As it is given that the good is an inferior, and inferior have a negative relation between income and its demand. So when income decreases, consumers increase the demand for the infeiour goods as they have cannot consume the more superior products and vice versa. So decrease in the income will increase the demand for inferior goods and the demand curve will shift to the right.

The shift in supply curve:

E.) Sellers expect the prices to fall in the future: As sellers are expecting the prices of the good to fall, they will increase the supply of the good in current. As sellers always wants to sell their goods at a higher prices, so the expectation of getting a lower price in the future will induce them to supply more in present. The supply will increase and it is will shift to the right.

Double shifts: Demand shifts to the right and Supply curve shifts to the right.

The new equilibrium will be where the new demand curve (D') meets new supply curve (S'). When the magnitude of the shifts is not clear, then one of the axis give an indeterminant outcome. Here, equilibrium price is indetermined. As the magnitude of the shift is not clear, so the equilibrium will be indeterminant. While equilibrium quantity will increase.

Equilibrium price = Indeterminate

Equilibrium quantity = Increase

b.) Assume that changes 2 and B occur, and the market is for a normal product.

2. The price of a substitute product increases.

B. The price of a substitution in production increases.

Shift in demand curve:

2.) The price of a substitute product increase. Since the price of a substitute good has a positive relationship with the demand of the given product. That is, increase in the price of substitute goods makes the given good cheaper and so its demand increases and vice versa. So an increase in the price of substitute goods will increase the demand for the given product. And the demand curve will shift to the right.

Shift in supply curve:

B.) The price of substitution in production increases: Substitude in production are goods that can be substituted with the given resources. So when the price of the substitution in production increases, suppliers get induce to take benefit of the higher price and produce that goods and decrease the production of the given good. So price of the substitude in producion has a negative relationship with the supply of the given good. Therefore as the price of subsititude in production increases, the supply of the given good decrease and the supply curve shift to the left.

Double shifts: Demand curve shifts to the right and supply curve shifts to the left.

Outcome: The new equilibrium is determined where the new demand curve intersects the new supply curve. Therefore the equilibrium price will increase.

As we discussed that when the magnitude of the shifts is not clear, then one of the axis gives indeterminant results. That is, if the demand shift would have been greater than supply shift. Then the equilibrium quantity would decrease. While if the supply shift is greater than the demand shift, then the equilibrium quantity would increase. So it is not possible to determine the new equilibrium quantity without the magnitudes of the shifts.

Equilibrium price = Increase

Equilibrium quantity = Indeterminate

c) Assume that changes 3 and E occur, and the market is for a normal product.

3. The price of a complementary product increases.

E. Sellers expect the price to fall in the future.

Demand shift:

3.) The price of a complementary product increase and the good is normal good: As the price complementary goods makes a negative relationship with the demand of the given good. That is, increase in the price of complementary goods makes the given good also costly. So its demand decreases and vice versa. Thereofre increase in the price of a complementary product will decrease the demand of the given good which will be shown as the leftward shift of the demand curve.

Supply shift:

E.) Sellers expect the prices to fall in the future: As sellers are expecting the prices of the good to fall, they will increase the supply of the good in current. As sellers always wants to sell their goods at a higher prices, so the expectation of getting a lower price in the future will induce them to supply more in present. The supply will increase and it is will shift to the right.

Double shifts: Demand curve shifts to the left and supply curve shifts to the right.

At the new equilibrium point, the equilibrium quantity increases while the equilibrium price is undetermined.

As the magnitude of the shifts is not clear, therefore it is not possible to find the new equilibrium price. It could be lower, if the supply rightward shifts is greater than the demand curve's leftward shift. Whereas the new equilibrium price could be higher, if the demand shift is more than the demand curve. So the change in equilibrium price is indeterminant.

Equilibrium price = decrease

Equilibrium quantity = Indeterminate

d) Assume that changes 5 and C occur, and the market is for a normal product.

5. Buyers expect the price to fall in the future.

C. Technological improvement occurs.

Demand shift:

5) Buyers expect the price to fall in the future: Buyers always wants to buy the good at a lesser price. As buyers are expecting the price of the good to fall, then they will postpone current consumption to buy the good at a lesser price. The demand will decrease and it will shift to the left.

Supply shift:

C.) Technological improvement occurs: Positive technological change results in increasing the production efficiency and so the supply of the good will increase. The supply curve will shfit to the right.

Double shifts: Demand shifts to the left and supply shifts to the right.

The outcome: At the new equilibrium point where new demand curve intersects the new supply curve. The equilibrium price decreases for sure but equilibrium quantity is indeterminant. Without the knowledge of the magnitude of the shifts, the new equilibrium quantity could not be traced.

Equilibrium price = decrease

Equilibrium quantity = Indeterminant

Answer 2.)

a). If price elasticity of demand is -0.5 and price decreases by 2 percent, the quantity demanded will increases by < 2 percent  .

Price elasticity of demand shows the proportionate response of the change in price on the quantity demanded.

The price elasticity of demand is -0.5, as the elasticity is less than 1.

So when PED is -0.5

That is, |PED|<1. it shows the percentage change in price is more than the percentage change in quantity demanded. And the negative sign shows the inverse relationship between price and quantity demanded. As it is given that the price decreases by 2%, so according to the PED, the quantity demanded will increase by less than 2%

The quantity demanded would increase because of the law of demand and it will decrease by less than 2% because of the price elasticity of demand is inelastic.

So quantity demanded will increase by less than 2 %

b. If price elasticity of demand is -1.3 and price increases by 2 percent, quantity demanded will decreases by > 2 percent

As |PED|>1, it means that the percentage change in quantity demanded is more than the percentage change in price. And the negative sign shows the inverse relationship between price and quantity demanded. As it is given that the price increase by 2%, so according to the PED, the quantity demanded will decrease by more than 2%

The quantity demanded would decrease because of the law of demand and it will decrease by more than 2% because of the price elasticity of demand is elastic.

So the quantity demanded will decrease by more than 2 %

Answer 3.) Given:

Price increases from $30 to $40, quantity demanded decreases from 250 to 200.

Price elasticity of demand is percentage in quantity demanded over the percentage change in price.

Since the price elasticity of demand is -0.6, as the |PED|<1, therefore the demand is relatively elastic.

Total revenue test suggests that when the demand is elastic, there is a negative relationship between price and total revenue. So increasing the price will decrease the total revenue. And when the demand is inelastic, there exists positive relation between price and total revenue. So increasing the price will increase the total revenue.

Here, demand is relatively elastic, so increasing price from $30 to $40 will decrease the total revenue.

Demand is Elastic and total revenue decreases.