Question

a) imagine a market for tennis rackets, with a certain equilibrium price (PE) and quantity (QE). Depicit it on a graph, using what you know about the laws of supply and demand.

b) show on the graph what would happen to PE and QE in this market if the hourly charge to use tennis court doubled. Which determinants are affected? Explain what is happening

c)show on your original graph what would happen to PE and QE if the price of nylon (used for racket strings) dropped and if tennis gained in popularity relative to golf. which determinants are affected now? Explain

d) explain the concept of price elasticity of demand and discuss why you think that the demand for tennis rackets would be price elastic or price inelastic.

e) would the demand curve for tennis rackets therefore be relatively steep or flat? why? how would this affect your answers to b and c?

Answer 1

A. The graph is shown below.

As price increases, supply increases while demand decreases. The equilibrium point is where these 2 curves meet.

B. This will decrease the demand for rackets as playing tennis is now more expensive. The effect is shown in graph below.

The new demand (Qe`) is lower and the new price is also lower. The new demand curve is D`, towards the left of the original.

C. The drop in price of Nylon will increase the supply, shifting supply curve to the right, as producing rackets is now cheaper. This is shown below.

The new equilibrium quantity is Qe``, price is Pe``

D. The price elasticity of demand measures the sensitivity of quantity demanded to the price. How much does the quantity demanded change if price is dropped by 1 unit. It is given by

PED=%Change in demand/%Change in price

To me it seems that demand for tennis rackets would be somewhat inelastic. Which means it wouldnt change as much as price because playing tennis is a pleasurable activities and demand for pelasurable activities is usually less sensitive to change in prices.

E. This means that the demand curve for eackets would be steep, which would mean change in price will not impact demand much.