Answer To: ©Al Tareeqah Management Studies XXXXXXXXXX Managerial Economics SBS/ABS – MBA Assignment – 2020...
Soma answered on Oct 15 2021
#1.
Price elasticity of demand is an important concept in the study of microeconomic theory. Price elasticity of demand exhibits how the quantity demanded for a good or service responds when the price changes. The coefficient of PED can be calculated by dividing the percentage change in quantity demanded by the percentage change in price. The coefficient value shows the price sensitivity of the consumers. Due to the inverse relation between price and quantity demanded, the coefficient of PED always com as negative, but we have to consider the absolute value only. If the absolute value of the elasticity coefficient is greater than 1, the consumers are price sensitive that makes the demand relatively elastic. If the absolute value of the elasticity coefficient is less than 1, the demand becomes relatively inelastic. For example, if the demand elasticity for cigarettes as estimated as 0.52, it implies a 10% increase in price of cigarettes would cause to reduce the demand for cigarettes by only 5.2%. Similarly of the demand elasticity for smart phone is found to be as 1. 21, it implies that 10% increase in the price of smart phone would lead to reduce the demand by 12.1 %. While cigarettes are an inelastic good, smart phone is found to be an elastic product. (Mankiw, 2008)
It not only plays a crucial role in economics; price elasticity of demand has vital implications in business decisions. While taking the price related decisions, business leaders takes into considerations about elasticity of demand for then particular good or service. The above case study illustrates the pricing strategy of Daily Mirror and its integral relation with price elasticity of demand. Sly Bailey has decided to increase the price of the tabloid aiming to increase the revenue. But her predecessor, Philip Graf, has taken a completer opposite pricing strategy – he tried to increase revenue by cutting the cover price. The pricing strategy of both the chief Executive can be explained with the help of price elasticity of demand. Due to availability of many substitutes or rivals like The Sun, the Daily Star, the demand was likely to be elastic for Daily Mirror. An increase in the price will reduce the demand by a greater magnitude thereby reduce the revenue. Thus, when Sly Bailey raises the price of the tabloid newspaper, it will reduce the circulation in a greater magnitude and reduce the total revenue. Price raising strategy by Bailey will not serve the purpose because of the higher elasticity of demand driven by the fierce competition in the market. The Sun, another competitor, also did not increase its price for the same reason. Since there are many rivals in the market, the demand for a particular newspaper is relatively elastic. In such a market, consumers tend to be price sensitive, they are likely to switch over in case of a rise in price of a particular newspaper. Thus, cutting price, not the raising price, is the best recommended strategy for increasing revenue.
Q2. Data response Questions:
a) Microeconomic theory defines Quantity demanded as the quantity of any good or service that a consumer is willing to buy for a particular price at a particular point of time. The quantity demanded changes along the demand curve that demonstrates an inverse relation between the two variables: price and quantity demanded for a nor mal good. Quantity supplied, on the other hand, is defined as the quantity that suppliers are willing to supply at a particular time. The supply curve portrays the direct relation between the price and quantity supply supplied. Whenever we talk about quantity demanded or quantity supplied, we clearly mean the movement along either demand or supply curve.
b) Equilibrium in the market occurs at the point where the demand curve intersects the supply curve. In other words, at equilibrium demand and supply becomes equal to each other. The above table illustrates the level of quantity demanded and quantity supplied at different prices. The equilibrium price is $4 because at $4, the quantity demanded and the quantity supply becomes equal at 60. Since demand and supply becomes equal only at $4, it is the equilibrium price. So we have equilibrium price = $4 and the equilibrium quantity = 60.
c)
i) Let us assume that the price is $2. At this price quantity demanded = 100 and the quantity supplied = 20. Since quantity demanded exceeds quantity supplied there is an excess demand in the market. Excess demand = 100-20=80. Thus, if the market price is $2, then there will be an excess demand = 80.
ii) Now the price is assumed to be $6. At this price quantity demanded =20 and the quantity supplied =100. Since the quantity supplied exceeds the quantity demanded, there is an excess supply in the market. Excess supply = Quantity supplied @6 – quantity demanded @6 = 100-80.
D) An inferior good is good whose quantity demanded is likely to reduce when there is an increase in price. For example, let us assume Sandy consumes 2 kg of potato in a week when his income is $100. When his income increases to $120, he has reduced per week consumption of potato to 1.5 kg. Despite the rise in income, the demand for potato has come down for Sandy. It shows that potato is an inferior good for sandy.
The table below has shown the new demand and supply schedules of good X (where the quantity demanded is 20 units less at each price.
PX ($)
QD
QS
1
100
0
2
80
20
3
60
40
4
40
60
5
20
80
6
0
100
The above graph shows the new equilibrium price is 3.5 and the new equilibrium quantity is 50. (Mankiw, 2008)
#Q3.
a) The price increases from $40 to $60
P1= 40 and P2=60
Price elasticity of demand = % change in Qd / % change in price
At price $40, quantity demanded = Q1=16
At price 60, the quantity demanded falls to Q2= 12.
We can calculate the price elasticity of demand with the help of mid-point formula:
The formula for price elasticity of demand with then hep of mid-point formula is
/ ]
% change in quantity demanded
% change in price =
Price elasticity of demand = -0.71429
Since the absolute value of PED is less than 1, the demand is said...