economics

OPTION 1 INDEPENDENT VARIABLES COMPUTATION

1. Q (D) = -5200 – 42 * 500 + 20 * 600 + 5.21 * 5500 + 0.20 * 10000 + 0.25 * 500

Q (D) = 16580

PRICE ELASTICITY = (P/Q) * (Dp / Dq )

P/Q = 500 / 16580

= 0.03

DP/DQ = -42

PRICE ELASTICITY = -42 * 0.03

= -1.26

ELASTICITY OF PX

= (PX/Q) * (DpX / Dq )

PX/Q = 600 / 16580

= 0.036

DPX/DQ = 20

PX ELASTICITY = 20 * 0.036

= 0.72

ELASTICITY OF PER CAPITA INCOME

= I/Q) * (DI / Dq )

I/Q = 5500 / 16580

= 0.33

DI/DQ = 5.21

I ELASTICITY = 0.33 * 5.21

= 1.72

ELASTICITY OF AVERTISING EXEPENDITURE

= (A/Q) * (DA / Dq )

A/Q = 10000 / 16580

= 0.6

DA/DQ = 0.20

A ELASTICITY = 0.20 * 0.6

= 0.21

ELASTICITY OF MICROWAVE

= (M/Q) * (DM / Dq )

M/Q = 5000 / 16580

= 0.32

DM/DQ = 0.25

M ELASTICITY = 0.25 * 0.32

= 0.08

2. Implications of the elasticity.

The price elasticity of -1.26 indicates that a 1% increase in the price creates a 1.26% decrease in the amount or quantity demanded. The demand for the product is hence elastic (Smalbro, J.2010). Hence, an increase in the price leads to a decrease in the number of customers for the product.

In the long term, the customer number continues decreasing while in the short term the number of customers decreases gradually.

Elasticity of 0.72 in the price of the competitor’s product indicates that 1% increase in the price of the competitor will lead to 0.72% increase in the quantity demanded. This is fairly elastic and there is no need to closely monitor the prices of the competitor. The long term effect is that the quantity of demanded products will gradually increase while the short term effects are insignificant increase in customers (Dixon, M.2010).

Elasticity of 1.72 in the per capita income indicates that indicates that the quantity demanded is elastic to the per capita income. An increase in the per capita income will lead to a significant increase in the quantity demanded. Hence a 1% increase in the per capita income leads to 1.72% increase in the quantity demanded. The long term effect is the steady increase in the number of customers while the short term effect is a slight increase in customers (Vestbo, J.2010).

Elasticity of 0.21 in the advertising expenditure indicates that 1% increase in the expenditure leads to 0.21% increase in the quantity demand. Hence the income expenditure in this case is inelastic and insignificant to the quantity of goods demanded. The long and short-term effects are no changes in the number of customers.

Elasticity of 0.08 in the number of microwaves sold in the supermarket indicates that a 1% increase in the number of microwaves sold will only lead to 0.08% increase in the demand for the product. Hence, relation is not elastic and that the short and the long-term effects are absent on the demand quantity of the products.

3. I would recommend that the firm should cut the prices of the products. This due to the fact that the prices heavily affect the quantity of products demanded and the number of customers interested in the products of the company. The customers are extremely reactive to any price changes as seen with the negative elasticity of -1.26 where a slight increase in the price leads to sharp decrease in the demanded quantity. Hence, a significant decrease in the prices would easily lead to a situation where there is increased demands and customers for the product.

4.

The equilibrium price is 350 while the equilibrium quantity is 5000.

Some of the factors that will change the demand and supply curve include the prices of the competitors, the product priced, competition, quality of products,. These factors could cause a left or right shit in the supply and the demand curves for the company.

References

Dixon, M., Albrechtsen, T., Hejslet, S., Smalbro, J., & Vestbo, J. M. (2010).  Supply & demand. Mark Dixon & Thomas Albrechtsen.

Creative Educational Video, Inc. (2008).  Supply & demand. Lubbock, TX: CEV Multimedia.

Farmer, R. E. A., & National Bureau of Economic Research. (2007).  Aggregate demand and supply. Cambridge, Mass: National Bureau of Economic Research.