Essay.. related to Assignment 1 which is uploaded

NAME: Emanuel Barclay

PROFESSOR’S NAME: Gueeman Kornilov

COURSE TITLE: Econ550

DATE 7/28/2013

1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.

QD=-2000-100P+15A+25PX+10L

Substituting the variables in the equation to get the total quantity demanded

QD=-2000-100(200) +15(640) + 25(3) +10(5,000)

QD=-2000-20,000+9,600+75+50,000=37,675

Price elasticity = PEoD = (% Change in Quantity Demanded) / (% Change in Price)

QD=37,675

37,675=-2000-100(200)

37,675+2000+20,000

59,675

N= (-100) (200) /37475)

Elasticity=-0.335

Advertising elasticity

Qd=-2000+15A

37,675=-2000+15(640)

=37,675+2000-9600=30,075

Elasticity= (15) (640/30,075)

=0.32

Competitor’s elasticity

QD=-2000+25(3)

37,675-75+2,000=39,600

Elasticity= (25) (3/39,600)

=0.0019

Per capita income elasticity

QD=-2000+10L

37,675=-2000+50000=

37,675+2000-50,000

=-10,525

Elasticity= (10) (5000/10525)

=-4.75

2. Determine the implications for each of the computed elasticities for the business in terms of short term and long-term pricing strategies. Provide a rationale in which you cite your results.

PRICE ELASTICITY

The elasticity is negative in nature meaning that it is less than one which indicates inelasticity with regard to price. It also indicates that there would be an effect in the price change both in the short term and the long term.

Advertising elasticity

The value is positive in nature meaning that the product is elastic to advertising; this also means that since it is less than one, there is an effect on the quantity demanded for the amount of money used in advertising both in the short term and the long run.

Competitor’s elasticity

The product is elastic to the competitors pricing and this means that if the company changes its prices in the short term or long term, the demand will change.

Per capital income elasticity

This product is perfectly inelastic to the per capita income and this means that a change of the per capita income both in the short term or long term shall not lead to an increased demand for the product all other factors held constant

3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.

The firm should reduce its prices because the elasticity is less than -1 meaning an increase in prices would reduce the quantity demanded and hence the total revenues as indicate by this equation

TR = PQ

dTR/dP = Q(dP/dP) + P(dQ/dP)

(1/Q)(dTR/dP) = (dP/dP) + (P/Q) (dQ/dP) =

= 1 + E

If E < –1 (elastic), dTR/dP > 0,Means a decrease in price will lead to increased revenues and quantity demanded.

4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the prices are 100, 200, 300, 400, 500, 600 dollars.

QD = -2,000 - 100P + 15A + 25PX + 10I

We substitute the values in the equation to get the QD of various prices then we shall plot the figures to get the demand curve

QD=-2000-100(200) +15(640) +25(3) +10(5,000)

=-2000-10000+15(640) +25(3) +10(5000) =47,675 for P=100

=-2000-20000+9600+75+50000=37675, For P=200

=-2000-30000+9600+75+50000=27675, For P=300

=-2000-40000+9600+75+50000=17675, for P=400

=-2000-50000+9600+75+50000=7675, for P=500

=-2000-60000+9600+75+50000=-2325.for P=600

DEMAND CURVE (Quantity demanded on X axis and Price on Y-axis)

b) Plot the corresponding supply curve on the same graph using the following MC/supply function Q = -7909.89 + 79.0989P with the same prices.

PRICES=100, 200, 300, 400, 500 AND 600 dollars substituting the prices in the equation

Q=-7909.89+79.0989P

=-7909.89+79.0989(100) =0.0 units

=-7909.89+79.0989(200) =7,909.89units

=-7909.89+79.0989(300) =15,819.78 units

=-7909.89+79.0989(400) =23,729.31 units

=-7909.89+79.0989(500) =31,639.56 units

=-7909.89+79.0989(600) =39,549.45units

THE SUPPLY CURVE (quantity on X-axis and price on Y-axis)

c) Determine the equilibrium price and quantity.

EQULIBRIUM CURVE

Price on the Y axis and quantity on the Y-axis

Price

The equilibrium Price=400 dollars

The equilibrium quantity=23730 units

d) Outline the significant factors that could cause changes in supply and demand for the

product. Determine the primary manner in which both the short-term and the long-term

changes in market conditions could impact the demand for, and the supply, of the

product.

Factors affecting demand

· Price of the commodity

· Income of the consumers

· Consumer’s tastes and preferences

· Consumer awareness

· Political stability

· Price of other related commodities

· Speculation of future price changes

· Government regulations and laws

· Climatic or seasonal factors

· Persuasive advertising

· Population size and distribution

Factors affecting supply

· Own price of the commodity

· Price of other related commodities

· Prices of production factors

· Goals of the producing firm

· Technology state of the firm

· Nature of events

· The time span either short run or long run

· The supply of production inputs

· Tax subsidies and tax laws

Both long term and short term changes have positively or negatively impacted the demands and supply of market products, the primary factor being the price of the commodity whereby an increase in prices decreases the demand whereas the same effect increases the supply of the commodity.

5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.

Shifts in the supply curve are brought about by changes in factors other than the price of the commodity. A shift in supply is indicated by an entire movement (shift) of the supply curve to the right (downwards) or to the left (upwards) of the original curve.

Shifts in the demand curve are brought about by the changes in factors like taste and preferences, prices of other related commodities, income etc other than the price of the commodity. The change in the demand for the commodity is indicated by a shift to the right or left of the original demand curve.

References

Karlan, D. and Zinman, J (2005). Elasticities of Demand for Consumer Credit: Center discussion paper No.926, Economic Growth Centre. Yale University. http://www.eea-esem.com/papers/eea-esem/2003/968/householdEEA.pdf

Ibrahim, G; Kedir, A and Torres, S (2007) Household level Credit Constraint in Urban Ethiopia: University of Leicester, Department of Economics, Working Paper number 07/03

Bardhan, P (ed) (1989). The Economic Theory of Agrarian Institutions: Claredon Press.

Adelman and Morris (1968) Performance Criteria for Evaluating Economic Development Potential: An Operational Approach Quarterly Journal of Economics, 82(2), 260-80.

CPA Study Pack on Economics: Strathmore university, 2006.