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Concordia University

Department of Economics

ECON 201 – INTRODUCTION TO MICROECONOMICS

Assignment #1

Written by:
Jad El-Rifai, 3981401

Wednesday February 11th 2004.


1. The market forces of Supply and Demand.

a. Plotting the Demand and supply Curve.


The following Table Illustrates the values used in the plotted graphs.

Price Per Unit Quantity Quantity


($) Demanded Supplied

8 1 10
6 2 8
4 3 6
2 4 4
1 5 2
0.5 6 0

The resulting graph is illustrated below.

Demand and Supply Curves for Comic Books

6
Price of each comic book

5
Demand
Supply
4

0
0 1 2 3 4 5 6 7 8 9 10
Quantity of comic books

b. Finding the Equilibrium point


Plotted on the graph, as well as seen clearly in the table, the equilibrium is
established for the price of $2.00. In fact, at this price, the supply equals
the demand at 4 units.
c. The Law of Demand and the Law of Supply (Price Increase)
According to the Law of Demand, if all other things remain constant, an
increase of price (from the equilibrium price of $2) to $6 would decrease
the quantity of comic books demanded to 2. Similarly, also provided all
other things remain constant, the Law of Supply dictates that the number
of comic books supplied would rise to 8. This creates a situation of excess
supply, or surplus, and would lead to an increased inventory size for the
suppliers.

d. The Law of Demand and the Law of Supply (Price Decrease)


The Law of Demand and the Law of Supply apply also in this case of
price decrease under the price of equilibrium of $2. Ceteris Paribus, the
decrease in price to $1 would raise the quantity demanded to 5 and drop
the quantity supplied to 2. This creates a situation of excess demand
(shortage) and reduces the size of suppliers’ inventory.

e. The effect of income on the demand curve.


Income is a determinant of demand. The Increase of income would
increase the demand for comic books, which are considered to be normal
goods. To obtain the new demand values, 3 units must be added for every
price. The results are displayed in the table below.

Price Per Unit Quantity Quantity New Quantity


($) Demanded Supplied Demanded

8 1 10 4
6 2 8 5
4 3 6 6
2 4 4 7
1 5 2 8
0.5 6 0 9

This increase of demand shifts the demand curve to the right, as illustrated
in the updated graph below. This graph is the same as in (a) but the shifted
demand curve has been added as a dotted line.
Demand and Supply Curves for Comic Books

6
Price of each comic book

5
Demand
Supply
4 Shifted Demand

0
0 1 2 3 4 5 6 7 8 9 10
Quantity of comic books

f. Updated Equilibrium after Curve-Shift


As seen from the updated table and the updated graph, the demand meets
the supply at the quantity of 6. The equilibrium price is therefore $4.
2. Elasticity and its applications
a. Calculating Price Elasticity of Demand

Examples of for calculating each value in the table.


i. To calculate (a) it’s simply the difference between two rows in the
price column the total divided by the amount in the first row, i.e.
(a) = (12-10)/12 = 0.167
ii. To calculate (b) it’s simply the difference between two rows in the
quantity column the total divided by the amount in the first row,
i.e.
(b) = (2-3)/2 = -0.5
iii. The price elasticity of demand is the ratio between the %
difference in quantity and the % difference in price. In other terms,
(b) divided by (a). i.e.
(c) = -0.5/0.167 = -3
iv. The slope of demand is the rise over the run of the demand curve,
which means, the difference in price, divided by the difference in
quantity between any two given points. Since the demand curve is
linear, it has a constant slope.
(d) = (12-10)/(2-3) = - 2
v. The total revenue is the price of one item multiplied by the total
number of items (quantity).
(e) = 12x2 = $24.00

The results of all the calculations are displayed in the table below.

Price Quantity % % Elasticit Slope Total


Per Demande change change y of of revenu
Unit ($) d in price in demand Deman e (e)
(a) quantity (c) d (d)
(b)

12 2 0.167 -0.500 -3.000 -2 $24.00


10 3 0.200 -0.333 -1.667 -2 $30.00
8 4 0.250 -0.250 -1.000 -2 $32.00
6 5 0.333 -0.200 -0.600 -2 $30.00
4 6 0.500 -0.167 -0.333 -2 $24.00
2 7 - - - -2 $14.00

The negative values have been left as so to illustrate the direction of the
respective curves. However, for the rest of the answers, the absolute value
of these numbers will be considered.

b. What is Price Elasticity of Demand?


Price elasticity of demand is a measure of the responsiveness of the
quantity demanded to the change in its price. The price elasticity of
demand is different for each point of the demand curve. Therefore, each
price range has a different elasticity. The behavior for the $10 to $12 range
is elastic, because Ed is superior to 1. At the $8 price, Ed is one and
therefore the behavior is unit elastic. For a price of $6 and below, the
behavior is inelastic since Ed is between 0 and 1. As for product
classification, we could say that this product is inelastic with regard to
price due to the high slope of demand. We could therefore assume that this
product is deemed somewhat of a necessity.

c. Relationship between the Slope of Demand and the Elasticity of


Demand
The main difference between the two curves is that the Elasticity of
demand is a ratio of the percentage difference, where the slope is just the
ratio of the differences. Although the slope is constant and the Elasticity is
variable, the two curves are related to each other by an equation that
factors in the price and the demand. Following is an explanation of how
the relationship between the Slope of demand (Sd) and Elasticity of
demand (Ed) is obtained.

Q − Q0
Q P − P0
Ed = (b) / (a) = and Sd =
P − P0 Q − Q0
P

Q Q − Q0
If we multiply Ed by we obtain which is the inverse
P P − P0
of Sd. Therefore, we could say the following:
P
Sd = = |-2| = constant
Q × Ed

To verify whether this relationship is accurate, it is tested below for a random


point of the demand curve.

4 4
For Q = 6 and P =4, Sd = = = 2. The test is successful and the
6 × 0.333 2
relationship is verified.

d. Maximizing total revenue.


The total revenue is maximized at the unit-elastic level. Where the
elasticity of demand is equal to 1, the price reaches the top value of
$32.00.