Course: Business Economics

Exam Cycle: December 2018

Answer 2

Price Fluctuations:

Price fluctuations are a strong factor affecting supply and demand. When a product gets expensive
enough that the average consumer no longer feels it is worth it to buy the product , then the demand
declines. This leads to cuts in production that will hopefully stabilize the product’s value. Lowering the
price of product may increase demand, indicating that the public feels the product is suddenly a great
value. This may also cause changes in production to increase to keep up with demand.

Income and Credit:

Changes in income level and credit availability can affect supply and demand in major way. The housing
market is prime example of this type of impact. During a recession when there are fewer jobs available
and there is less money to spend , the price of homes tends to drop. Also the availability of credit may
be less because of the average person’s inability to qualify for the loan. To help encourage those who
can afford to buy, prices fall which can boost sales, and even more so if interest rates decrease.

Availability of Alternatives or Competition:

When an alternative product hits the market the competition between competition between existing
product and new one can cause demand to drop for the existing product . Just as many people may be
buying the product, a large portion of them may elect to buy the alternative brand. This leads to price
wars that ultimately lower the price of the product and may require a cut in supply to fall in line with the
decrease in demand.

Trends:

Demand rises and falls on trends in many cases. Only a few things remain a constant need for society.
Even food and shelter are not immune to the effects of changing trends. If widespread media attention
is given to the idea that eating beans sprouts is bad for you, then eventually it will affect demand for
bean sprouts.

Commercial Advertising:

Commercials on television, internet and radio have an effect on supply and demand in that they make
more people aware of the availability of a product. People do not buy what they don’t know is for sale.
If it is an appealing ad, there is a good chance demand will increase and supply will have to follow suit.

Seasons:

The seasons can affect supply and demand drastically. The supply and demand for toys peaks around
Christmas and Turkeys sell like crazy at Thankgiving. Fireworks experience a boom at the fourth of july
in America. Meanwhile, it’s difficult to increase demand for bikinis in January in Minnesota.

Tastes and Preferences of Consumers:

 Course: Business Economics
Exam Cycle: December 2018

An important factor which determines the demand for a good is the tastes and preferences of the
consumers for it. A good for which consumers’ tastes and preference are greater , its demand would be
large and it’s demand curve will lie higher.

Income of the People:

The demand for goods also depends upon the incomes of the people. The greater the income of the
people the greater will be their demand for goods. In drawing the demand schedule or the demand
curve for a good we take income of the people as given constant.

Answer 3:

Percentage Method:

Ep = (Q2-Q1)/Q / (P2-p1)/p

Where Q1 = Original quantity demanded

Q2 = New quantity demanded

P1 = original Price

P2 = New price

So here Ep = 250 – 400/250 / 120 – 100/ 120

= -150/ 250 * 20/120

= 2.5

Arc Elasticity Method:

Ep = ^Q/^P* P+ P1/Q+Q1

Where ^Q is change in quantity (Q1- Q)

^P is change in price (P1-P)

Q is original quantity demanded

Q1 is the new quantity demanded

P is original price

P1 is the new price

So here, Ep= 250-400/120-100*100+120/400+250

=-150/20*220/650
 Course: Business Economics
Exam Cycle: December 2018

= 2.3 (app)