Managerial Economics Assignment PDF

Executive Summary

This assignment is based on the various micro as well as macroeconomic theories. Impact of changes in prices on the quantity demanded and supplied has been illustrated in this assignment. This assignment also makes discussion regarding elasticity of price and income of demand. It has been observed that there is negative relationship between price and quantity demanded. In this assignment it has also been found that there is a positive relationship between price and quantity supplied.

Question 1

  1. a) Supply schedule and Factors affecting supply in a market

            It is known that in the context of economics, supply schedule is mainly referred to a specific quantity of a particular commodity or a service, which is available in the market at a particular price and at a specific time. As stated by Becker (2017), supply schedule is always explained as the willingness of a specific seller for selling a particular quantity of a commodity at a certain time.

Price of the Bottles Quantity Supplied of the Bottles
A 10 0
B 15 50
C 20 150
D 25 250
E 30 350
F 35 450
G 40 550
H 45 650
I 50 750
J 55 850

Table 1:  Supply Schedule Table

(Source: Friedman, 2017)

 Following major factors have the ability to affect the supply of a particular commodity in a market:

  • Price: There is a direct strong positive relationship between the price of a commodity and supply of it. As stated by Friedman (2017), an increase in the price of a particular commodity will result in an increase in the overall supply of that commodity in the market as well.
  • Production cost: There is an inverse relationship between the supply of a particular commodity and production cost of the specific commodity.

The above diagram shows the impact of increase in price level on the overall commodity market. It can be seen that an increase in price of a commodity can lead to an increase in the quantity supplied in an economy.

Question 2

Various Degrees of Elasticity and Point Elasticity

            As stated by Bel & Gradus (2016), Elasticity is mainly referred to as responsiveness of one specific economic variable to the change in another economic variable. For example, it can be said that responsiveness to the changes in quantity demanded to the change in product price can be considered as elasticity. The main formula of Elasticity of Demand is as follows:

ep = % change in quantity demanded of x commodity/ % change in price of x commodity

Considering two complimentary commodities such as coffee and tea, it can be said that increase in the price of tea can lead to a shift of the consumer’s demand towards coffee. Usually complimentary commodities have negative cross-price elasticity.

There are mainly four types of elasticity such as:

  • Price elasticity of Demand
  • Price Elasticity of Supply
  • Cross Elasticity of Demand
  • Income Elasticity of Demand

            Considering various degrees of Elasticity of Demand, it can be said that it can be classified into five different types such as:

  • Unit Elasticity: As stated by Bas et al. (2017), demand will be considered as unit elastic if percentage changes in the quantity demanded are equal to the percentage changes in price level.
  • Relatively Inelastic Demand: A demand will be treated as a comparatively Inelastic demand if the proportional changes in the demand< proportional changes in price level. In this particular situation, the slope of the respective demand curve starts to fall continuously. (In this situation, ed <1).
  • Relatively Elastic Demand: As commented by This is the case when comparative changes in the quantity demanded is greater than that of the changes in price level.(Here, ed>1 )
  • Perfectly Elastic Demand: Demand will be treated as perfectly elastic when a small change in the price level can cause huge changes in the quantity demanded.
  • Perfectly Inelastic Demand: In this case, there will be no impact of changes in price level on the quantity demanded of which in this case, ed = 0 (Colen et al. 2018).

It has to be noted in this context that:

Price Elasticity of demand (PED) = (Proportional changes in quantity demanded_) / (proportional changes in the price level).

There are various methods of measuring Elasticity of demand such as percentage method, arc method, point method, and total outlay method. In the case of Point elasticity method, the Price Elasticity of Demand is always measured at a particular given point in the specific demand curve. As per this method, PED can be measured as follows:

PED = Lower portion of respective demand curve/ upper segment of the respective demand curve (Kerr, 2018)

Figure 4: Point Elasticity

(Source: economicswebinstitute.org, 2019)

            The above diagram illustrates that PED = PM/PN.

Question 3

Computing Elasticities

  1. a) It is known that demand for every commodity is always very sensitive to the economic variables such as income of consumers and changes in the price level of respective commodities.

According to the provided scenario, the initial price of envelopes = $3 per box

Initial number of box = 10

Final price of envelopes = $3.75 per box

Final number of box = 8

Percentage change in the quantity demanded = (8 – 10) / 10 = – 0.20 = – 20%

Again, percentage change in the price level = (3.75 -3.00) / 3 = 0.25 = 25%

Therefore, elasticity = | (-20%)/ 25%| = 0.8

The elasticity of demand for Julie is nothing but the absolute value 0.8 which implies that there exist inelastic demand as in this case, elasticity is lower than 1.

  1. b) According to the given scenario, Katherine has advertised for selling cookies worth $4 per dozen. It is known that elasticity of demand is nothing but the percentage change in quantity demanded divided by the percentage change in the total amount of process.

            Therefore, it can be said that:

Percentage change in quantity demanded = (40 / 50) / 50

Alternatively, percentage changes in quantity demanded = – 0.20 = -20%.

Along with this, percentage change in price level = (6 -4)/ 4 = 0.50 = 50 percent

Therefore, elasticity of demand = | (-20%)/ 50%| = 0.4.

Thus, it can be said in this context that the actual elasticity of demand is an absolute value 0.4, which indicates that the demand is completely elastic.

Now, in order to find out the quantity demanded at the time when price = $10 per box, then,

| (Percentage change in quantity/ percentage change price)| = 0.4

Alternatively, percentage change in price = (10/4)/4 = 150%.

-0.4 = (percentage change in the quantity demanded / 150%)

Alternatively, percentage change in quantity demanded | = -60%

Alternatively, (x-50)/50 = -0.6

Alternatively, x = 20.

Therefore, finally, it can be stated that the final new demand at the $10 per dozen cookies will be 20 dozen cookies.

Question 4

Effects on Demand, Supply, Equilibrium Price and Equilibrium Quantity

  1. a) It has been observed that the discovery of a cheaper synthetic vanilla flavoured ice cream has reduced the cost of the vanilla ice cream in America. Vanilla can be considered a nice substitute for chocolate. It is known that there is a strong relationship between the quantities demanded a commodity and the price of the substitute commodities. As commented by Coccia (2018), if there is a reduction in the price of the substitute products, then the consumer’s ‘demand may shift their demands to the substitute commodities.
  2.  In this case, since there is a reduction in the price of vanilla ice cream which is a substitute for chocolate ice cream, consumers would like to prefer vanilla compared to chocolate ice creams. Because of this, there will be an increase in the demand for vanilla ice creams and the demand for chocolate ice creams will tend to fall. The demand curve of chocolate will shift to the leftward direction. Therefore, both of the equilibrium quantity, as well as price, will continue to decrease gradually as well (Shishkin & Olifer, 2017). The above diagram depicts that the standard equilibrium occurs at the pony at which the market demand curve has intersected the market supply curve of ice cream. The corresponding equilibrium price is P* and corresponding equilibrium quantity is Q*.
  3. In this context, it has been noticed that by decreasing the herds, all of the dairy farmers have reduced the overall supply of the cream. This has resulted in a shift of the supply curve of cream to the leftward direction. Therefore, it can be said that the overall market charge of the crease has increased. As stated by Hummels & Lee (2018), this can result in a hike in the overall producing a particular unit of the chocolate ice cream in America. Therefore, this can lead to a shift of the supply curve of the respective chocolate ice cream to the leftward direction. This is mainly because of the fact the producers of the chocolate ice cream have reduced the total amount of quantity supplied if chocolate ice cream at a given amount of price level. The above diagram determines a decrease in the quantity supplied of ice-cream as it is not available on the respective market (economicswebinstitute.org , 2019). The above figure illustrates that EP will increase because of a shortage of ice-cream in a market. As a result, the supply curve has shifted to the leftward direction because of a reduction in quantity supplied. EQ will reduce with the increase in supply of chocolate in the market.
    1. b) Considering the pricing policy, it can be said that all of the companies in the emerging market of the telecom industry can consider an agile pricing policy. Pricing policies can be divided into two parts such as first-degree price discrimination and second-degree price discrimination. In case of First-degree price discrimination, the monopolist knows the absolute amount of maximum price that every consumer wants to pay (Baaquie, 2016). This kind of price discrimination allows the producer for obtaining the highest amount of revenue. Considering the second-degree price discrimination, it can be said that a greater quantities are always available at the lower amount of prices. Higher amount of discounts are provided to the consumers in this case. For example, Premium pricing, travel industry, coupons and many others can be considered as proper examples of such pricing policies (org, 2019).
      • Product differentiation
      • Free exit and entry
      • Absence of having perfect knowledge
      • Greater elasticity in demandb) It can be said in this context that UAE has exceeded the prices of roses across the rest of the world. Therefore, it can be said that the rest of the countries across the whole world has a comparative advantage in the production of roses. As stated by Stein (2017), if a country determines a higher level of the price of the particular commodity compared to the rest of the world, then it can be said that this nation has a comparative disadvantage in the production of that particular commodity.
        1. c) In case the UAE wholesalers have bought roses at the lowest price level, the UAE wholesalers will buy 2 million containers from the UAE raised growers and they can buy 10 million containers from the other foreign countries. This quantity will be imported into the UAE.

        Question 7

        1. a) By considering the concept of microeconomics, it can be stated that the following will be the major characteristics of the respective emerging telecom market in UAE:
        • This market can have a particular per-capita income, which is less than average.
        • As commented by Tarasova & Tarasov (2016), there will exist a high level of volatility in the market
        • A huge amount of capital investment is necessary

        Monopolistic competition is mostly observed in the restaurant business across the whole world. In such kinds of a market, there are many buyers and many sellers, unlike a monopoly market. Other features of monopolistic competition are as follows

        References

    Books

    Becker, G. S. (2017). Economic theory. Routledge.

    Friedman, M. (2017). Price theory. Routledge.

    Journals

    Armstrong, T. B. (2016). Large market asymptotics for differentiated product demand estimators with economic models of supply. Econometrica, 84(5), 1961-1980.

    Baaquie, B. E. (2016). Statistical microeconomics and commodity prices: theory and empirical results. Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences, 374(2058), 20150104.

    Bas, M., Mayer, T., & Thoenig, M. (2017). From micro to macro: Demand, supply, and heterogeneity in the trade elasticity. Journal of International Economics, 108, 1-19.

    Coccia, M. (2018). A theory of the general causes of long waves: War, general purpose technologies, and economic change. Technological Forecasting and Social Change, 128, 287-295.

    Hummels, D., & Lee, K. Y. (2018). The income elasticity of import demand: Micro evidence and an application. Journal of International Economics, 113, 20-34.

    Stein, J. G. (2017). The micro-foundations of international relations theory: Psychology and behavioral economics. International Organization, 71(S1), S249-S263.

    Tarasova, V. V., & Tarasov, V. E. (2016). Elasticity for economic processes with memory: Fractional differential calculus approach. Fractional Differential Calculus, 6(2), 219-232.

    Online Articles

    Bel, G., & Gradus, R. (2016). Effects of unit-based pricing on household waste collection demand: A meta-regression analysis. Resource and Energy Economics, 44, 169-182.[Online]Retrieved from< https://www.sciencedirect.com/science/article/pii/S0928765516000269> Accessed on 24.02.2019

    Colen, L., Melo, P. C., Abdul-Salam, Y., Roberts, D., Mary, S., & Paloma, S. G. Y. (2018). Income elasticities for food, calories and nutrients across Africa: A meta-analysis. Food Policy, 77, 116-132..[Online]Retrieved from< https://www.sciencedirect.com/science/article/pii/S0306919218302318> Accessed on 25.02.2019

    Kerr, S. (2018). General equilibrium theory, but better.[Online]Retrieved from< https://www.researchgate.net/profile/Steven_Kerr6/publication/326552355_General_Equilibrium_Theory_But_Better/links/5c38ecf6458515a4c71e43c7/General-Equilibrium-Theory-But-Better.pdf> Accessed on 23.02.2019

    Shishkin, D., & Olifer, A. (2017). Point Elasticity Versus Arc Elasticity On Different Approaches to Teaching Elasticity in Principles Courses. Journal of Economics and Economic Education Research.[Online]Retrieved from< https://www.abacademies.org/articles/point-elasticity-versus-arc-elasticity-on-different-approaches-to-teaching-elasticity-in-principles-courses-6759.html>Accessed on 23.02.2019

    Websites

    economicswebinstitute.org (2019) Elasticity Retrieved fromhttp://www.economicswebinstitute.org/glossary/elasticity.html on 23/02/2019

    economicshelp.org (2019) Income Elasticity of Demand (YED) Retrieved fromhttps://www.economicshelp.org/microessays/equilibrium/income-elasticity-demand/ on 23/02/2019

    econlib.org (2019) Supply and Demand, Markets and Prices Retrieved fromhttps://www.econlib.org/library/Topics/College/supplyanddemand.html on 23/02/2019