1. What is a market?
A MARKET IS A GROUP OF BUYERS AND SELLERS OF A PARTICULAR GOOD OR SERVICE--- BUYERS AS A GROUP DETERMINE DEMAND FOR THE PRODUCT OR SERVICE AND THE SELLERS AS A GROUP DETERMINE THE SUPPLY OF THE PRODUCT OR SERVICE
2. What are the characteristics of a perfectly competitive market? Explain. A COMPETITIVE MARKET IS A MARKET IN WHICH THERE ARE MANY BUYERS AND MANY SELLERS. EACH BUYER AND SELLER HAS A NEGLIGIBLE IMPACT ON THE MARKET PRICE AND THERE IS FULL INFORMATION AMONGST BUYERS AND SELLERS.
3. Explain what is meant by a) quantity demanded; b) a demand schedule; and c) the law of demand. THE QUANTITY DEMANDED IS THE AMOUNT OF A GOOD THAT BUYERS ARE WILLING AND ABLE TO PURCHASE.
THE DEMAND SCHEDULE IS A TABLE OR LISTING THAT SHOWS THE RELATIONSHIP BETWEEN THE PRICE OF A GOOD OR SERVICE AND THE QUANTITY OF THE GOOD OR SERVICE DEMANDED.
THE LAW OF DEMAND IS A CLAIM THAT ,OTHER THINGS EQUAL, THE
QUANTITY DEMAND OF A GOOD OR SERVICE FALLS WHEN THE PRICE OF THE GOOD OR SERVICE RISES.
4. Graph the demand curve given the data from the demand schedule for slices of cherry pie at different prices in the table below.
Price of a Cherry Pie Slice (in U.S dollars) $ 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Number of Cherry Pie Slices Demanded 8 7 6 5 4 3 2 1 0
Price
$2
$1
Demand curve
QUANTITY 4 8
5. Define or identify the economic factors that shift the demand curve. CHANGES IN INCOME, CHANGES IN THE PRICES OF SUBSTITUTE AND COMPLEMENTARYGOODS, TASTES AND PREFERENCES, CHANGES IN EXPECTATIONS, AND CHANGES IN THE NUMBER OF BUYERS,.
6. Define what is meant by the “Law of Supply”.
THE LAW OF SUPPLY CLAIMS THAT, OTHER THINGS BEING EQUAL, THE QUANTITY SUPPLIED OF A GOOD OR SERVICE INCREASES WHEN THE PRICE OF THE GOOD OR SERVICE INCREASES.
7. Look at the figure below and then indicate what factors, or variables, would cause the supply curve for Pizza to shift back from supply curve S1 to supply curve S2.
INCREASES IN THE COSTS (PRICES) OF INPUTS SUCH AS LABOR, CAPTITAL, MATERIALS, ENERGY WILL SHIFT THE SUPPLY CURVE FROM S1 TO S2. SIMILARLY CHANGES IN TECHNOLOGY THAT INCREASE THE COST OF PRODUCTION WILL SHIFT THE SUPPLY CURVE BACK IN ADDITION OF THE DAMPENING OF EXPECTATIONS ON HOW MUCH CAN BE SOLD. IFTHE NUMBER OF SELLERS (PRODUCERS) DECREASES AND THEIR PRODUCTION DECREASES, THEN SUPPLY WILL SHIFT BACK AS WELL.
8. The supply of canvas covers from the Cheung Company to the canvas market is 300 canvases if the price per canvas is RNB2,000. The supply of canvases from the Liu Company is 314 canvases if the price per canvas is RNB2,000. What is the market supply of canvases at a price of RNB2,000?
MARKET SUPPLY OF CANVASES AT ANY GIVEN PRICE IS THE ADDITION OF THE SUPPLY OF EACH PRODUCER AT THAT GIVEN PRICE, WHICH IN THIS CASE WOULD BE 614 CANVASES IF THERE ARE ONLY THE TWO SUPPLIERS IN THE MARKET.
9. The demand function for a good, Q, is given by QD = 12 – P, while the
supply function for Q is given by QS = 4 + 3P, where P = price. Solve for the equilibrium quantity, Q, and price, P, in the market.
SET QD = QS, OR 12 – P = 4 + 3P, OR 4P = 8, OR P = 8/4 = 2, SO P = 2
SUBSTITUTE P = 2 INTO QD = 12 – P, OR Q = 12 – 2 = 10, SO Q = 10
10. Now suppose that the demand for good Q shifts out (same as shifting upwards on the supply curve) and the demand curve under these
conditions now becomes QD = 14 – P. In addition, because of a shortage in inputs used to produce good Q, the supply of Q shifts back and the supply function becomes QS = 2 + 3P. Now solve for the new equilibrium price, P, and quantity, Q, in the market.
AGAIN SET QD = QS UNDER THE NEW SUPPLY AND DEMAND CONDITIONS: 14 –P = 2 + 3P, OR 4P = 12, AND P = 3
SUBSTITUTE P = 3 INTO Q = 14 – P = 14 – 3 = 11, SO PRICE = 3 AND
QUANTITY = 11 BECAUSE OF THESE SHIFTS IN DEMAND AND SUPPLY.
11. Define the economic meaning of the term, “Price Elasticity of Demand” in words and also in terms of percentage changes. )
THE PRICE ELASTICITY OF DEMAND IS A MEASURE OF HOW MUCH QUANTITY DEMANDED OF A GOOD OR SERVICE RESPONDS TO A
CHANGE IN PRICE OF THE GOOD OR SERVICE, AND IS COMPUTED AS THE PERCENTAGE IN QUANTITY DEMANDED DIVIDED BY THE
PERCENTAGE CHANGE IN THE PRICE OF THE GOOD OR SERVICE.
12. Derive the price elasticity of demand using the midpoint method if the quantity purchased of a good is 60 units at price $HK8,000 and changes to 70 units purchased at a price of $HK6,000.
THE MIDPOINT METHOD OF COMPUTING THE PRICE ELASTICITY OF DEMAND = ((Q2 – Q1)/ (Q2 + Q1)/2) / ((P2 – P1)/(P2 + P1)/2)
((70 – 60) / (70 + 60)/2 ) / ((6000 – 8000)/ (6000 + 8000)/2) = -0.53846
13. a) The quantity of Women’s purses (in some locations women call these handbags) purchased decreases 67 % as price is increased by 22%. What is the price elasticity of demand for women’s purses?
IN THIS CASE, PRICE ELASTICITY OF DEMAND = - 76 PERCENT / 22 PERCENT = - 3. 45455
b) Do women’s purses have an elastic demand elasticity or an inelastic demand elasticity from your answer derived in part a) above? Explain.
THE ABSOLUTE VALUE OF THE ELASTIITY HERE IS 3.45455 > 1, SO THE ELASTICITY OF WOMENS PURSES IS ELASTIC MEANING THAT AS PRICE DECREASES, THE QUANTITY DEMANDED INCREASES MORE THAN THE PERCENTAGE DECREASE IN PRICE. OR, SAID ANOTHER WAY, AS PRICE INCREASES, THE QUANTITY DEMANDED DECREASES GREATER THANTHE PECENTAGE PRICE INCREASE.
14. You are the manager of a clothing store and you have information that the price elasticity of demand on men’s shirts is -1.568. What would you do to increase shirt revenues? (Choose from the choices below and explain your choice)
a) Increase price?
b) Initiate a sale from time to time by decreasing prices of men’s shirts? c) Only sell men’s cotton pants?
THE PRICE ELASTICITY OF DEMAND HERE SUGGESTS THAT MEN’S SHIRTS HAVE ELASTIC DEMAND. SO A 10 PERCENTAGE DECREASE IN THE PRICE OF MEN’S SHIRTS INDUCES A GREATER THAN 10
PERCENT INCREASE IN QUANTITY DEMANDED. SO THE STRATEGY WOULD BE TO DECREASE PRICES BY HAVING A SALE FROM TIME TO TIME IN ORDER TO INCREASE REVENUES ON THE SALE OF MEN’S SHIRTS, SINCE QUANTITY DEMANDED INCREASES GREATER THAN PRICE DECLINE, THIS INCREASING REVENUE.
15. The income elasticity of demand for watches in Hong Kong is 0.785. What happens to the demand for watches as incomes in Hong Kong increase? Explain.
ONE SUCH SCENARIO WOULD BE THAT AS INCOMES INCREASE SAY BY 10 PERCENT, THEN THE QUANTITY OF WATCHES DEMANDED INCREASES BY 7.85 PERCENT. SO AS INCOMES INCREASE, THE
DEMAND FOR WATCHES INCREASES. SUCH AN INCREASE IN INCOME CREATES AN OUTWARD SHIFT IN THE DEMAND FOR WATCHES.
16. The cross-price elasticity of demand for oranges relative to the price of pineapple is 0.286. Are oranges and pineapples complements or substitutes in consumption? Explain your answer.
SINCE THE CROSS-PRICE ELASTICITY OF DEMAND IS POSITIVE, AN INCREASE IN THE PRICE OF PINEAPPLE INCREASES THE DEMAND FOR ORANGES, THAT IS THE DEMAND FOR ORANGES EXPERIENCES A POSITIVE (OUTWARD) SHIFT IN DEMAND. ORANGES AND PINEAPPLE ARE SUBSTITUTE GOODS ACCORDING TO THE CROSS-PRICE ELASTICITY.
17. Suppose the price of milk in the United States increases from $2.85 per
gallon to $3.15 per gallon and the quantity supplied increases from 9,000 to 11,000 gallons per month. Derive the price elasticity of milk supply in the United States.
USING THE MID-POINT METHOD OF CALCULATING THE SUPPLY ELASCTITY WE OBTAIN,
((11000 -9000)/(11000+9000)/2)/ ((3.15 – 2.85)/(3.15 + 2.85)/2) = 1.997 AS THE PRICE ELASTICITY OF SUPPLY OF MILK.
18. Both the demand for and supply of rice in Thailand are inelastic, but a new hybrid rice is developed that increases the yield of rice per hectare in Thailand.
a) Is this good news for Thai agriculture? Explain.
YES, THIS IS GOOD NEWS FOR THAI AGRICULTURE, SINCE NOW MORE RICE CAN BE PRODUCED AND PRODUCED MORE EFFICIENTLY. THE
SUPPLY CURVE OR FUNCTION FOR RICE SHIFTS OUTWARD. MORE RICE CAN NOW BE PRODUCED PER UNIT OF LAND IN THAILAND.
b) Is this good revenue news for individual Thai rice farmers? Explain
THE SUPPLY CURVE FOR RICE SHIFTS OUTWARD AND MORE RICE IS PRODUCED FROM THAI AGRICULTURE. IF THE DEMAND FOR RICE DOES NOT CHANGE, THEN THE PRICE FOR RICE IN THAILAND WILL FALL AND DEPENDING ON THE ELASTICITY OF DEMAND FOR RICE IN THAILAND, REVENUE TO THAI RICE FARMERS COULD DECREASE SINCE THEY ARE PRODUCING MORE RICE. IF THE DEMAND FOR RICE IS INELASTIC, THEN PRICE DECLINES ARE GREATER THAN INCREASES IN RICE CONSUMPTION AND REVENUES TO THE FARMERS DECLINE.
19. Explain the difference in prices changes in the short run relative to the long run as a result in changes in demand and supply in the short run relative to the same changes over the long run.
In the long run, both the price elasticities of supply and demand become less inelastic or more elastic and therefore more responsive to price
changes relative to short run conditions of demand and supply. For any given shift of supply on a given demand, quantity increases or decreases are greater than price increases or decreases in the long run setting. In the long run there are more substitutes for any given product or service
making demand less inelastic or more elastic. On the supply side, smaller increases in price bring about greater increases in quantity supplied relative to the short run conditions of supply.
20. Explain the factors or influences upon which the price elasticity of supply depends.
THE ELASTICITY OF SUPPLY DEPENDS ON THE FLEXIBILITY OF
SELLERS TO CHANGE THE AMOUNT OF THE GOOD OR SERVICE THEY PRODUCE OR OFFER, ANDTHE TIME PERIOD BEING CONSIDERED, SUCH AS BEING MORE ELASTIC IN THE LONG RUN RELATIVE TO THE SHORT RUN.
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