Question:

QUESTION 1

Ceteris paribus, assume a global shortage of petrol has resulted in a doubling of petrol prices. Use graphical demand and supply analysis to support your explanation of the impact on equilibrium price and quantity in the market for:

1. Low fuel efficient petrol cars.
2. Cars that use liquid gas (a substitute for petrol), where the price has not increased.

                                                                                                                        2 + 2 = 4 Marks

NOTE: In your answers explain the market equilibrium adjustment process

QUESTION 2

Use graphical demand and supply analysis to support your explanation of the effect the following events will have on the market for beef. (Assume ceteris paribus for each of the event).

1. A sharp fall in average wages, assuming beef is a normal good.
2. Farmers have access to high quality cattle feed (food for the cows), which has reduced the time it takes to get cattle ready for the market.
3. Governments in beef producing countries have not only ordered the mass slaughter of cows due to the spread of mad cow disease but they have also warned consumers about the dangers of consuming beef. (HINT: Explain all possible impact on price and quantity) 2 + 2 + 4 = 8 Marks

QUESTION 3

Ceteris paribus, assume the increase in new commercial apartments has at the same time been accompanied by a decrease in the demand for such apartments.  Use graphical demand and supply analysis to support your explanation of the impact on equilibrium price and quantity of the market for new commercial apartments.                                  4 Marks

(HIN: Explain all possible impact on price and quantity)                                           

QUESTION 4

3. If the price of a good increase from $3.25 to $4.00, leading to a fall in quantity demanded from 25 to 18 units, what is the price elasticity of demand for the good at this price range?

1. Explain why it is important for the business owner to understand the meaning of the elasticity value.                                                                                     2 + 2 = 4 Marks

QUESTION 5

The CEO of HAPPY enterprise has decided to change its business strategy from a sales maximising strategy to a profit maximising strategy. Use graphs to support your explanation of the two methods a company can use to decide on how much it has to produce to ensure it achieves a profit maximising output level.                                                                        5 Marks

Jesse Singh (March 2017).

Answer:

1.

Figure 1: Global Shortage of Petrol leading to Twice its Prices

Part a)

Figure 2: Low Efficiency of Petrol Cars

Petrol and fuel efficient cars are complementary yet paired goods such that increase in price of petrol will lead to decrease in demand for cars. This is because a car is not complete if it does not has fuel and vice versa. This highlights the negative cross elasticity of demand.

Part b)

Figure 3: Cars using Liquid gas other than Petrol

Petrol and liquid gas cars are substitute yet replaceable goods such that increase in price of petrol will lead to increase in demand for liquid gas cars. This is because a liquid gas can be used instead of petrol and vice versa. This highlights the positive cross elasticity of demand.

2

Part a)

Figure 4: Fall in average wages for Normal Good (Beef)

Normal good have a direct relationship with income (wages) such that increase in income will lead to more consumption of normal good (beef) and vice versa. In this scenario, the beef’s market is affected by decrease in averages leading to less demand of beef in the market.

Part b)

Figure 5: Demand and Supply Analysis on high quality cattle feed

The demand and supply can be explained as the farmers get high quality feed, cattle gets ready for the market that the supply over the time of beef has increased in the market. As a result, this further shifts the demand to right hand side by increasing the demand to meet the supply to bringing it to new equilibrium position E2 from E1. On the other hand, the outcome is favourable for beef takes as demand increases and price of beef increases in the market.

Part c)

Figure 6: Demand and Supply Analysis based on Price Flooring

The mass slaughter of cows due to mad cow disease has resulted in maximum prices as the government has posted a price floor price in which there is excess supply in the market. This has been done because consuming beef can be dangerous for the customers. As a result, the demand has deceased in the market for beef irrespective of excessive supply.

3

Figure 7: Demand and Supply Analysis for the New Apartments

In the above figure, with increase in new commercial apartments there has been a decrease in demand for the same. This can be further illustrated by with increased supply and decreased demand such as when the supply increases, the number of new commercial apartments were at Q1 but when the demand decreased the new commercial apartments were at Q2. This states that there had been variation in the price as the price has decreased from P1 to P2 leading to response gathered by the customers on the new commercial apartments.

4

Part a)

Price Elasticity of Demand

η  =  X  = [(18-25)/(4-3.25)] X 3.25/25 = (7/0.75)* 0.13 = -9.33 X 0.13 = -1.2133

The demand curve is inelastic.

Part b)

It is important for the business owners to understand the importance of elasticity because price relates to a product such that the sensitivity of products is in correspondence to their elasticity. For example an elastic product is said to be more sensitive. Moreover, while knowing the products elasticity level, business owner can decide their price to attain their targets of revenue. In addition, it also helps in setting targeting segments as well as marketing strategies.

On the other hand, if a business owner wishes to decrease the price of a product for further quantity and if the product does not respond to changes then the demand will not increase and in return the organization’s goals and objectives will not be achieved. This will further result in change in strategies and promotional events for the product.

5

The CEO wants to shift its strategy from sales maximization to profit maximization. As a result, there are two methods that help in analyzing the profit maximization strategy – one is Total Revenue and Total Cost Approach (Total Profit Approach) and other is Marginal Revenue and Marginal Cost Approach.

The two approached can be explained such as in TR and TC approach, the HAPPY busiess will continue its production till a time when revenue of the firm is increasing while in long run when cost would be minimum and here, the profit would be maximum. However, TR-TC will be a point where the business can earn maximum profit.

On the other hand, MR and MC Approach, this can be exaplained when each unit derived from total cost and revenue is derived where they would be equal, will give an equilibrium position and Marginal revenue (MR) cuts MC from below creating an impact where profit would be maximum as cost would be minimum.