1. Explain the meaning of elasticity? What are the different types of elasticiti
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Question
1. Explain the meaning of elasticity? What are the different types of elasticities? Of what use are these elasticities to business ( in other words to Total Revenue) ?
2. A firm supplied 3000 pens at the rate of AED 10 per pen. Next month, due to a rise in the price to AED 22 per pen, the supply of the firm increased to 5000 pens. Using the midpoint method find the price elasticity of supply of pens.
3. The government of Dubai had been concerned about the recent explosion in apartment rental rates for low income families. To combat this problem, a proposal has been made to institute rent control that would place $850 per month ceiling on apartment rental rates. Apartment supply and demand in the market are expressed in the following equations:
Qs = - 400 + 2P Market Supply
Qd= 5,600 – 4P Market Demand
Where Q is the number of apartments and P is the rental rate
A. Calculate the equilibrium rental rate and the equilibrium apartments rented
B. Determine the quantity demanded, quantity supplied, and shortage with a $ 850 per month ceiling price on apartment rental rates
C. Determine the amount of consumer and producer surplus with rent control
Explanation / Answer
1. Elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price will cause large changes in quantity consumed. If a curve is less elastic, then it will take large changes in price to effect a change in quantity consumed. There are different types of elasticties such as :
Different types of Elasticity of Demand:
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Advertisement Elasticity of Demand
1. Price Elasticity of Demand:
We will discuss how sensitive the change in demand is to the change in price. The measurement of this sensitivity in terms of percentage is called price Elasticity of Demand. According to Marshall, Price Elasticity of Demand is the degree of responsiveness of demand to the change in price of that commodity.
Types of Price Elasticity of Demands:
a) Perfectly Elastic
b) Perfectly Inelastic
c) Relatively Elastic
d) Relatively Inelastic
e) Unit Elasticity
Factors influencing Price Elasticity of Demand:
a) Nature of Commodity
b) Availability of Substitutes
c) Number of Uses
d) Durability of commodity
e) Consumer’s income
Practical significance of Price Elasticity of Demand:
a) Importance to the business
b) Important to Government
2. Income elasticity of demand:
In economics, the income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income. For example, if, in response to a 10% increase in income, the quantity of a good demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.
3. Cross elasticity of demand:
In economics, the cross elasticity of demand and cross price elasticity of demand measures the responsiveness of the quantity demand of a good to a change in the price of another good.
It is measured as the percentage change in quantity demanded for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient demanded decreased by 20%, the cross elasticity of demand would be -20%/10% = -2.
4. Advertisement Elasticity of Demand:
The degree of responsiveness of quantity demanded to the change in the advertisement expense of expenditure.
Ea= Change in quantity demanded x original advertisement expenses
Change in advertisement expenses original quantity demanded
Important factors influencing Advertisement:
1. Promotional elasticity of demand will be affected, depending on whether it is a new product or the product with a growing market.
2. The amount a competitor reacts to the firm’s advertisement.
3. The time interval between the advertisement expensed or expenditure and the unresponsiveness of the sales.
4. The influence of non-advertisement determinants of demands such as trends, price, income etc.
Uses of Advertisement Elasticity of Demands:
1. It helps the manager to decide the advertisement expense. If the advertisement is more than one, which means incremental revenue exceeds incremental expenses, then increased expenditure on advertisement can be justified.
2. The fire should observe the saturation point, where advertisement pays nothing or does not help in increasing sales revenue.
Source:http://aboutcareerchoices.blogspot.com/2008/01/explain-different-types-of-elasticity.html
2. By formula, Midpoint
elasticity=(B2 - B1)/(A2 - A1)x(A2 + A1)(B2 + B1)
Here, Let A= no. of pens
Therefore A1= 3,000 A2= 5,000
Let B= AED
Therefore,
B1= 10, B2= 22
Price Elasticty of supply = (22-10)/(5000-3000) * ( 5000+3000) /(22+10) = (12/2000) * (8000/32) = 1.5
3. At Equlibrium, quantity demanded equals to quantity supplied.
Hence, if Qs= Qd
Therefore, -400 +2P = 5600 -4P
=> 6000= 6P
=> P= 1000
A. Hence, equilibrium rental rate is $1000. Equilibrium apartments rented would be equal to Qs i.e. 5600 -4 P= 1600
B. At , $850 Qs= -400 +850*2=1300
Qd = 5600 - 4*850 = 2200
Hence shortage would be Qd -Qs = 2200 -1300 = 900
C. Consumer Surplus = 1/2 * Equilibrium quantity * (price at which EQd is zero - Equilibrium Price )
= 1/2 * 1600 * (5600/4- 1000) = (1600* 400 ) / 2 = 640000 /2 = 320000
Producer Surplus= 1/2 * Equlibrium quantity* Equlibrium Price = 1/2 *1600* 1000 = 800000
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