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ECONOMICS2010ASSIGNMENT2–CHAPTERS4&5NAME____________________________________________1.Whatisamarket?AMARKETISAGROUPOFBUYERSANDSELLERSOFAPARTICULARGOODORSERVICE---BUYERSASAGROUPDETERMINEDEMANDFORTHEPRODUCTORSERVICEANDTHESELLERSASAGROUPDETERMINETHESUPPLYOFTHEPRODUCTORSERVICE2.Whatarethecharacteristicsofaperfectlycompetitivemarket?Explain.ACOMPETITIVEMARKETISAMARKETINWHICHTHEREAREMANYBUYERSANDMANYSELLERS.EACHBUYERANDSELLERHASANEGLIGIBLEIMPACTONTHEMARKETPRICEANDTHEREISFULLINFORMATIONAMONGSTBUYERSANDSELLERS.3.Explainwhatismeantbya)quantitydemanded;b)ademandschedule;andc)thelawofdemand.THEQUANTITYDEMANDEDISTHEAMOUNTOFAGOODTHATBUYERSAREWILLINGANDABLETOPURCHASE.THEDEMANDSCHEDULEISATABLEORLISTINGTHATSHOWSTHERELATIONSHIPBETWEENTHEPRICEOFAGOODORSERVICEANDTHEQUANTITYOFTHEGOODORSERVICEDEMANDED.THELAWOFDEMANDISACLAIMTHAT,OTHERTHINGSEQUAL,THEQUANTITYDEMANDOFAGOODORSERVICEFALLSWHENTHEPRICEOFTHEGOODORSERVICERISES.4.Graphthedemandcurvegiventhedatafromthedemandscheduleforslicesofcherrypieatdifferentpricesinthetablebelow.PriceofaCherryPieSlice(inU.Sdollars)NumberofCherryPieSlicesDemanded$0.0080.2570.5060.7551.0041.2531.5021.7512.000$1485.Defineoridentifytheeconomicfactorsthatshiftthedemandcurve.CHANGESININCOME,CHANGESINTHEPRICESOFSUBSTITUTEANDCOMPLEMENTARYGOODS,TASTESANDPREFERENCES,CHANGESINEXPECTATIONS,ANDCHANGESINTHENUMBEROFBUYERS,.Price$2eQUANTITY$2Demandcurve6.Definewhatismeantbythe“LawofSupply”.THELAWOFSUPPLYCLAIMSTHAT,OTHERTHINGSBEINGEQUAL,THEQUANTITYSUPPLIEDOFAGOODORSERVICEINCREASESWHENTHEPRICEOFTHEGOODORSERVICEINCREASES.7.Lookatthefigurebelowandthenindicatewhatfactors,orvariables,wouldcausethesupplycurveforPizzatoshiftbackfromsupplycurveS1tosupplycurveS2.INCREASESINTHECOSTS(PRICES)OFINPUTSSUCHASLABOR,CAPTITAL,MATERIALS,ENERGYWILLSHIFTTHESUPPLYCURVEFROMS1TOS2.SIMILARLYCHANGESINTECHNOLOGYTHATINCREASETHECOSTOFPRODUCTIONWILLSHIFTTHESUPPLYCURVEBACKINADDITIONOFTHEDAMPENINGOFEXPECTATIONSONHOWMUCHCANBESOLD.IFTHENUMBEROFSELLERS(PRODUCERS)DECREASESANDTHEIRPRODUCTIONDECREASES,THENSUPPLYWILLSHIFTBACKASWELL.8.ThesupplyofcanvascoversfromtheCheungCompanytothecanvasmarketis300canvasesifthepricepercanvasisRNB2,000.ThesupplyofcanvasesfromtheLiuCompanyis314canvasesifthepricepercanvasisRNB2,000.WhatisthemarketsupplyofcanvasesatapriceofRNB2,000?MARKETSUPPLYOFCANVASESATANYGIVENPRICEISTHEADDITIONOFTHESUPPLYOFEACHPRODUCERATTHATGIVENPRICE,WHICHINTHISCASEWOULDBE614CANVASESIFTHEREAREONLYTHETWOSUPPLIERSINTHEMARKET.9.Thedemandfunctionforagood,Q,isgivenbyQD=12–P,whilethesupplyfunctionforQisgivenbyQS=4+3P,whereP=price.Solvefortheequilibriumquantity,Q,andprice,P,inthemarket.SETQD=QS,OR12–P=4+3P,OR4P=8,ORP=8/4=2,SOP=2SUBSTITUTEP=2INTOQD=12–P,ORQ=12–2=10,SOQ=1010.NowsupposethatthedemandforgoodQshiftsout(sameasshiftingupwardsonthesupplycurve)andthedemandcurveundertheseconditionsnowbecomesQD=14–P.Inaddition,becauseofashortageininputsusedtoproducegoodQ,thesupplyofQshiftsbackandthesupplyfunctionbecomesQS=2+3P.Nowsolveforthenewequilibriumprice,P,andquantity,Q,inthemarket.AGAINSETQD=QSUNDERTHENEWSUPPLYANDDEMANDCONDITIONS:14–P=2+3P,OR4P=12,ANDP=3SUBSTITUTEP=3INTOQ=14–P=14–3=11,SOPRICE=3ANDQUANTITY=11BECAUSEOFTHESESHIFTSINDEMANDANDSUPPLY.11.Definetheeconomicmeaningoftheterm,“PriceElasticityofDemand”inwordsandalsointermsofpercentagechanges.)THEPRICEELASTICITYOFDEMANDISAMEASUREOFHOWMUCHQUANTITYDEMANDEDOFAGOODORSERVICERESPONDSTOACHANGEINPRICEOFTHEGOODORSERVICE,ANDISCOMPUTEDASTHEPERCENTAGEINQUANTITYDEMANDEDDIVIDEDBYTHEPERCENTAGECHANGEINTHEPRICEOFTHEGOODORSERVICE.12.Derivethepriceelasticityofdemandusingthemidpointmethodifthequantitypurchasedofagoodis60unitsatprice$HK8,000andchangesto70unitspurchasedatapriceof$HK6,000.THEMIDPOINTMETHODOFCOMPUTINGTHEPRICEELASTICITYOFDEMAND=((Q2–Q1)/(Q2+Q1)/2)/((P2–P1)/(P2+P1)/2)((70–60)/(70+60)/2)/((6000–8000)/(6000+8000)/2)=-0.5384613.a)ThequantityofWomen’spurses(insomelocationswomencallthesehandbags)purchaseddecreases67%aspriceisincreasedby22%.Whatisthepriceelasticityofdemandforwomen’spurses?INTHISCASE,PRICEELASTICITYOFDEMAND=-76PERCENT/22PERCENT=-3.45455b)Dowomen’spurseshaveanelasticdemandelasticityoraninelasticdemandelasticityfromyouranswerderivedinparta)above?Explain.THEABSOLUTEVALUEOFTHEELASTIITYHEREIS3.454551,SOTHEELASTICITYOFWOMENSPURSESISELASTICMEANINGTHATASPRICEDECREASES,THEQUANTITYDEMANDEDINCREASESMORETHANTHEPERCENTAGEDECREASEINPRICE.OR,SAIDANOTHERWAY,ASPRICEINCREASES,THEQUANTITYDEMANDEDDECREASESGREATERTHANTHEPECENTAGEPRICEINCREASE.14.Youarethemanagerofaclothingstoreandyouhaveinformationthatthepriceelasticityofdemandonmen’sshirtsis-1.568.Whatwouldyoudotoincreaseshirtrevenues?(Choosefromthechoicesbelowandexplainyourchoice)a)Increaseprice?b)Initiateasalefromtimetotimebydecreasingpricesofmen’sshirts?c)Onlysellmen’scottonpants?THEPRICEELASTICITYOFDEMANDHERESUGGESTSTHATMEN’SSHIRTSHAVEELASTICDEMAND.SOA10PERCENTAGEDECREASEINTHEPRICEOFMEN’SSHIRTSINDUCESAGREATERTHAN10PERCENTINCREASEINQUANTITYDEMANDED.SOTHESTRATEGYWOULDBETODECREASEPRICESBYHAVINGASALEFROMTIMETOTIMEINORDERTOINCREASEREVENUESONTHESALEOFMEN’SSHIRTS,SINCEQUANTITYDEMANDED