Answer to Question #198959 in Microeconomics for Tarun

Question

ASSIGNMENT 1

 

The following table presents the demand and supply of Orange in the market. By using these data, answer the following questions.

Price (Rs)

week

Demanded(Millions)

Supplied(Millions)

2.00

1

100

30

2.20

2

90

40

2.40

3

80

50

2.60

4

70

60

2.80

5

60

70

3.00

6

50

80

a) Draw the demand and supply curves for the above market. If price of the commodity increases from 3 to 5 and elasticity is 2 each for demand and supply, calculate quantity demanded and supply of the commodity? Elaborate the term of elasticity with diagram. (5 marks)

b) Calculate the Price Elasticity of Demand (PED) and supply (PES) for the data and draw diagrams for respective PED and PES in the market. (5 marks)

c) If price is increased from 5 to 7, how quantity demanded and supply will react using simple linear programming model forecast and answer this question. (5 marks)

Answer 1

(a)Following below is the demand curve as per the schedule for the market :

Following below is the supply curve as per the schedule for the market :

Price elasticity = % change in quantity / % change in price

After observing demand and supply graphs, we can say that price elasticity for demand is negative and for supply is positive.

Ed (Elasticity for demand) = -2

% change in price$=\frac{5−3}{3}×100 = \frac{2}{3}×100 = 66.67\%$

% change in quantity$= -2×66.67\% = -133.34\%$

$-133.34\%×50 = -66.5$

As the quantity demanded cannot be negative, thus the demand at a price of 5 is zero.

Following below is the graph depicting the same:

Es (Elasticity of supply) = 2

% change in price = 66.67%

% change in quantity$= 2×66.67\%= 133.34\%$

$133.34\%×80 = 106.67 units$

Thus, the quantity supplied at a price of 5 is 106.67 units.

(b)

Calculating PED 

When price increased from 2 to 3, quantity demanded fell from 100 to 50.

$Ed =\frac{ \frac{1}{2}×100}{\frac{−50}50×100}$

$=\frac{ 50\%}{ -50\%}$

$= -1$

Therefore, the price elasticity of demand is -1.

Calculating PES

When the price increased from 2 to 3, the quantity supplied increased from 30 to 80 units.

$Es =\frac{ \frac{1}{2}×100}{\frac{50}{30}×100}$

$= \frac{50\%}{ 166.67\%}$

$= 0.3$

Therefore, the price elasticity of supply is 0.3

The graphs for price elasticity of demand and supply will be similar to respective demand and supply graphs.

We can observe that the 45°°

° slope on the demand curve is evident of the fact that elasticity of demand is -1

(c)

As the price of the orange increased from 5 to 7 the demand and the supply will follow the trend thus the demand for the orange will further fall whereas the supply will also rise in the same proportion.