Homework

Homework

1. Explain the difference between a change in quantity demanded

and a change in demand. 2...
1. Explain the difference between a change in quantity demanded and a change in demand.

2. Use the model of supply and demand to explain why ticket scalpers exist.

3. For each of the following goods, indicate whether you expect demand to be inelastic or elastic, and explain your reasoning.

opera

foreign travel

local telephone service

video rentals

eggs

4. Suppose the price elasticity of demand for a campus film series is 1.40. If the objective of the film society is to maximize its total revenue (price times the number of tickets sold), should it increase or decrease price? Why ?
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4/26/2009
Zoheb, Tutor
Category: Homework
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Experience: I currently teach students from middle school to mba students in different math.
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1. A change in the quantity demand is a shift of the point on the demand curve. A change in the demand is a shift of the entire demand curve to the left or the right. When the price of a good changes it causes consumers to change their behavior and thus effects only the quantity demand. For example, if a good becomes more expensive and prices go higher, than the quantity demand for that good is lower.

Here is an example, when DVD prices went from 5 to 15, the point shift on the x axis from 74 to 30.

A change in the demand (shift of the entire curve) is not effected by price. It is affected by the following factors.

1. Change in Income. (If people have more income than the entire curve shifts right because they can afford to demand more, and same holds true if income goes down)

2. Changes in tastes and preferences (if a good comes into fashion and people just like it more.. like the iphone, than the whole curve shifts, and is demanded more.. if the consumer tastes decrease and have less of an appetite for the good, than the entire curve will shift down and to the left)

3. The availability and cost of credit (if it is cheaper to get a loan.. less interest. than consumers will have more income.. which is back to 1, and it will shift the curve to the right, and vice versa)

4. Changes in the price of related goods (there is 2 rules for this

a. if a good is a substitute.. let's say hot dogs and hamburgers. Let's assume the demand curve we are talking about is hamburgers. If the price of hot dogs goes up, less people will demand hot dogs, will substitute for hamburgers, and thus this will shift our demand curve up. If the price of hot dogs goes down, people will substitute away from hamburgers, and buy more hot dogs, because it is cheaper, and this will shift our demand curve for hamburgers down and to the left.

b. Complements-A good that is a complement is one that you use with the primary good. For example fries with hamburgers and we are still assuming hamburgers is our primary good. If the price of fries goes down, more people will buy fries, and thus will also buy more hamburgers because that complements fries, and that will shift the demand curve up and to the right. . If the price of fries goes up, than less people will buy fries, and thus hamburger demand will go down, and shift it to the left.

5. Population size and composition. The bigger the population and demographics size for people who demand your product, the more demand that will be created, and thus shift the curve to the right.

6. And finally expectations. If I feel as a consumer that the price of a good will go down in the future, I'm going to wait, and that will cause the demand curve to shift down and to the left. If I feel the price of a good will be more expensive in the future, I will buy it now, and the demand curve will shift up and to the right. An example of this is cars and gasoline. If I feel the price of a prius is cheap right now, because gas is cheap, and when gas goes up in the future, so will the price of the Prius, I will buy it now, and it will cause the demand curve to shift up.

2. Number 2, I will need to create a more thorough example. If you liked how I explained #1 and #3, I will also do #2.

3. Elasticity is the percentage change in one variable as a response to a change in another variable. In this example, price elasticity of demand, is the percentage change in quantity demand as a response to a percentage change in price. Basically how responsive quantity demand is to changes in price.

So for example, if price goes up by one percent, how much does quantity demand go down. If it goes down by more than 1 percent than it is very responsive (or very elastic), if the quantity demand goes down by less than 1 percent than people still buy the product and not very responsive to price (inelastic). An example of this would be gasoline. Even though the price of gasoline goes up, the demand for it doesn't drop as much as the price increase. If the price of the product or good goes up by 1 percent, and the quantity demand drops equal to 1 percent than it is unitary elastic.

Remember that the relationship between price and quantity demand is negatively correlated. If one goes up, the other goes down and if one goes down, the other goes up. Price elasticity of demand works the same way.

So what effects elasticity?

So using these factors, let's look at the elasticity.

Opera- There are lots of substitutes to opera, like Broadway plays, and other classical interests. Opera can be pricey, so it is a higher percentage of income. It is also not a necessity, thus opera is elastic.

Foreign Travel- Foreign travel has substitutes, like domestic travel, and other forms of leisure. It can be very expensive, and is definitely not e necessity, thus it is elastic as well.

Local Telephone Service- There aren't many substitutes to local telephone service, maybe email, or using your cellphone, or voice over IP, but its still not the same as talking to someone on the phone. Having the ability to communicate locally is a need and the percentage of income that it takes to pay for local phone service is not that much. So this would inelastic.

Video Rentals- There are plenty of substitutes to video rentals such as watching it on TV, pay per view, going to a movie theater instead, etc. It is definitely not a need. Video rentals aren't that expensive, so its not a big percentage of my income so that would make it inelastic. However, given that 2 of the determinates make it elastic, video rentals would be elastic. If the price increases by 1 percent, I would see a drop in quantity demand by more than 1 percent, because you go elsewhere and its just not needed.

Eggs- There aren't that many true substitutes to eggs, except for maybe meat that gives you proteins. There is a need for eggs, its part of our pyramid diet, and has been in our culture for hundreds of years like bread. And eggs aren't that expensive compared to how much income an average person makes, so this would be inelastic.

4. If the price elasticity is 1.4 what that means is that for every one percent the price goes up, the quantity demand goes down 1.4 for the movie. The formula for revenue is p*q (price per good multiplied by quantity of the good) So basically the way to maximize this equation is to make sure that the percent increase in one of these variables is greater than the other. If we increase price that won't happen because if goes up 1 percent, q will go down by 1.4 which is greater and thus revenue is lower. However if we decrease the price for the film series by 1 percent the quantity demand (q) will go up 1.4

which is greater and thus revenue is higher. So the campus should decrease the price, and thus they will attract more than enough people to offset the lower price, and make higher revenue.

Customer reply replied 8 years ago

Excellent work...if you could complete number two in the same manner...we will be good to go.

Customer/p>

Basically the example I used above is from a hockey example. The reason they exist is because the primary market has distortions and doesn't reach its equilibrium point, for specific reasons. It could be that new information came about at the event, after the tickets were sold (for example Wayne Gretzky announced he retired, and these tickets have already been sold, and thus new information changes the demand side because since this is Wayne's last game, the demand curve increases because tastes and preferences have increased). It could also be artificially created because somebody buys all the tickets, and now has a monopoly where he can sell it at a different price. However, this person also takes the risk that he may not be able to sell it a higher price, for the investment he put in, of time and money. Thus, the secondary market is created with scalpers who are able to charge a different price, or resale price, because the equilibrium point wasn't reached in the primary market, due to lack of information or the supply and demand curves have shifted after the primary market was settled because of new information and thus a new equilibrium is needed (a great example of this, in the stock market.. after the firm initially comes out with a stock price, the company gets their money from selling shares ,and the primary market is settled.. however, as the life of the company progress, you get new information, and the environment changes, and thus the supply and demand for the shares of the company changes, creating a secondary market, where people buy and sell the company stock, because there has been a shift of the supply and demand curves.

Hope this helps.

oh by the way, the above examples and images were cited from the essential of economics book I had in college by Paul Krugman.

Thank you!

Zoheb, Tutor
Category: Homework
Satisfied Customers: 2
Experience: I currently teach students from middle school to mba students in different math.
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Customer reply replied 8 years ago

Yes I am. I studied quantitative economics at the University of California, San Diego.

It has one of the top ten economic departments in the country.

Customer reply replied 8 years ago
Great. I will be needing you over the next 9 weeks. Thanks...be on the lookout for me.
Would you like to ask this question?
Customer reply replied 8 years ago

I have already accepted and paid this. Could you please post it as accepted and paid.

thanks

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Category: Homework
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