Showing posts with label market systems. Show all posts
Showing posts with label market systems. Show all posts
Sir Shannon Scott Williams
Microeconomics
Unit 2: Individual Project
Microeconomics and Market Systems
American InterContential University, Online
January 15th, 2011
Abstract:
In every economy, prices tend to change due to the scarcity of resources. A season changes from autumn to winter, and consumers are likely to have less demand for autumn clothing and increased demand for winter clothing. This example is just one factor for the price elasticity of demand. To prepare for changing prices, economists use this tool to understand how it will affect gains, or losses, on revenue. For certain products, if the price increases too much, consumers may lose interest and consider another product. Other products may not have a change at all due to the great demand. This paper will give a scenario on the change in price and demand, and how to understand the calculations to what equals the price elasticity of demand. Once understood, readers will be able to determine the elasticity of the product.
In the given scenario, you own a business painting a developmental neighborhood. There are several houses to be painted and you have a high demand for paint. The current rate per gallon for paint is $3.00 a gallon in which you normally purchase 35 gallons. Over a period of time, your painting business does great, and then price increases to $3.50 per gallon. Due to that change you are now purchasing 20 gallons of paint. To understand the elasticity of this product, you will be shown how to calculate the price elasticity of demand, change in price percentage, and change in quantity demanded, (Krugan, Wells, 2009, p. 144-145).
Equation for price elasticity of demand equals:
(Percentage change in quantity demanded / Percentage change in price)
In order to calculate price elasticity of demand we must first determine percentage change in quantity demanded and also percentage change in price.
Percentage (%) change in quantity demanded equals:
[(New quantity – Old quantity) / Old quantity] x 100 = % Change in quantity demanded
To calculate your percentage change in quantity demand, take the new quantity demanded, 20 gallons of paint, minus the old quantity demanded, 35 gallons of paint, and then divided that by the old quantity demanded, 35 gallons of paint, and finally multiply by 100.
[(20 – 35) / 35] x 100 = (-3/7) x 100 = -0.42 x 100 = |-42%| = 42%
The result is a negative percentage due to the demand in paint decreased, but report the percentage as an absolute value.
Next calculate the percentage change in price.
Percentage (%) change in price equals:
[(New price – Old price) / Old price] x 100 = % Change in price
To calculate our percentage change in price, take the new price, $3.50 per gallon of paint, minus the old price, $3 per gallon of paint, and then divided that by the old price, $3 per gallon of paint, finally multiply by 100.
[($3.50 - $3) / $3] x 100 = (1/6) x 100 = 0.166 x 100 = 16 %
Input those percentage changes to the price elasticity of demand, (percentage change in quantity demanded / percentage change in price).
Price elasticity of demand equals:
42% Quantity demanded change / 16% Price change = 2.62
As you can see from the calculations for price elasticity of demand, 2.62, this product would be considered elastic, when the price elasticity of demand is greater than one, (Krugan, Wells, 2009, p. 149). It is logical that you would buy less paint due to the price increase. This price increase affects your business expenses. Suppose you accepted the price change at $3.50, and bought 30 gallons of paint, you would almost have the same amount of paint, short 5 gallons. However if the price per gallon decreased the next month to $2.50, you could have saved money from your expenses if you instead bought 20 gallons of paint. Clearly, when prices change, consumers should be cautious because the price could change again.
References:
Krugan, Wells. (2009). Economics (2nd Ed.).
Worth Publishers. AIU Online Version
Sir Shannon Scott Williams
January 10th, 2010
ECON220
Unit 2: Discussion Board
Microeconomics and Market Systems
The winter seasons’ temperature for south eastern United States changes more than today’s gasoline prices. One week it could be a steady 32 degrees Fahrenheit and the next week temperatures’ could rise to 45 degrees. With the new job I have, I sometimes have to work outside. Now, this week, the coldest so far for this season, I needed a winter jacket from the local hardware store.
At the time of shopping I noticed several different types of jackets: heavy duty ($150), light duty ($25), stylish ($125), and all-purpose ($50). There were plenty of options to choose from, and since this was a work-jacket, I didn’t need anything too fancy or expensive. Due to the upcoming cold predictions, I know that I absolutely needed a jacket to prepare for, so even if the sales attendants changed the prices on scene, I would still make a purchase. The jacket I chose was the all-purpose ($50).
Changing the prices of a product can affect revenues earnings. To determine this, economist use the price elasticity of demand, which measures the responsiveness of the quantity demanded to changes in prices (Krugan, Wells, 2009, p. 144). The elasticity is based on the availability of substitutes, the specific nature of the good, how much income is spent on the good, and the amount of time consumers have to buy the good. They classify the responsiveness to elastic if the changes in quantity demanded are greater than the changes in prices. Inelastic if changes in quantity demanded are less than the changes in prices. Unitary elastic if changes in quantity demanded equals the changes in prices, (QuickMBA.com, 2009).
Based on those factors, my jacket would be inelastic due to my spending wasn’t very much, the product is a necessity, there were many jackets to choose from, and I had all season long to purchase the jacket. During this current economy, demand wouldn’t change much because of the cold weather conditions and consumers are likely to purchase the good even if prices are changed. In addition, it is logical for businesses to change prices on products when there is a change in demand (eg. winter clothes, spring clothes).
References:
Krugan, Wells. (2009). Economics (2nd Ed.).
Worth Publishers. AIU Online Version
Price elasticity of demand. (n.d.). Retrieved August 26, 2009, from QuickMBA Web site: http://www.quickmba.com/econ/micro/elas/ped.shtml
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