Movement and Shift Along Demand and Supply Curve Essay

Movement and Shift Along Demand and Supply Curve Essay.

Introduction

The market is an amazing instrument, it enables people who have never met and who know nothing about each other to interact and do business. Supply & demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.

Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.

Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The connection between price and how much of a good or service is supplied to the market is known as the supply relationship.

In this report we will see analyze the factors that causes the demand and supply curve to shift and what causes movements along both these curves.

Both the supply curve and the demand curve can experience movements and shifts cause by price and other external factors that will be discussed below.

The Demand Curve

http://www.netmba.com/econ/

The above figure shows the demand relationship with the help of the demand curve. We can see that at point A when the price is highest at P1 quantity demanded is lowest at Q1. As price decreases from P1 to P2 and P3, the quantity demanded increases to Q2 and Q3 respectively as shown at the point B and C. The graph illustrates the demand relationship that explains that as P increases the demand at points (A, B and C) in the market decreases hence the Q decreases. This demonstrates a downward slope. We know that, the quantity demanded of a good usually is a strong function of its price. Demand is illustrated by the demand curve and the demand schedule. The term quantity demanded refers to a point on a demand curve. (O’Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall)

Movement along the demand curve:

A movement along a demand curve is defined as a change in the quantity demanded due to changes in the price of a good will result in a movement along the demand curve. For instance, a fall in the price of apples from P1 to P2 causes an increase in the quantity demanded from Q1 to Q2. http://www.bized.co.uk/virtual/vla/theories

In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa.

Difference between movement or shifts along the demand curve

Changes in demand for a commodity can be shown through the demand curve in two ways namely:
-Movement along the demand curve.
-Shifts of the demand curve.

The change in the demand of a commodity due to change in its price leads to moving the demand curve upward or downward depending upon the change in price. When the price rises, the demand falls. And when the price falls the demand for that commodity rises leading to movement in the demand curve. Shift in the demand curve is the result of the price remaining constant but the demand changing due to several other factors such as, change in fashion, income, and population, etc. (Krugman, Paul, and Wells, Robin. Microeconomics. Worth Publishers, New York. 2005.)

Shifts in the demand curve:

A shift of the demand curve is referred to as a change in demand due any factor other than price. A demand curve will shift if any of these occurs:
Change in the price of other goods (complements and substitutes); leading to increase / decrease of real income.
Change in the income level.
Change in consumers’ taste and preferences.
Change in expectations.

http://www.bized.co.uk/virtual/vla/theories

Each of these factors tends the demand curve to shift downwards to the left or upwards to the right. While downward shift signifies decrease in demand, an upward shift of the demand curve shows an increase in the demand. For example, if there is a positive news report about FMCG products, the quantity demanded at each price may increase, as demonstrated by the demand curve shifting to the right. There are many factors may influence the demand for a product, and changes in one or more of those factors may cause a shift in the demand curve. ?

http://www.netmba.com/econ/

An outward (rightward) shift in demand increases both equilibrium price and quantity.

As shown in the demand curve if any of these changes factors changes, the demand curve will shift to D2 from D1 and accordingly the price and quantity demanded will change. Movements along a demand curve is the result of increase or decrease of the price of the good, while the demand curve shifts when any demand determinant other than price changes.

Factors that causes the demand curve to shift

Various factors affect the quantity demanded by a consumer of a good or service. A number of factors may influence the demand for a product. The key determinants of demand are as follows: -( Parkin, Powell, Matthews (2008) Economics, Pearson Education Limited, 7th Edition)

Price of the good:

This is the most important determinant of demand. The relationship between price of the good and quantity demanded is generally inverse as we will see later while studying law of demand.

Price of related goods:

Substitutes:

If the price of a substitute goes down than the quantity demanded of the good also goes down and vice versa.

Complements:

If the price of gasoline goes up the quantity demanded of automobiles will go down. An increase in the price of a complement reduces demand. Thus the prices of complements have an inverse relationship with the demand of a good.

Income:

Higher the income of the consumer the more will be quantity demanded of the good. The only exception to this will be inferior goods whose demand decreases with an increase in income level.

Individual taste and preferences:

A preference for a particular good may affect the consumer’s choice and he / she may continue to demand the same even in rising prices scenario. Expectations about future prices & income: If the consumer expects prices to rise in future he / she may continue to demand higher quantities even in a rising price scenario and vice versa.

Supply

Supply is the quantity of a good or service sold or willingness to sell for consumption by the producer for a price at a given point of time.

Law of supply

The law of supply staes that the quantity of a good offered or willing to offer by the producer/owners for sale increase with the increase in the market price of the good and falls if the market price decreases, all other things remaining unchanged?An increase in price will increase the incentive to supply which means that supply curves will slope upwards from left to right. Supply curves can be curves or straight lines?Consider the supply of labour as shown in the figure below.

http://www.netmba.com/econ/

The above supply curve shows the hours per week at job by the labour on the X axis and hourly wages on the Y axis. As we can see that as the hourly wages increases the hours spent on job also increases. Thus the supply curve is a left to right upward sloping curve

Movement along and shifts in supply curve

Changes in the determinants of the supply cause movement along the supply curve or shifts in the supply curve. ?We will discuss these two phenomenons in detail as below: Movement along the supply curve

Movement along the supply curve happens due to change in the price of the good and resulting change in the quantity demanded at that price. ?For instance, an increase in the price of the good from P1 to P2 in the figure below results in an increase of quantity supplied of the good from Q1 to Q2. This movement from point A to point B on the supply curve S due to change in price of the good all other factors of supply remaining unchanged is called movement along the supply curve. http://faculty.winthrop.edu/stonebrakerr/book/demand_and_supply.htm

http://www.bized.co.uk/virtual/vla/theories
*

Shifts in the supply curve

Shift in the supply curve is also sometimes referred as a change in supply.
This happens due to changes in factors of supply other than that of price of the good?For example, if the price of a factor of a related good increases the supply curve shifts. Similarly changes in technology and government tools like tax and subsidy tends to shift supply curve.?

? http://www.bized.co.uk/virtual/vla/theories

The supply curve can shift to the right or left as shown in the figure below. A shift towards the right i.e. from S1 to S2 curve denotes an increase in supply of the good at all levels of prices. Similarly a shift in the supply curve from S1 to S3 denotes a decrease in supply of the good at all levels of prices?As seen in the figure above a rightward shift in the supply curve from S1 to S2 increases supply from Q1 to Q2 while the price of the good remains same at P1. Similarly a leftward shift from S1 to S3 decreases supply from Q1 to Q3 whilst the price remaining unchanged at P1?A shift in supply will occur if either of the following changes:

the (opportunity) cost of resources needed to produce the good
the technology available to produce the good.
Either factor could cause the supply curve to shift to the left (a decrease in supply) or to the right (an increase in supply). http://ocw.mit.edu/courses/economics/14-01-principles-of-microeconomics-fall-2007/lecture-notes/14_01_lec02.pdf Factors that causes the supply curve to shift

Quantity supplied of a good/ service is affected by various factors. Several key factors affecting supply are discussed as below: http://www.pitt.edu/~mgahagan/Definitions/SupplyandDemand.pdf

Price of the product:

Since the producer always aims for maximizing his returns/profit, so the quantity supplied changes with increase or decrease I the price of the good.

Technological changes:

Advanced technology can yield more quantity and at lesser costs. This may result in the producer to be willing to supply more quantity of the goods

Resource supplies and production costs:

Changes in production costs like wage costs; raw material cost and energy costs might impact the producers’ production and eventually the supply. An increase in such cost might result in lesser quantities produced and thus lesser quantities supplied and vice versa Tax or subsidy:

Since the producer aims to minimize costs and expand profit, an increase in tax will increase the total cost, thereby decreasing the supply. Similarly a subsidy might incentivize the producer to supply more of that goods in order to maximize his profits. Tax and subsidy are two important tools used by central government to control supplies of certain goods. For example an increase in tax can be used to reduce the supply of cigarettes, while and increase in subsidy can be used to increase the supply of fertilizers

Expectations of prices in future:

An expectation that the prices of goods will fall in future might lead to lessen the production by the producer and thereby decrease the supply and vice-versa.

Price of other goods:

A producer might have several options to produce. Since the money to invest is limited with the producer he would decide to produce the good that offers him the maximum profit. Thus if the producer is currently producing good A and the price of good B increases than he might switch to producing good B as this would result in better returns for him.

Number of producers in the market:

This is a very important factor or determinant of supply. If there are large number of producers or sellers in the market willing to sell goods than the supply of good will increase and vice versa

Conclusion

As shown above, the movement along the demand curve and the supply curve is directly related to any change in price. A rise in price will cause quantity demanded to fall but on the other hand quantity supplied will increase. The shift along the demand curve and the supply curve on the contrary does not depend on the price of the product only but on many other external factors that would cause the both curve to shift either to the left or to the right with the shift to the right being more profitable for the firm producing the product or offering the service.

References

Parkin, Powell, Matthews (2008) Economics, Pearson Education Limited, 7th Edition

O’Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall

Krugman, Paul, and Wells, Robin. Microeconomics. Worth Publishers, New York. 2005.

http://www.bized.co.uk/virtual/vla/theories

http://www.netmba.com/econ/

http://faculty.winthrop.edu/stonebrakerr/book/demand_and_supply.htm

http://ocw.mit.edu/courses/economics/14-01-principles-of-microeconomics-fall-2007/lecture-notes/14_01_lec02.pdf

You may also be interested in the following: the supply curve of antique reproductions is

Movement and Shift Along Demand and Supply Curve Essay

The basic economic problems Essay

The basic economic problems Essay.

1a) The basic economic problem is one of scarcity of productive resources . Explain how resources are allocated between competing uses in a market economy . (10)

Scarcity refers to a limited number of resources such as workers, machines, factories, raw materials .

A market economy also known as a free market is one where decisions are made through the market mechanism. The forces of demand and supply, without any government interference, determine how resources are allocated. What to produce is decided upon by the level of profitability for a particular product.

Buyers cast their spending votes in the market place.How production should be organized is equally determined by what is most profitable. Firms are encouraged through the market mechanism to adopt the most efficient methods of production. For whom production should take place, production is allocated to those who can afford to pay. Consumers with no money cannot afford to by anything.

There are mainly four factors of production . Land , Labour , Capital and Enterprise .

Demand is the quantity that consumers are willing to buy at a given price. For example, a consumer may be willing to purchase 30 bags of potato chips in the next year if the price is $1 per bag, and may be willing to purchase only 10 bags if the price is $2 per bag.The main determinants of the quantity one is willing to purchase will typically be the price of the good, one’s level of income, personal tastes, the price of substitute goods, and the price of complementary goods .

There are normal and inferior goods . Normal goods is when income rises the demand for the product will also rise . As income rises the demand curve for a normal good will shift to the right . An increase in income may cause a small shift to the right in the demand curve for salt but a larger increase in the demand for cinema tickets .

If a product is considered to be inferior , then the demand for the product will fall as income rises and the consumer starts to buy higher priced substitutes in place of the inferior good . Examples of inferior goods are cheap wine or own brand supermarket detergents . As income rises , the demand curve for the inferior good will shift to the left . When income gets to a certain level the consumer will be buying only the higher priced goods and the demand for the inferior good will become 0 . Thus the demand , curve will disappear.

If products are substitutes for one another , then a change in the price of one of the products will lead to a change in the demand for the other product . For example , if there is a fall in the price of a chicken in an economy then there will be an increase in the quantity demanded of chicken and a fall in the demand for beef . Which is a substitute.

Complements are products that are often purchased together , such as printer and ink cartridges . If products are complements to each other , then a change in the price of one of the products will lead to a change in the demand for the other product . For example if there is a fall in the price of Dvd players in an economy , then there will be an increase in the quantity demanded of Dvd players and an increase in the demand for Dvds , which are a complement . This will lead to a movement along the demand curve for Dvd players and a shift to the right of the demand curve for Dvds .

Supply is the quantity that producers are willing to sell at a given price. For example, the chip manufacturer may be willing to produce 1 million bags of chips if the price is $1 and substantially more if the market price is $2.

In general, demand and supplys theory claims that where goods are traded in a market at a price where consumers demand more goods than businesses are prepared to supply, this shortage will tend to increase the price of the goods. Those consumers that are prepared to pay more will bid up the market price.Conversely, prices will tend to fall when the quantity supplied exceeds the quantity demanded. This price-quantity adjustment mechanism causes the market to approach an equilibrium point, a point at which there is no longer any impetus to change. This theoretical point of stability is defined as the point where producers are prepared to sell exactly the same quantity of goods as the consumers want to buy.

You may also be interested in the following: basic economic problem essay, the basic economic problem of scarcity

The basic economic problems Essay

What Is the Right Supply Chain for Your Product Essay

What Is the Right Supply Chain for Your Product Essay.

The technology has improve glaringly the capacity of enterprises , make the supply chain every time more efficient thank to globalization we can contact rapidly but at the same time new markets grow and the competence with new ideas. Nevertheless having an excellent tool as communication the enterprise makes a mistake don’t choosing the appropriate supply chain for their products. The costs are so high due to the bad relationship between the company and the retailers, Dysfunctional industry practices, Overconfidence in promoting, Poor coordination between the chain links and Excess demand or shortage.

It’s important to predict the demand and the profit to choose the right supply chain. It must consider demand predictability, product life cycle, market standard response, product variety, and service. When products have a stable demand as milk , brain , basic products pattern and therefore are reasonably predictable, the planning of their supply is easy although the competition is intense and the profit is low.

On the other hand are unpredictable products often carry higher profit; these products are innovative, are new product developments and incorporate new technology as clothes , music, movies etc.

These have unpredictable demand, a greater risk of shortage or oversupply. The supply chain performs two functions: one physical and other market intermediary and the market mediation function must ensure that the variety of products that come to market match which consumers want to buy. The companies have a need to identify whether their products are functional or innovative.

The traditional continuous cost reductions companies have reached the point of reducing profitability within them, now turn toward better coordination with suppliers and customers with support of electronic communications networks. To the extent that increased information and resources, increase the capabilities of each of the components of the supply chain, allowing them to make better decisions and thus streamline the business. Conclusion A successful supply chain is one that manages to deliver to the end customer the right product in the right place at the right time, the required price and the lowest possible cost.

In the future, competition will not be business to business, but rather supply chain to supply chain is the famous phrase of academic business school of Harvard University, Michael Porter that’s why the importance to having an excellent supply chain to satisfy the client. To the extent that increased information and resources, will increase the capabilities of each of the components of the chain, allowing them to make better decisions and make more efficient the company. The most recurrent reason why there are problems in the supply chain is the incompatibility between the type of product and type of supply chain.

The objective is to optimize costs and increase sales by choosing appropriate strategies having as result a win-win negotiation both the company and the customer. Example: U. S. Nike Shop, which offers customers the option to design their own shoes. That is, the client has chosen a design according to the purpose for which you want to use (basketball, running, etc. ) And also gives you the option to customize the design with the choice of distinctive colors for each shoe. Nike has the ability to make shoes in a standardized (and massive, if desired), but personalized

What Is the Right Supply Chain for Your Product Essay

Market Demand Essay

Market Demand Essay.

The calculation above shows that Bonia Group practice elastic demand for the previous 10 years. This is mainly due to strong competition among competitors. Bonia Group, which target the mid-high price range market encounter a few international branding competitor like Calvin Klein, DKNY, Paris Hilton, Armani Exchange and Lacoste in the market and were highly competitive for years.

Bonia Group was advised to avoid price increase for the coming years as sales figures for the past 10 years show that Bonia Group were in elastic demand.

In order to increase yearly sales amount, the Group could actually remain or decrease price as in elasticity demand, sales growth is oppositely proportional to price. They are always encourage to remain or decrease the price, and at the same time remain the quality and material of goods to boost up the sales quickly and to show immediate results.

Besides that, the mid-high price range in Bonia Group show that their products are actually inferior goods. In order to overcome the coming economic crisis and recession, lower down the price range to normal goods is another way to avoid for profit losing.

Economists predict that beginning from this year, it would be another recession coming ahead. During recession, the average salary for population will decrease and unemployment increase. People will try to find out substitute for expensive goods. Thus, Bonia as an inferior goods brand will encounter sales decrease during recession. It is good to change from inferior goods to normal goods so that they can still gaining profit during recession.

Market Demand Essay

Village Volvo Case Study Essay

Village Volvo Case Study Essay.

1. Describe Village Volvo’s Service Package.

Supporting Facility: Village Volvo occupies a new Butler building that has four work bays in addition to an office, waiting, area, and storage room. Facilitating good: A television set, comfortable chairs, coffee, a soft-drink vending machine, magazines, and the local newspaper Information: The mechanic who will be working on the vehicle and the client discuss the problems the client has noticed. Another source of information for the mechanic is the Custom Care Vehicle Dossier. Village Volvo maintains a continuing file on each vehicle it services.

The service manager gives the vehicle owner an estimate of the cost and the approximate time when the repair will be completed if no unexpected problems arise. Explicit services: To provide quality repair service, notify the customer when the vehicle is ready for pickup. Implicit services : Set specific time for people for tune-up and oil change,

2. How are the distinctive characteristics of a service firm illustrated by Village Volvo? A.

Customer Participation:

Village Volvo has designed their waiting room–the area clients perceive and interact with the most during “drop-in” times—in a fashion that provides as much comfort as possible by including a television set, chairs, coffee, a soft-drinking vending machine, magazines, and the local newspapers. The firm acknowledges the customer participation component of the service, and has taken the task to accommodate the clients. Furthermore, also in regards to customer participation, customers play an active role in the service by interacting with the mechanic to discuss the problems they are having with their vehicle. Additionally, they have the option to take a short test drive with the mechanic to have said issues elucidated.

B. Simultaneity:

The act of auto repairing represents a service that is both “created” and “consumed” simultaneously, and cannot be stored. As such, customer waiting is inevitable for decoupling purposes.

C. Perishability:

Village Volvo does no repairs between 7 and 8 AM, and 5 and 6 PM because these are heavy customer contact hours. This is done to smooth consumer demand, as the firm knows this is the optimal time frame to discuss with the client the repairs that are going to be done, whereas “drop-in” times are carried out during other hours. Also, the owner-mechanic at Village Volvo notes any additional problems with the vehicles that may need attention in the future, and records them in their Custom Care Vehicle Dossier. The firm knows that its service is a perishable commodity, and thus it makes sure to manage its time properly to avoid cyclical shifts in demand, as well as create new opportunities to provide services for their clients later in time.

D. Intangibility:

Services are generally intangible ideas and concepts, unlike products, which are things. Because of the nature of a service, customers can only rely on the firm’s reputation, as they cannot physically see, feel, or test the service like in the case of a product. In respect to Village Volvo, they provide a quality repair service, and have earned a “respected reputation and following of satisfied customers.”

E. Heterogeneity:

Like with all service firms, there is clear variation of service from customer to customer in Village Volvo due to the customer-employee experience; clients are likely to perceive their interaction with the mechanic and service manager differently. Also, during the repair process, unexpected problems may arise that influence client perception of the firm. As a way to set a standard on quality, and make sure positive outlooks by clients outweigh any negative views, care is taken during the repair process to keep the cars clean, and the insides are vacuumed as courtesy.

3. Characterize Village Volvo in regard to the nature of the service act; the relationship with customers; customization and judgment; the nature of demand and supply; and the method of service delivery.

There are some characteristics of Village Volvo. First, for the nature of service act, Volvo provides the repaired service. Volvo chooses to use the differentiation and the cost leadership as it provides the unique services to their customers with reasonable price. For the relationship with customers, Volvo maintains the relationship with their customers through providing enough information and customizing services. For the nature of demand and supply, the demand is routine as such as oil changes and turn ups. For the supply, the supply is limited in the specific time period. Volvo tries to encourage the customers to make an appointment so as to smoothen the demand and maximum the profit. For the method of service delivery, the delivery service is lack of variance as Volvo does not provide other transportation to their customers. However, they also add the variance which set a drop in times and have routine jobs.

4. How could Village Volvo manage its back office (i.e, repair operations) like a factory?

Village Volvo’s back office can be operated like a factory by creating departments or work bays for specific mechanical works such as Engine, Transmission, Electronics and Routine Maintenance. Just like “The Line Flow Production” in most manufacturing factories, each professional mechanic works in work bays that they are specialized in and vehicles moves from one bay to another as needed. Work order or Job sheets should be provided by mechanics at the completion of each work then recorded in the CCVD. Village Volvo should also have a separate storage building or warehouse to keep required parts for services. An inventory specialist should manage the usage of each part in order to make “the Line Flow Production” like a factory runs flawless.

5. How could Village Volvo differentiate itself from Volvo dealers? Village Volvo already provides a quick routine service that is not available at local dealers. It also provides highly customized services to meet customer’s needs. However, Village Volvo doesn’t have any shuttle services yet. It can offer such as “Pick-up & Delivery service” to create memorable personal experience for customers. It also can create a Networking with other vendors and dealers to improve and widen its service by sharing standard procedures for common faults and issues provided by Volvo of America. In addition, by assigning a same service manager and a mechanic to the same customer each time, it can help to build a better and closer relationship with customers.

Village Volvo Case Study Essay

Applied Problem Essay

Applied Problem Essay.

Bridget has limited income and consumes only wine and cheese; her current consumption choice is four bottles of wine and 10 pounds of cheese. The price of wine is $10 per bottle, and the price of cheese is $4 per pound. The last bottle of wine added 50 units to Bridget’s utility, while the last pound added 40 units. a) Is Bridget making the utility-maximizing choice? Why or why not? In simplest terms wine is 50 units/$10 = 5 and cheese is 40 units/$4 = 10. Bridget is taking away dollars from cheese to buy wine.

Thus, she is not maximizing her choice. b) If not, what should she do instead? Why?

She should trade the bottle of wine for more cheese to maximize her choice.

Chapter 6: Applied Problem 1

In an article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20 million a year.

A Wall Street analyst said that the paper should raise its price from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year. The paper’s publisher rejected this idea, saying that circulation could drop sharply after a price increase; citing Wall Street Journal’s experience after it increased its price to $.75. What implicit assumptions are the publisher and analyst making about price elasticity?

The Wall Street Analyst is saying that the paper has low elasticity, or low price sensitivity. He thinks that the customers would not respond negatively to a price increase thus helping the paper raise revenue. The Wall Street Publisher thinks the opposite; he believes the paper has high elasticity and price sensitivity that will result in customers reacting negatively to a price increase. The price increase will not be successful because they will also lose customers in the process.

Chapter 7: Applied Problem 1

Wilpen Company, a price setting firm, produces nearly 80 percent of all tennis balls purchased in the United States. Wilpen estimates the U.S. demand for its tennis balls by using the following linear specifications: Q = a + bP + cM + dPr

Where Q is the number of cans of tennis balls sold quarterly, P is the wholesale price Wilpen charges for a can of tennis balls, M is the consumer’s average household income, and Pr is the average price of tennis rackets.

a. Discuss the statistical significance of the parameter estimates a^, b^, c^, and d^ using the p-values. Are the signs of b^, c^, and d^ consistent with the theory of demand? The theory of demand says if the prices rise, then quantity sold will drop. The p-value associated with b is consistent with this claim. The theory of demand says when consumers have more income; they will probably purchase more tennis balls. The p-value associated with c is consistent with this claim. The theory of demand says that if Wilpen increases the price of their tennis rackets, then the consumers will buy less rackets and tennis balls. The p-value associated with d is consistent with this claim.

b) What is the estimate number of cans of tennis balls demanded? Q = a + b * P + c * M + d * Pr
Q = 425120 -37260.6 P + 1.46 * 24600 – 1456 Pr
Q = 425120 – 37260.6 * 1.65 + 1.46 * 24600 – 1456 * 110
Q = 239,396
c) At the values of P, M, and Pr given, what are the estimated values of the price (E^), income (E^m), and cross-price elasticity’s (E^xr) of demand? The estimate value for the price elasticity’s is:

E -37260.6 (1.65/Q) = -37260.6 (1.65/239396.01) = -0.257
The estimated values of the income (EM) of demand is:
EM = 1.46 (24600/Q) = 1.46 (24600/239396.01) = 0.150
The estimate values of the cross-price elasticity’s (EXr) of demand is: EXr = -1456.0 (110/Q) = -1456.0 (110/239396.01) = -0.669
d) What will happen, in percentage terms, to the number of cans of tennis balls demanded if the price of tennis balls decreases 15 percent? Q = E * % change in price = -0.257 * (-15%) = 0.04
The number of cans of tennis balls demanded will rise by 4%
e) What will happen in percentage terms, to the number of cans of tennis
balls demanded if the average household income increases by 20 percent? Q = EXR * % change in income = 0.150 * 20% = 0.03
The number of cans of tennis balls demanded will rise by 3%
f) What will happen, in percentage terms, to the number of cans of tennis balls demanded if the average price of tennis rackets increases by 20 percent? Q = EXR * % change in racket price = -0.669 * 25% = -0.167

The number of cans of tennis balls demanded will drop by 16%

Applied Problem Essay