Market Analysis and Economic Principles
1. Market Equilibrium and Surplus
The market supply and demand functions, with price (p), are: Q(s) = -80 + 4p and Q(d) = 1000 – 5p.
Graphing Supply and Demand
Graphing these equations reveals the market dynamics.
Equilibrium
Setting Q(s) = Q(d): -80 + 4p = 1000 – 5p. Solving for p gives p = 120. Substituting p back into either equation yields Q = 400.
Consumer and Producer Surplus
Consumer surplus (CS) is calculated as the area of the triangle formed by the demand curve, the price line, and the vertical axis: CS = ((200 – 120) * 400) / 2 = 16,000. Producer surplus (PS) is the area below the price line and above the supply curve: PS = ((120 – 20) * 400) / 2 = 20,000.
2. Elasticity and Market Decisions
Analyzing market data for demand and supply at various price points.
Price Elasticity of Demand
At $4500 and $5000, the price elasticity of demand needs to be calculated using the standard formula: E = (% change in quantity demanded) / (% change in price).
Pricing Strategy
Raising the price is not advisable when demand is unit elastic, as total revenue tends to remain constant.
Price Elasticity of Supply
Similar to demand elasticity, supply elasticity at $5500 and $6000 is calculated using: E = (% change in quantity supplied) / (% change in price).
3. Market Shifts: Ice Cream in Chile
Analyzing the Chilean ice cream market under different scenarios.
Winter and Low Sugar Prices
In winter, demand for ice cream decreases. Lower sugar prices increase supply. The combined effect is a lower price with a relatively stable quantity.
High Interest Rates and Recession
Higher interest rates reduce supply, while a recession decreases demand. This leads to a relatively stable price but a significantly lower quantity.
Positive Advertisement
Shakira’s endorsement increases demand, leading to higher prices and quantity.
4. Market Effects of Taxation
Taxes create a wedge between consumer and producer prices, reducing market size. The burden of the tax is shared, with the incidence depending on supply and demand elasticities. Taxes generate revenue for the state but also lead to a deadweight loss.
5. Market Intervention: Price Ceiling
Analyzing the effects of a price ceiling on a market.
Equilibrium and Spending
Given Q(s) = 30 + 3p and Q(d) = 120 – 3p, equilibrium is found by setting Q(s) = Q(d), resulting in p = 15 and Q = 75. Consumer spending and firm revenue are both 15 * 75 = 1125.
Price Ceiling and Shortage
A price ceiling at 40% of the equilibrium price (6) leads to Q(s) = 48 and Q(d) = 102, creating a shortage of 54.
Return to Equilibrium
Market forces tend to push the price back towards equilibrium. In the face of a shortage, buyers compete, driving prices up.
6. Elasticity and Market Decisions (Continued)
Further analysis of market data and pricing strategies.
Price Elasticity of Demand
Calculating price elasticity of demand at $80 and $100.
Pricing Strategy
Lowering the price is not recommended with inelastic demand, as it reduces total revenue.
Price Elasticity of Supply
Calculating price elasticity of supply at $100 and $120.
7. Market Shifts: Hawaiian Shirts in Chile
Analyzing the Chilean market for Hawaiian shirts under different scenarios.
Winter and Lower Input Costs
Winter reduces demand, while lower input costs increase supply. This results in a lower price and a relatively stable quantity.
Import Tax and Recession
An import tax reduces supply, and a recession decreases demand. This leads to a relatively stable price but a much lower quantity.
Celebrity Endorsement
Penelope Cruz’s endorsement increases demand, leading to higher prices and quantity.
8. Perfume Price Increase and Demand
With a price elasticity of demand of 0.4, a 50% price increase for a $40,000 perfume will lead to a 20% decrease in quantity demanded (0.4 * 50% = 20%).
9. Tourism Package Pricing
Analyzing the pricing strategy for tourism packages.
Price Elasticity of Demand
A 10% price increase leading to a 7% decrease in demand (100 tourists) implies a price elasticity of demand of 0.7.
Price Adjustment
With inelastic demand, a 20% price increase is likely to increase revenue.
10. Cost of Vacation: Explicit vs. Implicit
Calculating the total cost of a vacation, considering both explicit and implicit costs.
Total Cost
Explicit costs (rent, travel, etc.) total 1,400,000. Implicit costs (lost income) are 3,000,000. Total cost is 4,400,000.
Accountant’s Cost
An accountant would only consider the explicit costs of 1,400,000.
11. Market Equilibrium and Taxation
Analyzing market equilibrium with and without tax.
Market Equilibrium
Given Q(s) = -20 + p and Q(d) = 60 – p, equilibrium is at p = 40 and Q = 20.
Taxation and Social Loss
A $10 tax shifts the supply curve. The new equilibrium is at Q = 15, with a consumer price of 45 and a producer price of 35. Tax revenue is 150, and the deadweight loss is 25.
Additional Exercises
1. Total Cost of Incident
Explicit costs (repairs and other expenses) are 950,000. Implicit costs (lost income) are also 950,000. Total cost is 1,900,000.
2. Market Analysis and Income Change
Analyzing market equilibrium, consumer spending, and surplus, and the impact of income changes.
3. Price Elasticity and Revenue
Calculating price elasticity of demand and its impact on revenue.
4. Determinants of Price Elasticity of Demand
Factors influencing price elasticity include availability of substitutes, necessity, market definition, and time horizon.
5. Market Equilibrium, Surplus, and Elasticity
Analyzing market equilibrium, producer surplus, and price elasticity of demand.
6. Price Increase and Demand Change
Calculating the impact of a price increase on quantity demanded.
7. Marginal Revenue and Market Structure
Analyzing marginal revenue and determining market structure.
8. GDP Calculation and Components
Calculating GDP, investment, exports, and GDP per capita.
9. Profit Maximization and Market Structure
Determining profit-maximizing output and analyzing market structure.
10. Marginal Revenue and Market Structure
Calculating marginal revenue and determining market structure.
11. GDP and Quality of Life
Discussing the limitations of GDP as a measure of quality of life.