Demand, Supply, Shifts, Elasticity and its Application

This text covers various topics related to demand, supply, shifts, elasticity, and its application. It discusses the effect of certain events on the demand and supply of woolen jumpers in Australia, flaw in reasoning of the comment on the shift of and movement along the demand curve, the impact of bird flu on the price and quantity on the market of live chicken, price elasticity of demand and revenue maximization, and profits in an industry of firms making economic profits.

DEMAND, SUPPLY, A SHIFT IN BOTH, ELASTICITY AND ITS APPLICATION
Student’s Name

I. QUESTION ONE
Effect of Certain Events on the Demand and Supply of Woolen Jumpers in
Australia
a. The decrease of the price of leather jackets
Economic theory has it that, a change in the price of a substitute of good causes a change
in the demand of the substitute in the same direction. That, if the price of leather jumpers
decreases as it is in this example, the demand for woolen jumpers will decrease, see.1 Therefore,
the decrease in the price of leather jumpers will attract more consumers hence leading to a shift
in the demand curve of the leather jumpers to the right as the equilibrium goes higher from E1 to
E2 as shown in Fig. 1.1. Conversely, the demand curve for the woolen jumpers shifts leftwards
because their demand decreases and consequently lowers the equilibrium from E1 to E2 as shown
in the fig. 1.2 below.
1 Roger Miller, Economics Today the Micro View (Addison-Wesley,16th ed, 2012).

b. Adoption of new machines increasing the productivity of the industry
Technological improvement in production of cotton jumpers in the industry
affects the supply of the cotton jumpers. It makes production cheaper because the
producers spend less on inputs yet producing the same output and thus increasing the
number of cotton jumpers produced at any given price see.2 As such the supply curve
shifts to the right as shown in fig. 2.3 below. As it can be seen from the panel for fig. 1.3:
at price Pf, the quantity produced after introduction of technology is higher than the initial
quantity supplied at the same price. Notably, the equilibrium price also declined from E1
to E 2 after the introduction of advanced production technology.
c. The rise in income of the consumers
Assuming that the nature of woolen jumpers is normal goods, an increase in
income of the consumers will mean they will end up demanding more of the jackets and
thus shifting the demand curve to the right, generally see.3 The increase in the demand
leads to a fall higher equilibrium price assuming that the supply remained constant as
shown in the fig 1.4 below.
2 Paul Krugman and Robin Wells, Economics (Worth Publishers, 3rd ed,2013).
3 Ibid.

II. QUESTION TWO
Flaw in Reasoning of the Comment on the Shift of and Movement Along the Demand Curve
Analysis of the statement shows that it confuses the concepts of shift in the demand curve
for movement along the supply curve. The revelation of the study to which the consumers refer
results in an increase in demand for the garlic cloves that is seen through a rightward shift in
demand from D1 to D2, generally see4. This can only be shown using a shift in the demand curve
as shown on Fig. 2.1 below. Therefore, the price ambiguously increases as illustrated in the
diagram below.
4 Daron Acemoglu, David Laibson and John A List, Microeconomics (Pearson, Global ed, 2016).

From panel of figures above, it can be seen that a shift in the demand curve leads to an
increase in the equilibrium price and quantity to P1and Q1 respectively. However, an
examination of the supply curve shows that there was a movement along the supply curve caused
by the increase in the demand. That is illustrated in fig 2.2 as shown by movement from
equilibrium E1 to E2. Therefore, the statement that ‘consumers, seeing that the price of garlic has
gone up, reduce their demand for garlic’, is wrong, contra.5 Such a movement along the supply
curve is not responsible for a leftward shift in the demand curve. It is not consistent to the
knowledge that: it is only changes in other factors that affect demand other than price that can
cause a shift in the demand curve and only changes in price that can cause movement along the
supply curve, generally see also.6
III. QUESTION 3
The Impact of Bird Flu on the Price and Quantity on The Market of Live Chicken
The reports on bird flu scared customers from purchasing live chicken. At this time, the
demand curve for live chicken in the market shifted leftwards as shown in fig. 3.1. At the same
5 N Gregory Mankiw, Principles of Economics (Cengage Learning, 7th ed, 2015).
6 Roger Miller, Economics today, above n 1.

time the government’s policy of culling 50% of the chicken considerably cut the supply of
chicken in the market thus lowering raising the equilibrium price and lowering the equilibrium
quantity as shown in fig. 3.1. Given that the demand and supply of decreased simultaneously, the
effect of the decrease in demand is unambiguous but that of supply is almost certain since it is
cut by half. The overall effect is an increase of the equilibrium price due to the artificial shortage
caused by culling from Pe to P1 and a decrease in the supply from Qe to Q1.7
IV. QUESTION 4
a. Price elasticity of demand using the midpoint elasticity formula
Elasticity =
Q2−Q1
Q2+ Q1
2
× 100
P2−P1
P2+ P1
2
× 100
7 Paul Krugman and Robin Wells, Economics, above n 2.

=
500−450
500+450
2
× 100
8−10
8+10
2
× 100
= 10.5263
−22.2222
= -0.4737
Ignoring the negative sign, the elasticity is 0.4737
b. Price elasticity of demand and revenue maximization
Generally, see8, the change in revenue is roughly equal to the product of the quantity
of good sold and the change in price added to the product of the original price and the change
in quantity. From the foregoing, it is crucial for a firm to consider the elasticity of the good
they are dealing with-determine whether it is unit elastic, perfectly elastic or relatively
elastic, perfectly inelastic or relatively inelastic. Considering the elasticity of goods, along the
demand curve as shown in the panel for fig. 4.1 below;
8 Hal R Varian, Intermediate Microeconomics a Modern Approach (W W Norton &Company, 8th
ed, 2010).

It is concluded that at point A, the elasticity of goods is elastic. Here, a small change
in price causes a large change in the quantity of the good demanded. In such a position, a
firm can make more revenue if it lowers its price. The result is so because the increase in
demand more than compensates the fall in price. Assuming that the fir originally operates at
point C, it can be demonstrated that a revenue moves in the same direction as price.
Therefore, an increase in price more than compensates the inelastic changes in quantity
demanded. However, maximum revenue is obtained when the demand is unitary elastic that
is at point B. Illustratively, assuming that a hypothetical firm using the demand curve in the
fig 4.1 sets prices P1, Pe and P2 at 50, 100 and 150 respectively; quantities Q2, Qe and Q1 as
200,400 and 600 respectively, maximum revenue will be obtained at point B. The revenue at
point A will be 30,000, that at 40,000 and point will be 30,000. It can be explained that at
this point, the marginal cost is zero. That is one necessary condition for revenue
maximization. Samuelson and Marks conclude that; that “Revenue is maximized at the point
of unitary elasticity. If demand were inelastic or elastic, revenue could be increased by
raising or lowering price, respectively”. 9
V. QUESTION 5
Profits in an Industry of Firms Making Economic Profits
The internet and online commerce reduces barriers moving markets closer to the ideal
perfectly competitive markets. In such a scenario, the technology lowers existing technical
impediments to entry. 10 At the beginning, firms will have an incentive to enter the market
because of the signal of positive economic profits at price P. That is so because at that point, the
9 William F Samuelson and Stephen G Marks, Managerial Economics (John Wiley & Sons, 7th
ed, 2012).
10 Ibid.

price is higher than their average total costs. Generally stated, entry of new firms leads to an
increase in the supply of the industry because the total supply is a summation of individual
supply of the firms including the new entrants.11 In other words, it leads to a shift of the supply
curve to the right as exhibited in fig 5.1 below. As a consequence of increased supply, the prices
are driven downwards as can be seen in fig 5.1. The price reduces from P1 to a new equilibrium
price Pe. Analyzed together with the costs as can be seen in fig 5.2, it can be seen that the new
price Pe equals the average total cost of an individual firm in the long run. As such, the economic
profits that initially served as an incentive of entry reduces to zero {from Marginal Revenue
1(MR1 to MR2)} as shown the fig 5.2 panel. As a result of zero economic profits experienced in
the long run, entry of firms ceases.
11 Daron Acemoglu, Microeconomics, above n 4.

Bibliography
A Articles/Books
Acemoglu Daron, David Laibson and John A List, Microeconomics (Pearson, Global ed, 2016)
Krugman Paul and Robin Wells, Economics (Worth Publishers, 3rdf ed, 2013)
Mankiw N Gregory, Principles of Economics (Cengage Learning, 7th ed, 2015)
Miller Rodger, Economics Today the Micro View (Addison-Wesley, 16th ed, 2012)
Samuelson F William and Stephen G Marks, Managerial Economics (John Wiley & Sons, 7th ed,
2012)
Varian R Hal, Intermediate Microeconomics a Modern Approach (W W Norton &Company, 8th
ed, 2010)