Assignment on Economic Applications

Running head: Economic Applications
Economic Applications
Name of the Student
Name of the University
Student ID

Economic Applications1
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Reference.........................................................................................................................................7

Economic Applications2
Answer 1
The new drug of the company helps bald men to grow hair. The company wants to earn
maximum possible profit by selling this drug. However, to maximize profit the company has to
increase sales at a high price. In contrary, as per the theory of demand, with rise in price of a
product the demand of the good decreases. Thus, increasing price of the product may lead to fall
in demand. However, it should be noted that after rise in price and fall in demand whether the
total revenue has increased or not. This happens when percentage fall in demand is lower than
the percentage rise in price. Under this situation, the firm may increase its price as it is getting
higher revenue. This phenomenon or the relation between price and demand is explained by the
concept of price elasticity of demand (Jawad et al. 2018). It is given that price elasticity of
demand is 1.4 at the current price that means the demand of the product is price elastic. The
meaning of the said value is if the price of the product increases by 10% then its demand will fall
by 14%. Therefore, the total revenue earned from selling the product falls with rise in price. It
can be clearly visible in figure 1 that percentage change in price is smaller than the percentage
change in quantity demanded. In addition to that, rectangle given by P1Q1 is smaller than the
rectangle given by PQ. Therefore, the revenue of the company reduces with increase in price.
Hence, the company is suggested not to increase the price of the product.
Figure 1: Demand is elastic
Source: (Created by the Author)
On the other hand, if the elasticity of the product is 0.6 it means that the demand is
inelastic. Therefore, with 10% increases in price the demand of the product will fall by 6%.