ECON 1102 - Macroeconomics - Increase in Demand

Macroeconomics
Macroeconomics
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Macroeconomics
Q1 (a)
Demand curve for cars will shift towards right side in case of increase in its demand.
Increase in demands is a type of situation when the demand of the product starts increasing at the
given price or the demand of the product remain constant even when its price increases because
of certain changes in factors other than price if the good.( Frank, 2014)
The reasons related to the shift of demand curve for car towards the right side includes
(a) Income of the customer may rise.
(b) The price of the substitute goods may rise.
(c) Prices of complementary goods may reduce.
(d) Taste of the customer regarding the product may increase.
(b) The rightward shift in the demand curve of the price of cars is shown by the following
supply demand diagram
The causes of the rightward shift in the demand curve are as follows:
 Rise in the income of the consumer.
 Substitute’s price may rise. For example, if Tata increases the prices of its car then other
companies manufacturing similar segments of car will find and increase in the demands.
 Prices of complimentary goods may fall. For example, if the price of petrol and diesel
goes down then automatically the demand of car will increase.
Q2 (a)
Price Elasticity of Demand (PED or η) is a technique or a method used in Economics in
order to calculate the responsiveness or the elasticity related to the quantity demanded of the
good or any other service according to change in its price. This technique provides the change in
percentage of the quantity demanded with respect to the change in price.
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Macroeconomics
Price elasticity related to goods other than Giffen goods are negative as Giffen goods has
positive Price elasticity of demand. It is said to be inelastic in case the value of PED is less than
one which represents lesser changes in the quantity of the good that is demanded in comparison
to the changes in price and vice versa in case of elastic goods.
Demand of a group is calculated as:
(b) Percentage rise in the price of ice cream = 40%
Fall in quantity demanded = 20%
Hence, the price elasticity of ice cream is calculated as:
η = %change in quantity/ % change in price
= (-20%)/40%
=0.5
Hence, since the elasticity is less than one it is inelastic in nature.
The negative sign represents that a larger change in the quantity demanded will occur
corresponding to the change in its price.
Q3 (a)
There are four different types of market structure under which a firm operates in the
market and they are:
 Perfect Competition: It the market structure which maximizes the efficiency according
to the total surplus generated. In this type of market Advertising does not exist as
products are identical and the firms produce their goods at minimum average cost.
 Monopolistic competition: It is the market in which in which differentiated products are
available which provides the customer with more choices as compared to perfect
competition. This market has lesser efficiency due to higher pricing and lesser total
output.
 Oligopoly: In this type of market structure small number of firms contains or holds
majority of the market share. This model is similar to monopoly but here in case of one
single firm, two or three firms dominate the market.
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