Changes in demand of the puma brand

DECREASE IN DEMAND occur when there is a change in any one of the determinants of demand, other than the price of the good itself. Hence, the demand curve will shift to the left.

EXAMPLE

Wearing PUMA brand is outdated nowadays. So, the demand for PUMA brand will decrease. Hence, the demand curve for PUMA brand will shift to the left.

PRICE, $

QUANTITY OF PUMA BRAND

At price $2, the demand for Puma brand decrease from 20 units to 10 units. So, the demand curve shift leftward.

DECREASE IN QUANTITY DEMANDED occur when there is a change in the price of the good itself which is the only factor that cause the change in quantity demanded. Hence, movement downward along the demand curve will occur.

EXAMPLE

The price of Yakult increases. So, the demand for Yakult will decrease.

B

A

PRICE,$

When the price of 1unit of Yakult is $3, the quantity demand for it is 20. But when the price increase to $5, the quantity demanded for it also decreases to 10.

PART B

Income elasticity of demand is the ratio of the percentage change in the quantity demanded of a good or service to a given percentage change in income. It indicates the responsiveness of demand to changes in household incomes.

Income elastic (YED > 1). It is a luxury good. The quantity demanded increases by a larger percentage than the rise in income. When a person’s income increase, they will go for branded stuff which is the luxury items.

Example:

John receive his payment for this month which is $10,000. It gives him a total of $80,000 per annum. So, his purchasing power now increase where he can afford to travel to another country twice a year instead of once a year previously. Below is the equation that calculate the income demand elasticity.

John’s salary increase from $70,000 to $80,000. As his income has increases, he decided to change travel twice a year instead of one a year previously.

YED = the percentage change in quantity demanded

The percentage change in houseold’s income

= ((2-1)/1) x 100)

((80000-70000)/5000) x 100

= 7 > 1

YED is negative, (YED < 0). Demand falls as income increases. It is called as inferior goods. Consumers decreases their purchases of a good as income rises. Example of inferior goods in used clothing, low quality goods and second-hand goods.

EXAMPLE:

Michael’s income increases from $1000 to $5000. Before this, he go to work by bus but now he change to taxi.

YED is exactly zero (YED = 0). The quantity demanded does not change as income increase or decreases. The good is called as necessity such as salt, sugar and rice.

EXAMPLE

Sarah’s income increases from $2500 to $3200. But she still buys the same amount of sugar every week.

QUESTION 3

PART A

The first reason why supply of a product increase is because, the price of the good itself. If the price is increase, the supply of the good will also increase. For example, when the price of a pen increase, the quantity supply for the pen will also increase. The supplier tend to sell more when the price high as they can make more profit from it.

Quantity supplied

The next reason why supply of a product increase is because, expectation of the future price. Consumer expect the price of a good will change, so it will affect the quantity supply of a good. For example, the price of a good is expected to fall in future, so the supply for the good currently increasing. For example, the price of a ruler will decrease in the future, therefore the supply for ruler now will increase.

Price ($/unit)

S1 S0

Quantity supplied (unit)

Supply curve of a ruler

Next is the cost of making the good, also known as the price of raw materials. If the price of the raw materials is cheaper, the production of the good will increase and the supply for the good will increase as well. For example, the raw material for bread is flour. When the price of flour decrease, the production of bread will increase and the supply of bread will also increase. Therefore, the supply curve for bread will shift rightward.

Price($/unit)

S0 S1

Quantity supplied (unit)

Supply curve of a bread

PART B

When economists means that ‘price floors and ceiling stifle the rationing function of prices and distort resources allocation’ , is that this is the consideration what happens after a hurricane, prices are often stop to pre-hurricane prices through “price gouging laws” to protect the consumer. This occurs for gasoline as well as for groceries and other products that might be in high demand after the damage of a hurricane. Furthermore, It causes the market price goes lower or higher than the equilibrium price where the resource allocation is supposed to be efficient. Lower price creates too much demand and higher causes too many supply.

Reference: (http://answers.yahoo.com/question/index?qid=20090927175041AAo22iw) 12.49 am 13/5/2010

When unrestrained, prices rise and fall to correct imbalances between the quantity supplied and quantity demanded in a market. If sellers find themselves at a given price with more output than consumers are willing to purchase, the price will fall. And, if the market is not offering enough of a good to give satisfaction to the consumer demand, the price will rise. Price floors and ceilings prevent price movements to correct these imbalances. When a price is set above equilibrium, sellers will produce more than the market can support, diverting resources away from more highly valued uses. Price ceilings result in an under allocation of resources toward a particular good, where the excess demand (shortage) reveals that consumers value the good (and therefore the resources used to produce it) more than what the market currently offers.

QUESTION 2

PART A

Input substitutability: suppliers can find substitutes-in-production which can affects the price elasticity of supply. Goods which have greater availability to substitutes is more sensitive to price changes. If suppliers uses much specialised inputs of factors of production, supply of the product is more likely to be inelastic.

For example, the production of Ali Don Steak Sandwiches. It has a lot of very close substitutes because the resources used for production can easily being switch between different goods. The guy who slices tomatoes for the Steak Sandwish can easily switch to sell hot dogs at the Stadium Putra Bukit Jalil stadium. The number of available substitutes makes the price elasticity of supply extremely elastic.

Time Period: The longer the time period of producing, the more responsive quantities are to price changes. Sellers need time to find resources used in the production of the good. Longer time periods allow sellers the time needed to find alternatives. If the time taken to produce a product is long, the supply is fairly inelastic.

For example, the supply of the Proton is not very elastic for a period of a few weeks or even months. Resources used to produce a car cannot easily being switch to other goods. However, given enough time, a year or more, resources can move between production, resulting in a more elastic supply.

PART B

The price elasticity of demand affect the price setting of the goods and services as the price elasticity of demand has an impact on total revenue and yield management.

For example, a company is setting its prices for the services and say its peak period demand is inelastic and off peak period demand is elastic then setting higher prices in peak period and setting low prices in off peak periods and using price discrimination can maximise revenue or yield.

By considering the factors affecting the price elasticity of demand a business can determine to extent the price elasticity of demand and therefore enable to set prices on the basis of the price elasticity information into consideration.

For example if a company knows that changing the cost may affects the price elasticity of demand by increasing the cost of the services, they can make the demand inelastic by increasing the prices as the customers will not be able to switch to other companies easily even the price is higher.

The telecommunication company can use this type of information to maintain their market by changing the price that affect the price elasticity of demand and restrict the customers to choose services from their rivals.

In competitive markets, the businesses must consider price as a competitive strategy when there are similar products and substitutes for their products because the price elasticity will be mostly elastic and affect sales than other factors.

Reference on Thursday, 1:19AM : http://socyberty.com/economics/price-elasticity-of-demand-and-its-implications-for-business-and-government/

QUESTION 6

PART A

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service and the total amount that they actually pay. It actually shows the amount consumers benefit from paying less than the amount they are willing to pay.

Producer surplus is the difference between the prices producers actually receive over the price they are willing to receive. It illustrates the amount producer’s benefit from receiving a market price higher than the price they are willing to receive.

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PART B

Production Possibilities Frontier (PPF) is a graph that shows the various maximum combinations of two outputs that the economy can possibly produce given the available factors and production technology.

Scarcity is a situation when there is not enough resources to produce as many goods as people wants. Demand for a good is high but the supply for a good is low.

Choice is where scarcity forces people to make a choice in order to maximize their satisfaction.

Firm choices- firms and businesses have to decide what to produce, where to produce, how to produce and who to produce for?

National choices, Labor – size, educational level, intellectual and mental skill

Land – availability of natural resources or nonhuman gifts of nature

Capital – amount of capital and technological development

Enterprise – entrepreneur skills, foresight and organizational ability

Opportunity costs is when one action is taken, another choice must be sacrificed. These sacrificed alternatives are called opportunity cost.

EXAMPLE : producing more robots requires to take some resources away from the production of pizza, reducing the output of pizza. The forgone pizza is the opportunity cost of producing more robots.