8. There are many reasons to understand the price elasticity of demand and the p

Question

8. There are many reasons to understand the price elasticity of demand and the price elasticity of supply. Below are some small problems related to this topic. a. Suppose I am to analyze the impact of a change in demand for widgets. There is some uncertainty about the elasticity of supply of widgets. One analyst says that the supply is elastic and another analyst says that the supply is inelastic. I am concerned about potential price and quantity changes in this competitive market because I am responsible for planning at my firm. We know that demand will increase. Explain fully why it is important to know the supply elasticity if you want a precise understanding of the price change occurring from the demand increase. Include at least one graph, you probably want two that prove your point. b. The majority of firms in the economy operate in conditions that while competitive in some sense are less competitive than the perfectly competitive model. For those firms explain how they might influence the price elasticity of demand for their “brand” and why they might attempt to exert this influence. c. If you were a governmental entity considering sales taxes on various goods, what is the economic rationale for imposing taxes on goods that have an inelastic demand over those that have an elastic demand.

Explanation / Answer

Elasticity of supply is more important as compared to elasticity of demand because any change in the esupply is likely to cahnge the outlook of whole market.An sudden change in supply is likely to hurt the sellers as well as buyers. Suppose there is increase in supply while keeping the demnad constant, the market will flow with products with no demand resulting the decrease in price of goods and wastage of resources. Similarly if there is decrease in supply i.e negative supply shock the prices are likely to sprut up again hurting the consumers.Therefore elasticity of supply is more important as it influences the market more.

Firms with competative nature are likely to make more effect with introduction of brand and any other change that is making deamand elastic . Firms with brand have exclusive rightrs to sell the goods with brand at an exorbitant price thus they influence the market prices more.

Imposition of sales tax is likely to increase the price of goods thus increasing the costs from the sellers point of view.Increase in costs are likely to reduce the aggregate supply in market as now few goods will be produced untill and unless prices did not increase.

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