Question

The table below shows a hypothetical demand and supply schedule for CD players.

Price, K	Quantity demanded, thousand/yr	Quantity supplied, thousands/yr
100	10	3
120	9	4
140	8	5
160	7	6
180	6	7
200	5	8

1. Plot the supply and demand curves on the same diagram
2. Find the equilibrium price and quantity
3. Using the same data, what is the excess supply or demand

1. When the price is K120?
2. When the price is K200?

4. Explain why and in what direction the price of CD players will change in (i) and (ii) in question (c) above
5. What happens to the demand curve for CD players when the price of CDs rises?
6. Show in the supply-demand diagram how equilibrium price and quantity of CD players change
7. Explain why the price will not remain at its original level.
8. How is the demand curve for CD players affected by the invention of a music player, which, to many people seems like new and better product in terms of quality
1. What effect will the invention of a music player have on the equilibrium quantity of CD players bought and sold and on the price of CD players? Why? (Hint: please be clear to show the effectson quantity bought and sold and also on the price of CD players. Use a graph)

DISCUSSION QUESTION TWO

Explain the following; supported graphically where necessary:

1. Movement along the demand curve
2. Shift in the demand curve
3. Producer surplus [2 marks]
4. Consumer surplus
5. Price floor
6. Price ceiling
7. Provide an example of the following and indicate the type of income elasticity we may expect from each of them and why?
   1. A normal good
   2. A necessity
   3. An inferior good.

DISCUSSION QUESTION THREE

1. Define Elasticity
2. Distinguish the following and identify each with the appropriate formular;
   1. Price Elasticity of Demand
   2. Cross Price Elasticity of Demand
   3. Income Elasticity of Demand
3. Why is Elasticity of Demand higher along a linear Demand Curve
4. Explain the relationship between Price Elasticity of Demand and Total Revenue
5. What is Price Discrimination and why is it possible?
6. Explain the following;
   1. Substitution Effect
   2. Income Effect
   3. Diminishing Marginal Utility

DISCUSSION QUESTION FOUR (graded)

Imagine you are being considered for appointment as a manager of a company that is involved in the selling of mobile phones and you have been invited for a board meeting to make a presentation. Explain fully your understanding of the relationship between Price Elasticity of Demand and Total Revenues for the company. (Hint: Do not draw any graphs)

Answer 1

(Question 1)

(a) Graph as follows.

(b) In equilibrium, quantity demanded equals quality supplied and demand curve intersect supply curve (at point E in above graph), so

Equilibrium quantity (Q0) = 6,500

Equilibrium price (P0) = 170K

(c)

(i) When P = K120,

Quantity demanded (Qd) = 9,000

Quantity supplied (Qs) = 4,000

Since Qd > Qs, there is excess demand equal to 5,000 (= Qd - Qs = 9,000 - 4,000).

(ii) When P = K200,

Quantity demanded (Qd) = 5,000

Quantity supplied (Qs) = 8,000

Since Qs > Qd, there is excess supply equal to 3,000 (= Qs - Qd = 8,000 - 5,000).

(d)

(i) When there is an excess demand, price is lower than equilibrium price. The excess demand will put an upward pressure on the price. As price starts rising, quantity demanded starts falling and quantity supplied starts rising until quantity demanded equals quantity supplied at original equilibrium level of price and quantity.

(ii) When there is an excess supply, price is higher than equilibrium price. The excess supply will put a downward pressure on the price. As price starts falling, quantity demanded starts rising and quantity supplied starts falling until quantity demanded equals quantity supplied at original equilibrium level of price and quantity.

NOTE: As HOMEWORKLIB Answering Policy, 1st 4 parts of the 1st question have been answered.