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Course Code: BUS525, Section-3

Submitted to
Dr. Sakib Bin Amin
Associate Professor
Department of Business and Economics
North South University

Submitted by
Ashikur Rahman
ID-2025219660

Submission date
7TH August, 2021

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1. What are the determinants of Supply? What happens to the supply curve when each of these
determinants changes? Distinguish between a change in supply and a change in quantity
supplied.
Answer- Supply is an important economic concept that describes the total amount of a specific goods
or service that is available to consumers. Determinants of supply are those factors that may shift the
demand curve or cause a change in demand.
There are 5 determinants of Supply-
 Market price
 Input prices
 Technology
 Expectations
 Number of producers
The determinants of supply will cause a shift in the supply curve. If it is something that increases the
supply, the curve will shift to the right. A decrease in supply will be shown by a shift to the left. A change
in price causes movement along the commodity’s supply curve. This movement is called a change in
quantity supplied. when other determinates like Input prices, Technology, Expectations and Number of
producers changes than supply cursve shifted. If those determinates incress than supply curve shif right if
decresss than it shift left.
A change in supply refers to adjustments with regard to the quantity amount produced by a supplier.
while a change in the the quantity supplied is with regard to the quantity availed by the supplier to meet
the consumer needs.When supply changes and its associated with the price changes and still in the same
supply curve then the change in supply is called quantity supply.

Figure 1 Figure 2

Figure 1 supply changes from q1 to q2 because of that products higher price but its in the same supply
curve. There is a change in supply but still in the same curve so its defiend as change in quantity supply.
In figure 2 here the input price incresed and for that supply curve changes its position and its called the
change in supply.

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2. What effect will each of the following have on the demand for product A?
a) The price of substitute product C falls.
b) Income increases and product A is an inferior good.
Answrer-

a) Substitute product, in economics and consumer theory refers to a product that consumers see as
essentially the same or similar-enough to another product. There is a positive relationship between the
price of the substitute product and demand of the original product. If price of substitute product
increases then demand for the main product increase. Here if the price of the Products As substitute
Product C decreases then the demand for the product C incresses and on the other hand the demand
for the product A also decreases. So here they have a positive relation between the price of the
substitute product C and demand of the original product A. Example-If Pizza Price increases then
demand for the another substitute product Burger increase.

b) We know that income-consumption curve has a positive relation with each other and the quantity
demanded increases with income. But there are some good whose demand drops when people's
incomes rise. Those goods are called inferior goods. When incomes are low inferior goods become a
more affordable substitute for a more expensive good. And here Product A is inferior goods and for
that reason when the customers income incresse customer feels he is in the higher stage in the socity
level and for that reason he buy expensive or other substitute product. And for that reason when
income incresed the demand for inferion product A decresed.

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3. Explain why the price in competitive markets settles down at the equilibrium
intersection of supply and demand.
Answer- Equilbrium is the Price that equates the quantity supplied to the quantity demanded.
Equilibrium is the process where in a certain price the quantity supplied and the quantity demanded are
just equal. At this point, because there is neither excess demand nor excess supply, there is no pressure for
the price to change further. In competitive market price settles down at the equilibrium intersection of
supply and demand.

As described earlier, there is no tendency for

demand or supply to move up or down at equilibrium point. If the market price begins at a higher price,
say at p3, then that of the quantity demanded. There would be surplus and goes sold out. So, the price gets
adjusted to a point where demand meets supply and there would be no surplus. This would bring it to
Equilibrium. On the other hand If the market price begins at a lower price, say at p1, then that of the
quantity demanded. There would be shortage and there will be shortage in supply. So, the price gets
adjusted to a point where demand meets supply and there would be no shortage. This would bring it to
Equilibrium. So for that reason in competitive markets always settles down at the equilibrium intersection
of supply and demand.

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4. What is the effect of each of the following events on the equilibrium price and quantity of
burgers?
a) The Price of Pizza Increases.
b) The government requires that all the ingredients of burger be absolutely fresh (that is nothing
can be frozen)
Answer-
a) The Price of Pizza Increases.
There is a positive relationship between the price of the substitute product and demand of the
original product. Since pizza and burger are substitute goods so they have positive cross price
elasticity. when the price of pizza increase at that time the demand for pizza dicresed
significantly. And those customers are influnced themself to take burger as substitute and this
price of pizza would lead to an increase in demand for burgers and thus the equilibrium quantity
and price of burgers will increase.

Q2

(b) The ingredients of burger be absolutely fresh

We know that burger producer always buy their ingrediants in a bulk amount and this strategy help them
to reduce the cost of burger. But here If the ingredients have to be fresh and this would raise the cost of
production and for this reason the price of the burger incresed. It also decrease the supply of burgers.
Thus, the equilibrium price of burgers will rise and equilibrium quantity also falls. And for that decress in
supply shift the supply curve leftward. It will icress the price from p1 to p2 and quantity decress from q2
to q1. And this also change the equilbrium.

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5. What do the price elasticity of demand, the income elasticity of demand, and the cross elasticity
of demand measure in general?

Price elasticity of demand- Price elasticity of demand is the measurement of change in quantity
demand for goods and services due to change in the price of the good. Here we found if price
increases or decress, then quantity demanded decreases or incress by how much.

Percentage change∈theQuantity Demanded

Price Elasticity of Demand: ¿
Percentage change ∈the Price

Income elasticity of demand- Income elasticity of demand is the measurement of change in

quantity demand for goods and services due to change in the income of the consumer. Here we
found If income increases or decreases then quantity demanded increases decreases by how
much.

Percentage change∈the Quantity Demanded

Income elasticity of demand¿
Percentage change ∈the Income

Cross elasticity of demand- Cross price elasticity of demand refers to the measurement of
change in quantity demand for goods and services due to change in the relative price of good.
Cross elasticity of demand for substitute goods is always positive because the demand for one
good increases at the time when the price for the substitute good increases on the other hand
when the cross elasticity of demand for complementary goods is negative.

Percentage change∈theQuantity Demanded of another commodity

Cross elasticity of demand ¿
Percentage change∈the Price of OneCommodity

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6. For the market demand schedule in the following table find the price elasticity of demand for a
movement , (a) from point C to point E, , (b) from point E to point C, (c) and at the point
midway between point C and point E.
Point A B C D E F G
PX 6 5 4 3 2 1 0
QX 0 20000 40000 60000 80000 100000 120000

Answer-
Here At point C quantity:= 40000, price = 4 and at point E quantity = 80000, price = 2.

We know that Price Elasticity of Demand:

Percentage change ∈the Quantity Demanded
Elasticity=
Percentage change∈the Price

Movement from point C to point E-

Percentage change ∈the Quantity Demanded

Elasticity=
Percentage change∈the Price

Q2−Q 1
Q1
¿
P2−P1
P1

= [(80000 - 40000) / 40000] / [(2 - 4) / 4]

= (40000/ 40000) / ( -2 / 4)

= -2 = 2 ¿Price elestisity demand has negetive relation with each other¿

Movement from point E to point C-

Percentage change ∈the Quantity Demanded

Elasticity=
Percentage change∈the Price

Q2−Q 1
Q1
¿
P2−P1
P1

= [(40000 - 80000) / 80000] / [(4 - 2) / 2]

= (- 40000/ 80000) / ( 2 / 2)

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 = -1/2 =-0.5 = 0.5 ¿Price elestisity demand has negetive relation with each other¿

Using Midpoint method-

Elasticity = (Change in Quantity / Average quantity) / (Change in price / Average price)

Elasticity=¿)

(80000−40000)/(80000+ 40000)/2
¿
(2−4)/(2+ 4)/2

40000/(120000 /2)
¿
(−2)/(6/2)
0.67
¿
−0.67
= -1 = 1 ¿Price elestisity demand has negetive relation with each other¿

7. State the relationship between elasticity of demand for a commodity and total revenue on that
commodity.

The elasticity of demand refers to how sensitive demand for a good is compared to changes in
other economic factors, such as price or income. And Total revenue is the amount paid by buyers
and received by sellers of a good. The Relationship between elasticity of demand for a
commodity and total revenue on that commodity depends on the commodity and its demand
type. Relationship between elasticity of demand for a commodity and total revenue on that
commodity described below-

Relationship between elasticity of demand and total revenue

1- When demand is elastic in the relevant range of prices then price and total revenue differ
inversely. That means a price increase will decrease total revenue.
Elastic demand means that the percentage change in quantity demanded is greater than the
percentage change in price. We know that Luxury products have elastic demand. And as
Luxury product if the price of Car increases then the demand fall down significantly. Here
we can see that an increase in price will result in a more than offsetting percentage decrease
in quantity but the Total revenue not changes so much as quantity.
P Q TR

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2- When demand is inelastic in the relevant range of prices then price and total revenue differ
directly. That means a price increase will increase total revenue.
Inelastic demand means that the percentage change in quantity demanded is less than the
percentage change in price. We know that Regular products have Inelastic demand. And as
Regular product if the price of Rice increases then the demand do not fall down significantly.
Here we can see that an increase in price will result in a less than offsetting percentage
decrease in quantity but the Total revenue changes and it increase a significant amount.

P Q TR

3- When demand is unitary in the relevant range of prices then total revenue does not change in
response to price changes.
Unitary demand means that the percentage change in quantity demanded is equal to the
percentage change in price. We know that most valuable items like Mobile phone,
Homeapplience products etc. have unitary elasticity demand. And as Unitary demand product
if the Mobile Phone increases in price will result in an equal percentage decrease in quantity.
Here we can see that an increase in price will result in a equal percentage decrease in
quantity but the Total revenue are in a fixed position.

P Q TR

8. Comment on the truth or falsity of each of the following statements:

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 In Bangladesh, Price elasticity of demand for Rajshahi mangoes equals 0.4. Therefore,
Rajshahi mango growers can increase their revenues by raising price.

Here price elasticity of demand for Rajshaji mangoes is 0.4 which is less than unity. And we
know that

ED>1(=Elastic Demand) and ED<1(=Inelastic Demand) .

So as a daily product here we can say that the demand is relatively inelastic. It means if the
prices rises by 100% then it will only lead to 40 declines in demand of Rajshahi mangoes. But
these types of large increase in price will lead a small fall in demand but the revenue will
increase in a significant amount.

Assume that If price of Rajshahi mangoes = 100 and Quantity demanded = 60

Revenue = 100×60=6000

Now let price rises to 200 by 100%. Since elasticity is 0.4. So here the demand for Rajshahi
mangoes will fall to 40% or 36

Hence new revenue = 200×36= 7200

Here Rajshahi mango growers can increase their revenue by raising the price. So the given
statement is true.

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