Equilibrium Price and Quantity, Economic Systems; Cross-Price Elasticity of Demand (Cped); Iv) Income Elasticity of Demand (Ieod);

This is where the quantity demanded and the quantity supplied are equal. The corresponding price is the equilibrium price and the quantity is the equilibrium quantity.

The equilibrium price is obtained by putting the demand curve and the supply curve lines and plotting when it connects (Sextion,2013).

Substitutes are two goods for which an increase in the price of one leads to an increase in demand for the other. An example of substitutes is Coca Cola and Pepsi because as the price of Coca Cola, the demand for Pepsi will go up. Complements are two goods for which an increase in the price of one leads to a decrease in the demand for the other. An example of complements is coffee vs donuts because as the price of coffee goes, the demand for donuts will go down.

2. Total revenue falls as the price of a good is raised, if the demand for the good is ( )

availability of substitutes, and justify how you determine the price elasticity of demand for your firm’s product. b) Explain the factors that affect consumer responsiveness to price changes for this product, using the concept of price

The first factor is the availability of substitute goods, which are goods that can be utilized instead of the original good. If there is a substitute good available, the demand is likely to change more because people can buy different products. On the contrary, if an item has few substitute goods, it may not gain or lose customers. In Canada, Nike shoes have lots of substitute goods like Adidas

Supply and demand lies in the heart and soul of economics. The concept is perhaps the single most driving force in an economy, specifically a capitalist economy. Supply and demand is based on two concepts: The law of demand and the law of supply. The law of demand states that the demand of a product rises as its price falls, therefore the demand of a product falls as its price rises. A good example of this occurs in grocery stores. If the price of a case of Coca-cola drops from $6.99 to $2.99 the demand for the product will rise because more people are willing to pay $2.99 rather than $6.99. Not only will typical consumer of Coca-cola purchase more but consumers who are not normally willing to pay $6.99 will make the purchase. Substitution also plays a role in the equation. Substitution occurs when consumers substitute one good for another based on price levels. In the Coca-cola scenario, some Pepsi drinkers will purchase the Coca-cola given the case of Pepsi is price higher.

In graph 1, point U1 shows that those who give importance to the standard good more, thru the satisfaction they have for their product, have a steeper demand curve (D1). In this case, a price increase won’t distort their consumption for the standard good. Although loyal consumers’ quantity demanded will decrease, they will still pay out the same amount of money only receiving less amount of that product. In addition, point U2 demonstrates those who will be more satisfied of the substitute which is inexpensive than the standard good. Substitution effect takes place in point U2.

A negative cross elasticity of demand in complementary goods means that the increase in price of one good, an example being potato chips, will decrease the demand for the complementary product that goes with it, the dip.

The supply and demand in microeconomics relies on competitors and the prices. The equilibrium is a point at which all the bidding is done.

When there is a change in the demand of price there becomes a competition. The vendor who is responsible for the good itself must lower their prices to be competitive with the substitution. The substitution must continue to maintain its prices and to never rise above the good or risk being overlooked for the original product. Therefore, the original good continues to lower its prices as does the substitution as well as meeting the supply and demand of the consumer.

Changes in demand factors other than price of the good will result in a change in demand. An increase in demand is depicted as a rightward shift of the demand curve. An increase in demand means that consumers plan to purchase more of the good at each possible price. A decrease in demand is depicted as a leftward shift of the demand curve. Income is another factor that can affect demand. If a good is a normal good, increases in income will result in an increase in demand while decreases in income will decrease demand. If a good is an inferior good, increases in income will result in a decrease in demand while decreases in income will increase demand. Other factors affecting supply include technology, the prices of inputs, and the prices of alternative goods that could be produced. An advance in technology, a decrease in the prices of inputs, or a decrease in the prices of alternative goods that could be produced will result in an increase in supply. A deterioration of technology, an increase in the prices of inputs, or an increase in the prices of alternative goods that could be produced will result in a decrease in

The equilibrium point occurs when supply and demand are equal. In the graph above the equilibrium occurs at a price of $3.70 and a quantity of 195.

Availability of substitutes: If the price of Coca-Cola was to increase, we can say that a lot of consumers would turn to other kind of soft drinks and that bring a result of the quality demanded of Coca-Cola will decline. But if the price of Coca-Cola falls a lot of consumers will change other soft drinks to Coca-Cola

An example of share of consumer income devoted to a good is sugar versus a 20 lb. bag of Pedigree dog food. If the price on these items were increased by 15%, consumers would notice the price on the dog food before the sugar. Normally, the dog food costs approximately $15 and the bag of sugar normally costs $3. The dog food’s price would increase to $17.25, while the bag of sugar would only cost $3.45. Consumers would still purchase the sugar and would have no impact on the demand; however, consumers may begin looking for substitutes for the dog food, which will begin decreasing the company’s revenue.