Supply and Demand and Budget Line

TASK 1 Consider the following equation MRSXY PX/PY where MRS = marginal rate of replacement x and y ar two solids P = toll = is slight than drawframe The graph preceding(prenominal) shown us the unconcern ignore compute assembly line diagram which explaining the equation MRSXY P X / PY. at that place ar two ways to measure the consumer preferences or what the consumer wants. The first nonpareil is by trying to put a value on the propitiation a consumer obtains from consuming a unit of a considerably. Consumers are off-key to be able measure utility in terms of a util. However, we faeces non find the total utility by using this method.So we mint use an new(prenominal) way which is by ranking the product. We can place that the consumer is preferred equitable Y comparisond to good X. the sputum deviate is a curve that shows consumption bundles that give the consumer the same level of satisfaction. So this nitty-gritty that the consumer is satisfied at any foca lise if the indifference curves above. The heel over of the indifference curves are downward sloping. For example, the consumer lead satisfy when he debases 3 good X and 4 good Y. The meaning of the term cypher unobtrusiveness is what the consumer can afford to buy.The income of the consumer exit determine how much he can buy in the market. So, the budget line in the graph above is showing how much good X and Y that the consumer affords to buy. If the slope of the budget line is higher, this mode that the consumer afford to buy good X compare to good Y. While if the slope of the budget line is lower, the consumer afford to buy good Y compare to good X. From the graph, we can see that the consumer is not maximizing the satisfaction. This is because the indifference curves are inside the budget line and it hybridise at two spotlights which are a and b.At psyche b, the slope of the indifference curve (MRSxy ) is less than the slope of the budget line (Px/Py). While, at evinc e a, the slope of the indifference curve (MRSxy ) is greater than the slope of the budget line (Px/Py). So the consumer does not maximizing the satisfaction for some(prenominal) point a and b. In order to maximize the satisfaction, the slope of the indifference curve must equal to the slope of the budget line. So at point b, the consumer should reduce the consumption of good X and make up the consumption of good Y until both slope of indifference curve and budget line will constrain the same.By switching spending away from good X towards good Y, the consumer will be able to reach a higher indifference curve. drawframe From the graph, we can see that the indifference curve has shift and meet the budget line at the point c. at this point, the slope of the indifference curve and the budget line are the same. So the equation will swap to MRSXY = PX / PY. At point c, the consumer satisfaction is at the highest place. The consumer choice is the product which been sold in the market. W hile, the undivided indigence for a product is the call for of a consumer on that product.The supplicate on a product will be higher if thither are only(prenominal) small choices in the market. People tend to essential more for the product as they cannot find other product. TASK 2 *Definition of legal injury snap of subscribe to (PEoD*) The price flexibleity of necessary is the measure of how responsive is the quantity postulateed to a alter in price. on that point are umteen types of expansibleity in demand which will corroborate for different types of product in the market. In order to differentiate between them we need to state the definition and the symmetry of the elasticity.Relatively Elastic Demand The relatively elastic demand is a demand relationship in which the character potpourri in quantity demanded is large in rank(a) value than the percentage change in price. In other quarrel the percentage change in quantity demanded is larger than the percenta ge change in price. drawframe The ratio for the relatively elastic demand is 1 PEoD Infinity Relatively Inelastic Demand The relatively nonresilient demand is a demand that opposes, somewhat, but not a great handle to change in price.In other words, the change in percentage change in price is larger than the percentage change in quantity demanded. drawframe The ratio for the relatively inelastic demand is 0 PEoD 1 Unit Elastic Demand The unit elastic demand is a demand relationship in which the percentage change in quantity demanded is the same as the percentage in change of the price. drawframe The ratio for the unit elastic demand is PEoD = 1 Perfectly Elastic Demand The perfectly elastic demand is a demand in which the quantity demanded drops to zero at the slightest in price.In other words, the quantity demanded will become zero if the seller increases the price of the product. While they will never reduce the price as it will reduce their normal profit. drawframe The rati o for the perfectly elastic demand is PEoD = Infinity Perfectly Inelastic Demand The perfectly inelastic demand is a demand in which quantity demanded does not respond at all to the change in price. drawframe The ratio for the perfectly inelastic demand is PEoD = 0 Calculating the legal injury Elasticity of DemandThe formula to determine the price elasticity of demand is PEoD = (% substitute in Quantity Demanded)*/(*% compound in Price) Price (OLD) =9 Price (NEW) =10 Q Demand (OLD) =150 Q Demand (NEW) =110 Calculating the contribution motley in Quantity Demanded QDemand(NEW) QDemand(OLD) / QDemand(OLD) 110 150 / 150 = (-40/150) = -0. 2667 Calculating the Percentage Change in Price Price(NEW) Price(OLD) / Price(OLD) 10 9 / 9 = (1/9) = 0. 1111 PEoD = (% Change in Quantity Demanded)/(% Change in Price) PEoD = (-0. 2667)/(0. 1111) = -2. 4005 TASK 3 The product that I choose is tobacco. some(prenominal) of the elasticity of demand and tag on of tobacco is relatively inelastic. This is because the product will has an inelastic demand if the item is habit forming. As tobacco is a habit forming, it is relatively inelastic in demand. So if there is increase in price, the quantity demanded will not respond too much. While, the supply of the tobacco is relatively inelastic is because of the time period. As the tobacco is the tillage product, it will take some times to grow it and get the product. So the manufacturer cannot increase the quantity of supply although there are many demands for the tobacco.TASK 4 drawframe The graph above has shown a market of tobacco with the relatively inelastic demand and supply curves. As we can see, the total overindulgence has reduced since the implementation of the value. The benefit accredited by buyers in a market is measured by consumer surplus. The consumer surplus is the follow buyers are willingly to pay for the good minus the amount they actually pay for it. So the consumer surplus before the tax are (a + b + c). However, aft(prenominal) the implementation of tax on the tobacco, the consumer surplus is only a.This means that the consumer needs to pay more after the implementation of tax. P in the graph stands for the price of tobacco before the tax. While, P*B* is the price that buyers need to pay after the tax has been implemented. The benefit authentic by sellers in a market is measured by manufacturing business surplus. The producer surplus is the amount of sellers received for the good minus their cost. So the producer surplus before the implementation of tax is (d + e + f). But, the producer surplus change after the implementation of tax, which became only f*. * This means that the seller received less profit after the tax implemented. **P*S in the graph is the price that seller received after the implementation of the tax. So this means that, the consumers and producers have to bear the tax meat after the tax has been implemented. Tax burden is the amount of tax suffered by individ uals or organization. The tax burden for the consumer and seller may vary depends on the elasticity of the demand and supply curves. Although the consumer and sellers seems to be burden by the tax, there is one party that gains benefit from it.It is the government because it has gain revenue from the tax. The tax revenue is the (b + d) in the graph above. From the revenue, the government can use it for other investment. However, the tax has also brought another disadvantage which is the deadweight loss. The deadweight loss is the reduction in total surplus that results from a tax. The deadweight loss in the graph is (c + e). The size of deadweight loss also depends on the elasticity of the demand and supply curves. If both of the curves become more elastic, then the size of the deadweight loss will become smaller.So in the conclusion the tax has given benefit to the government but brought disadvantages to the consumer and producer. REFERENCE LIST Mankiw, N. G. (2008). Ten Principl es of Economics. In J. W. Calhoun, A. V. Rosenberg, M. Worls, J. Tufts, J. E. Thomas & K. Yanos (Eds. ), Principles of Economics. Canada SOUTH-WESTERN CENGAGE Learning. Moffatt, M. (2010). Price Elasticity of Demand. _ _Retrieved April 26, 2010, from http//economics. about. com/cs/micfrohelp/a/priceelasticity. htm Webster, N. (2007). Economics_ _(3rd ed. ). Adelaide Greg Eather and Associates, Publication Division.