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Demand and Supply Curves, etc.

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I recently bought skim milk instead of soy milk because the skim milk was less expensive. (It could be a purchase of anything, soda, fast food meals, etc.) I used milk because that is what I specifically bought and why.

1. Please help me explain how the law of demand affected my purchase.

2. Give specific examples of how the determinants of demand and supply affect this product (T-I-P-E-N and P-R-E-S-T).

3. What happens to the demand curve and the supply curve when any of these determinants change?

4. Give examples of scenarios that would cause a change in demand versus a movement along the same demand curve and supply curve for this product.

5. Discuss the new equilibrium price and quantity that result from these changes.

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The law of demand tells us that as the price for a good rises, fewer people will buy it, holding other factors constant. So, you can see that this was played out in your decision to buy skim milk. Had soy milk been less expensive than its nearest substitute, you would have chosen it instead. The more its price rose, relative to skim milk, the less likely you were to buy it.

The five demand determinants are (1) taste of preference, (2) income, (3) price of complements and substitutes, (4) expectation of consumer regarding future price, and (5) numbers of buyers in the market. You can find how each of these would affect your decision with a ...

Solution Summary

Determinants of supply and demand; how the law of demand affects purchases; movement of the demand curve versus movement along the demand curve.

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Demand Elasticity

1. Xerox Corporation develops, manufacturers, and services document equipment and software solutions worldwide. Assume the company offered $75 off the $1,475 regular price on the Phaser 6360, a durable high-speed color copier, and Internet sales jumped from 700 units to 800 units per week.

A. Estimate the color copier demand curve, assuming that it is linear.

B. If marginal costs per unit are $650, calculate the profit-maximizing price-output combination.

2. The demand curve for a product is given by Qx = 1,000 - 2(Px) + .02(Pz), where Pz = $400.

A. What is the own price elasticity of demand when Px = $154? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price below $154?

B. What is the own price elasticity of demand when Px = $354? Is demand elastic or inelastic at this price? What would happen to the firm's revenue if it decided to charge a price above $354?

C. What is the cross-price elasticity of demand between good X and good Z when Px = $154? Are goods X and Z substitutes or complements?

3. Suppose the own price elasticity of demand for good X is -2, its income elasticity is 3, its advertising elasticity is 4, and the cross-price elasticity of demand between it and good Y is -6. Determine how much consumption of this good will change if:

A. The price of good X increases by 5 percent.

B. The price of good Y increases by 10 percent.

C. Advertising decreases by 2 percent.

D. Income falls by 3 percent.

4. For the first time in two years, Big G raised cereal prices by 2 percent. If the volume of cereal sold by Big G dropped by 3 percent, what can you infer about the own price elasticity of demand for Big G cereal?

5. This year was prosperous for Starbucks Coffee. Revenues increased 9 percent. Suppose management attributes this revenue growth to a 5 percent increase in the quantity of coffee sold. If Starbucks' marketing department estimates the income elasticity of demand for its coffee to be 1.75, how will looming fears of a recession (expected to decrease consumers' incomes by 4 percent) impact the quantity of coffee ]Starbucks expects to sell?

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