Economics Course

Economics

[Course]

  1. Price elasticity of demand

Irecently purchased ice cream from a convenience store in ourneighborhood. This is a luxury good for me. Therefore, if the priceof ice cream goes up, I will cut down on my ice cream consumption.Ice cream is not a necessity for many people therefore, it is veryprice elastic. A high price for ice creams will prompt individuals todivert their ice cream expenses towards the basic goods. Buyers canalways substitute ice cream with chocolate. Again, one can easilypostpone the consumption of luxuries to a later date until the pricesgo down (Robin&amp Michael, 2015). In the short period, consumers will be more sensitive to pricechanges as they adapt to the changes in price. Ice cream is not ahabitual commodity, therefore, unlike substances such as cigaretteand alcohol, ice cream is less price elastic. Moreover, ice cream isnot a complimentary good, leading to a higher price elasticity ofdemand.

Ahike in ice cream prices will be a major cause of concern for me as astore manager. I will not be thrilled to be selling ice cream whenthe prices are high. A price increase will lead to dwindling icecream sales and long stock turnover periods. Additionally, I willincur high storage costs with the slow stock turnover. Finally, ahigh price for ice cream will cut down the profit margins from icecream sales. Regarding cross elasticity of demand, a rise in the costof ice cream will lead to higher prices for ice cream cakes since icecream is a primary ingredient in the cakes. Ice cream is very incomeelastic. Dwindling real incomes will lead to slower ice cream saleswhile increases in real income lead to a higher demand for ice cream.

  1. Demand, Supply, and Market Equilibrium

Recently,I bought fresh green apples from a grocery store. I noticed that theprices of a kilogram of apples had gone down significantly by up to$2. Under normal prices, I buy less than a kilo of apples fromgrocery stores. However, with the reduced prices, I bought twokilograms of fresh apples since I love apples. The law of demandaffected my purchasing decision since the low prices of applesprompted me to buy more apples. The prices of substitutes such asmangoes and oranges have been going up. Therefore, right now I preferbuying apples because of the friendly prices. As the incomes ofindividuals rise, they will demand more apples. Consequently, if theprices of substitutes such as mangoes and oranges fall, the demandfor apples will also fall (Robin&amp Michael, 2015).Expectations about future changes in prices may not influencepurchasing decisions because apples are perishables. Taxes andgovernment regulations will lead to higher costs of apples whilesubsidies reduce the costs (Robin&amp Michael, 2015).Improvements in technology can lead to efficiency in farming anddistribution of fruits, therefore leading increased supplies and lowcosts.

TheEffects of Taxes on Supply and Demand

Taxes s

Sw/tax

Price

Dw/tax D

Quantity

Arise in the number of producers leads to higher supply levels forapples. Low production costs lead to higher levels of production forapples and hence increased supplies. This in turn results in lowerprices in the market.

Shiftsin and along the supply curve

Shiftsin the supply curve

Price

Shiftsalong the supply curve occur due to

Changesin price

Quantity

References

RobinB, &amp Michael P (2015) Essential Foundations of Economics.Prentice Hall Prentice Hall