Price Elasticity of Demand in Economics-Myassignmenthelp.Com

Questions: 1.As a producer, why is it Important to consider the Price Elasticity of Demand of your product when setting the price you are going to charge? 2.Explain the difference between comparative advantage an absolute advantage. Answers: 1.Introduction A producer who is rational will want maximum profits. (Elasticity, TR and MR)This guides all his decisions about pricing and costs. We use this guide to determine how profits are affected by demand elasticity for a good that the producer sells. Anaysis Profits are defined as the difference between revenues and costs. Demand elasticity affects only revenues, so that its effect on profits will depend on the effect on costs as well. If we ignore costs for a moment then it is clear that the marginal effect of price rise on revenues is given by Marginal change in revenues (MR)/ marginal change in prices = P( 1- e ) where e is demand elasticity in absolute terms. When demand is elastic e 1 so that ( 1-e) is negative , which implies that price and marginal revenue are negatively related. Any price rise will cause revenues to fall. When demand is inelastic e 1 so that ( 1-e) is positive , which implies that price and marginal revenue are positively related. Any price rise will cause revenues to rise, which contributes to higher profits. (Imperfect Competition ) Conclusion Thus we can argue that each producer has limited power over his profits. He may be able to control his costs but the revenues part depends partly of the nature of good and the market structure that he operates in. This implies partial control over profits,. Ideally a producer will want to face inelastic demand that allows him to raise revenues with prices increases 2.Introduction The concepts were first introduced to explain trade among nations. Ricardo is credited with comparative advantage concept (Comparative advantage) , which was better able to explain the trade direction than absolute advantage. Both are based on differences in ability to produce, which is related to resource level and technology. Anaysis A nation is said to have an absolute advantage over another nation in terms of a chosen good, if it can produce more of that good as compared to the other nation. Sometimes this is translated into cost so that the nation which has lower production cost has an absolute advantage in that good. The concept of comparative advantage is explained in terms of opportunity costs. (Comparative advantage) The latter looks at the sacrifices that need to be made in order to produce a good, in a world where resources are limited. An economy that makes lesser sacrifices will have lower opportunity costs of producing a good and accordingly enjoys comparative advantage in production of this good. In a way, this concept measures efficiency ofa producing good by two nations in relative terms. Take an example, consider a teacher who is trained in teaching English to kindergarten students and also learns about computer hardware in her spare time via part time courses. If she compares herself with a student at the computer class, then she may enjoy absolute advantage in terms of teaching and repair of computers. This is because she is trained to be a teacher, and has better understanding of computers due to her personal interest in them. But she enjoys comparative advantage in teaching, and the student in repairs work. This s because the opportunity cost of her repairing computers is low, as she is better trained to be a teacher. The student has no other skill except repairs, which gives him a lower opportunity cost of repairing than the teacher. Conclusion Both theories are based on strict assumptions which may not be found in real life , but serve as a good starting point for explaining trade direction. Comparative advantage is better as it looks at relative strengths of nations, rather than absolute differences alone. References Comparative advantage. (n.d.). Retrieved July 31, 2017, from Econlib.org: https://www.econlib.org/library/Topics/Details/comparativeadvantage.html Comparative advantage . (n.d.). Retrieved july 31, 2017, from Economicsonline.co.uk: https://www.economicsonline.co.uk/Global_economics/Comparative_advantage.html Elasticity, TR and MR. (n.d.). Retrieved july 31, 2017, from Economics.utoronto.ca: https://www.economics.utoronto.ca/jfloyd/modules/eltr.html IMperfect Competition . (n.d.). Retrieved july 31, 2017, from Colarado.edu: https://www.colorado.edu/Economics/courses/Markusen/fall05-4413-001/unotes7.pdf