# Calculating and interpreting elasticity essay sample

## Part 1 (Using the Midpoint Method)

– Price Elasticity of Demand = (Q2-Q1) ÷ (P2-P1)
(Q2+Q1)/2 (P2+P1)/2
= (400-500) ÷ (1. 5-1)
(400+500)/2 (1. 5+1)/2
= 22. 22% ÷ 40%
= 0. 56
– The demand for oranges is price elastic. An increase in the price of oranges leads to a decrease in the quantity demanded. The demand for a product is said to be elastic when an increase in the price of the product causes a decrease in the quantity demanded.
– Total Revenue = Quantity x Price
TR before price change = 500 x 1
= \$500
TR after price change = 400 x 1. 5
= \$600
The change in price led to a decrease in the demand for the oranges from 500 to 400, but the total revenue made by the business was higher after the price change compared to before the price change. The decrease in demand for oranges is not large enough to affect the total revenue negatively. The total revenue increased from \$500 to \$600. Using the midpoint method the increase can be calculated as shown below:
Increase in total revenue = (600-500)
(600+500)/2
= 18. 18 %

## Part 2 (Using the Midpoint Method)

– Income Elasticity of Demand = (C2-C1) ÷ (Y2-Y1)
(C2+C1)/2 (Y2+Y1)/2
= (2-10) ÷ (30, 000-20, 000)
(2+10)/2 (30, 000+20, 000)/2
= 133. 33% ÷ 40%
= 3. 33
– The increase in income has led to a decrease in the demand for spaghetti. Nancy is now consuming less units of spaghetti compared to her previous situation before her income was increased. Spaghetti can be interpreted as an inferior good according to Nancy’s consumption pattern. The increase in income means that Nancy can now consume other goods that are superior to spaghetti.

## Part 3

– Cross Price Elasticity of Demand = (% Change in Quantity Demanded for Good x)
(% Change in Price of Good y)
= 15/30
= 0. 5
– The Cross Price Elasticity of Demand is 0. 5 for Pepsi and Coca-Cola. This figure is greater than zero; therefore, the two products are substitutes for each other. That means that consumers can buy either Pepsi or Coca-Cola. One product can be used in place of the other.

## ES2550 Monopolistic Competition

– The market price is at \$4. 50 while the average total cost (ATC) is at \$5. 50. The firm will therefore incur losses because the ATC is above the market price.
Economic loss = (ATC – Price) x Quantity
= (5. 50 – 4. 50) x 55
= 55
The firm is able to reduce losses by selling the DVDS at the level where MR intersects with MC. However, the firm will have to eventually undo the losses or exit the industry.
– This firm is not likely to operate in the long run. The ATC curve continues to rise and increases the gap between it and the market price. Considering that the firm is already incurring losses, the firm is more likely to exit the industry.
– The impact of other firms leaving the industry would enable this firm to gain normal profits. The long-run equilibrium in monopolistic competition will enable the ATC to be equal to the market price. I would not alter my decision in part C because the firm would incur more costs than the additional revenue it receives. The firm would end up operating at excess capacity, and lose a lot of money.

## Finding the Optimal Amount of Labor

– The profit maximizing quantity of labor is 3 workers. At this quantity the profit is at a maximum level of \$900 and there is no additional profit. The additional profit at this level is zero. That means that all the workers are being fully utilized without incurring extra costs or wastage. The total revenue is \$6300 while the total cost of wages is \$5400. The firm is operating at optimum level.
– The firm is a price taker. It is operating in a competitive market where the price is influenced by the forces in the market. The firm increases the number of workers so as to enable it to meet the demand in the market and maximize profits. However, the firm stops receiving additional profits beyond 3 workers.

## Pharmaceutical Drugs and Drug Companies

– The market for pharmaceuticals drugs is oligopoly. Pharmaceutical companies are few, and they dominate the market. The costs for developing drugs are very high, and only a few companies can manage to meet these costs. That is why pharmaceutical companies are oligopolistic. Another reason is that the pharmaceutical companies are protected from competitors using patents.
– Research and development is very important because it enables the companies to get information on what the market needs. The pharmaceutical companies can use the information gathered to develop new drugs that are needed to cure diseases. The cost of research and development is very high, and many companies get discouraged, therefore, there is low competition. Every drug does not pay off because some drugs fail to satisfy their intended use.
– Strategic behavior is important in the market for drugs. Strategy enables the pharmaceutical companies to have a competitive edge over their competitors. The market has few companies, but they still need to stand out so as to attract customers.
– Product differentiation is important in this market because the companies develop some drugs that serve the same function. Examples of such drugs are painkillers. The pharmaceutical companies are competing with each other; therefore, product differentiation will enable the companies to set their products apart from those of their competitors. The end result will be attraction of customers to the company’s products.
– The movement of drugs from patented drugs to generic drugs brings about competition in the market. The monopoly that the original producer of the drugs had enjoyed because of the patent protection is removed. Other companies are then allowed to reproduce the drugs. The costs of the drugs fall, and people are able to afford them (Robertson, 2014).

## References

Robertson Sally. Drug Patents and Generic Pharmaceutical Drugs. 2014. Retrieved from: http://www. news-medical. net/health/Drug-Patents-and-Generics. aspx