Market Prices and Elasticities

3.1 D

The law of demand statement that an increase in price means the quantity demanded would decrease and a decrease in price means the quantity demanded will increase. This is because the opportunity cost for buyers rises when the prices rises.

3.2 C

As income increases, the opportunity cost for buyers decreases which means they can buy alternative normal products.

3.3 C

Supply would need to increase. This means that there would be a surplus of goods, which would cause the price of the goods to fall. When the price of a good fall, quantity demanded rises as the opportunity cost to buyers’ falls.

3.4 A

As quantity demanded increase, the marginal benefit of each additional chocolate bar decreases.

3.6 B

The demand curve has shifted left which means that the quantity of petrol demanded has fallen.

3.

Lets assume that the prices of apples drop from R9.40 to R7.20. Lets also assume that quantity demanded of apples drops from 6 to 4 within a given time period and cet. par. The price elasticity of demand equals the percentage change in quantity demanded divided by the percentage change in price. (PARKIN et al., 2008:85).

Our calculation would look like this:

e_p^D = (%∆ Qd / %∆ P)

= (Qd/ ∆Qd_avg) / (P/∆P_avg)

= (2/5) / (2.20/8.30)

= 40% / 26.5 %

= 1.5

The price elasticity of demand in the case is 1.5 .