Assignment Solution ( Eco 401)

Part A

Point Elasticity of demand and Supply: from August –July 2011

Point Elasticity of Demand:

Formula : Ed = dQ/ dP × P/Q

Putting the values in formula

dQ = 3.20 – 3.50 = -0.3

dP = 2.4 – 2.6 =- 0.2

P = 2.4

Q = 3.20

Ed =- 0.3/(-0.2) × 2.4/3.2

= 1.1142

Point Elasticity of supply

Es = dS/ dP× P/S

Putting the values in the Formula

dS = 3.33 – 3.06 = 0.27

dP = 2.6 – 2.4 = 0.2

P = 2.6

S = 3.33

Es = 0.27/0.2 × 2.6/3.33

= 1.05

b) Arc Elasticity of demand and supply for December-July 2011

Arc Elasticity of Demand

E = dQ/ dP× P/Q

Putting the Values

dQ = 4.15 -3.5 = 0.65

dP = 2.9 – 2.6 = 0.30

Q = 4.15

P = 2.9

E = 0.65/0.30*2.9/4.15

= 1.51

Arc Elasticity of Supply

Es = dS/dP× P/S

Putting the values

dS= 3.74 -3.33 =0.41

dP = 2.9 – 2.6 = 0.30

S = 3.74

P= 2.9

Es = 0.41/0.30*2.9/3.74

= 1.059

Part B:

a)Why the Sales Revenue of Toyota Car Decreased?

The Sales revenue of Toyota cars decreased because of Importing policy of cars because the government may impose some tax relaxation policy to import Used car therefore the demand will be shift to left ward because trend of the people is to import old cars from abroad.

As I have calculated in part A of this Question the Point Elasticity of Demand for august- July is 1.1142 and its supply is 1.05 but arc elasticity of demand and supply is for December –july is 1.51 and 1.059

Its mean Demand elasticity has been increased for the December but supply is elasticity is same as for august-july.

S’

P1 S’

E1EQ

If the Toyota will not converted to Euro-II standard then the other Companies will do this and the Toyota cars will be out dated by not applying new standard and company Equilibrium will move to E1 from E because it demand will be decreased due to not applying the new standard demand curve will shift to the left.

The impact of costly regulation on the Equilibrium situation of Toyota cars is that if the Government Transport department impose costly regulation to stop the imported car from abroad then it price will increase and the price increase its demand will decrease and the point where the demand price is equal to supply and supply price is equal to demand price this point is called Equilibrium. When the cost of Toyota car increases its demand will decrease and supply increases but the point where the both factors come equal the new equilibrium point is come into existence.

This is represented graphically as.

DES

At Price to the supplier will want to supply S amount of car but the Demand for the cars will be D only to maintain the both forces equal the Company will bring its price down to p1 to increase the demand.

In this case the company will bear some losses and its revenue profit will be decrease.