Question 5 [22]

5.1. Explain the difference between the calculation of normal point elasticity of demand and the calculation of arc (or midpoint) elasticity of demand. (2)

5.2. Explain the difference between income elasticity of demand and elasticity of supply. (2)

5.3. The following market information for beef red meat is given:

Supply curve equation: QS = 1 830 + 320P (quantity supplied can, of course, never

be negative)

Demand curve equation: QD = 3 455 - 286P

5.3.1. Calculate the equilibrium price (P) and quantity (Q) from the given equations.

(Hint: At equilibrium QS = QD. Use this information to calculate the equilibrium

price (P). Then substitute the value of P into either the supply or the demand

equation to obtain the equilibrium quantity. To test if your answer is correct,

substitute P in both equations; the answer should be the same.) (4)

5.3.2. Calculate the price elasticity of demand for beef red meat at equilibrium, using

the demand curve given. (2)

5.3.3. Calculate the price elasticity of supply for beef red meat at equilibrium, using the

supply curve given. (2)

5.4. Use your insight into elasticity to distinguish between the short-run and long-run price elasticity of demand for motor vehicles.

5.4.1. Identify the relevant price elasticity of demand values for motor vehicles in the

short run and the long run. (2)

5.4.2. Provide an explanation for the reason(s) behind the difference in the price

elasticity of demand for motor vehicles between the short run and the long run.

(2)

5.4.3. Construct a graph (diagram) to indicate the difference between the short-run and

the long-run price elasticity of demand of motor vehicles. (3)

5.5. Explain what will happen to total revenue if the price of a product decreases in the elastic part of the demand curve. (3)