Question

• Explain how market demand and market supply interact to determine equilibrium price and quantity and how this simplified model can be used to inform management decisions about product quantity, product pricing, and resources• Identify & analyze non-price factors that influence market demand and supply

• Define and interpret price elasticity. Explain what price elasticity implies about consumer behavior 

Answer 1

1.Equilibrium quantity and price is determined at the point where the market demand amd market supply are equal to each other.In cases they are not equal,there is either surplus or deficit in the market.

Suppose supply is greater than demand.It means that there is surplus.Surplus exerts downward pressure on price.The management must lower the prices to increase demand and reach equilibrium.

Similarly,a deficit exerts upward pressure on price.In case of a deficit the management should raise the price.

2.Price elasticity shows the sensitivity to quantity demanded to a change in price.If the quantity changes more than in proportion to a change in price,the demand is elastic.If quantity changes less than in proportion to a change in price,the demand is inelastic.

In case of elastic demand,a small rise in price would drastically reduce the quantity demanded by consumers and vice versa.