Economic Demand and Supply Analysis †MyAssignmenthelp.com

Questions: 1.Why is it important to consider the price elasticity of demand of your product when setting the price you are going to charge? 2.Explain the difference between comparative advantage an absolute advantage? Answers: 1. Demand for a product is usually highly responsive to a change in its price. This responsiveness is captured by price elasticity of demand. Price elasticity is calculated as a percentage change in quantity demand in response to a change in price. Now, response of demand to price is not uniform. It depends on several factors. These factors include nature of the product, availability of substitutes, income of the people and others (Baumol Blinder, 2015). Since, elasticity measure responsiveness of demand to its price this plays an important role in pricing decision. Sellers should set its price keeping in mind elastic response of the demand for the product. If demand is highly elastic as in case of luxury items, then charging a high price lead to a loss of business because people are able to reduce their demand largely. With availability of substitutes products demand, become more flexible. In this situation, producers should not set a high price. For goods having high elasticity, too high price harm the business by reducing demand and sellers should set a low price (Varian, 2014). Therefore, knowledge about demand elasticity helps the firm to take decision on price. This helps firms to rightly plan their marketing strategy and fulfill revenue goal. Even after setting price producers sometimes, need to revise for either increasing their revenue or capturing a greater market share. With complete information about elasticity, producers can optimally decide how much price increase or decrease is needed to achieve set revenue target. 2. In international trade, a country usually exports the good in which it has an advantage over another country and imports the good in which the country has disadvantage in production. This advantage or disadvantage is determined using the concept of absolute ad comparative advantage. Adam Smith gives the theory of absolute advantage. A country is said to have an absolute advantage in producing one good if it enjoys absolute cost benefit. On the other hand, comparative advantage is determined based on opportunity cost that is what amount of other goods needs to be sacrificed to produce a particular good (Levchenko Zhang, 2016). There are situations where two countries have absolute advantage in both goods. Then it becomes difficult to decide the trade relation. To resolve this issue David Ricardo gives the theory of comparative advantage. Trade based on absolute advantage cannot be mutually beneficial always. In times of comparative advantage, trade is always beneficial for both the nation. In contrast to absolute advantage overall output level is also considered under comparative advantage. In computing absolute advantage, absolute cost is important while for comparative advantage opportunity cost is used. Countries generally specialize and export goods in which it has a comparative advantage. The idea of comparative advantage dominates that of absolute advantage as it more efficiently determines countries production capacity more efficiently (Yang Ng, 2015). Comparative advantage analyzes gains from trade more intensively and provides a bigger rationale for trade than absolute advantage. Today international trade theory is mostly based on comparative advantage theory. References Baumol, W. J., Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning. Levchenko, A. A., Zhang, J. (2016). The evolution of comparative advantage: Measurement and welfare implications.Journal of Monetary Economics,78, 96-111. Varian, H. R. (2014).Intermediate microeconomics with calculus: a modern approach. WW Norton Company. Yang, X., Ng, Y. K. (2015).Specialization and economic organization: A new classicalmicroeconomic framework (Vol. 215). Elsevier.