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# Ans1a) In short run, 'is a time Irame in which quantity oI at least one Iactor oI

production is Iixed( parkin 2010 pg 214), the demand Ior oil is inelastic because there is
no substitute to use oil as a source oI Iuel or energy.
For example, iI the price oI petrol were to increase a person cannot easily convert their
car so it runs on another Iuel source.
They may choose to drive less , thereby decreasing quantity demanded, but most likely
would not drive twice as much iI petrol prices were to halve.
We can demonstrate this price inelasticity in the Iollowing example.
It costs john \$60 Ior 60L oI petrol (1\$/1L). petrol prices now double costing \$120 Ior 60L
(\$2/1L). john chooses to drive less, so buys only 50L oI petrol.

Q
P
10/55 * 100 18.8
40/80 * 100 50
18.18/66.7 0.36
Oil demand thereIore is inelastic. because the 'percentage change in the quantity oI oil
demanded is less then the percentage change in the price(parkin 2010 pg 84), giving
price elasticity a value between zero and 1.
Figure 1 illustrate inelastic demand curve, and shows that a large price change results in a
small change in quantity demanded.

Price

Demand
Ans1b) When a price change has no eIIect on the supply and demand oI a good or
service, it is considered perIectly inelastic. An example oI perIectly inelastic demand
would be a liIe saving drug that people will pay any price to obtain. Even iI the price oI
the drug were to increase dramatically, the quantity demanded would remain the same.
And products such as salt, potatoes, caIIeine and tobacco are Iairly inelastic. The
products inelasticity is judged on its importance to the consumer irrespective oI the price
thereIore any change in price will not aIIect the quantity. quantity remains same.

Price demand perIectly inelastic

Quantity

Price demand narrowly inelastic

Quantity

The main reason Ior a products inelasticity is the absence oI a substituent product such as
Ior caIIeine, tea and oil and also products such as salt and pepper because people
consume so much oI them. As well as medicines such as insulin and other liIe saving
drugs. These are some oI the products which is inelastic. The Iactors Ior a product to have
inelastic demand curve is usually Iewer substitutes, the product is considered a necessity,
it has a short time period Ior adjustment, and is a cheaper good relative to income. On the
other hand Iactors Ior a product to have an elastic demand curve is it must have many
substitutes, it must be considered a luxury, a long time period Ior adjustment; and be an
expensive good compared to income.
Ans1c) In short run the supply oI oil is also inelastic, and this is due to the cost associated
with production.
For example, once an oil Iield is build, the cost oI pumping oil will be the same
regardless oI whether the oil Iield is running at 60 capacity or 100 capacity
(goose 2007)
II the oil prices are high then producers may increase production because the marginal
cost oI producing the oil increases. however ,iI oil prices are low, producer may decrease
production because the marginal cost oI producing the oil Ialls.
ThereIore the amount oI oil produce depends on whether the oil prices are high enough to
cover the marginal cost oI production.
Figure 2 illustrates the supply curve Ior oil and shows how a small change in the supply
or demand curve can cause a large change in market oil price
Figure 2 oil equilibrium price

supply

price equilibrium price

demand

quantity

in the above equilibrium price there is a surplus oI oil and so Iorces operate to a lower oil
price. the increase quantity demanded and decreased quantity supplied, thereby reducing
oil surplus down towards the equilibrium price. However below equilibrium price there is
shortage oI oil and so Iorces operate to increase oil price, the decrease quantity demanded
and increase quantity supplied, thereby reducing oil shortage and moving it up towards
the equilibrium price.

During 1973, Arab member members oI organization oI petroleum exporting companies
OPEC stated that they would stop selling oil to the united states and limit oil production
(WTRG economics. 2009).since the majority oI worlds oil was supplied by OPEC this
caused a reduction in the supply curve oI oil as shown in Iigure 3.

Figure 3- decrease in oil supply

supply

Price new equilibrium price
Means higher oil price

demand
Quantity
The eIIect oI oil embargo shiIted the supply curve to the leIt resulting in less oil being
supplied at any given price, and decrease in quantity demanded.
In addition to producers who supply oil there are several other Iactors that contribute
towards the volatility oI prices.
For example, in 2005 when hurricane Katrina hit the gulI oI Mexico oil production in
gulI oI Mexico was severely aIIected (easterbook 2005).
As a result oI this disruption in supply, the supply curve shiIted towards leIt in similar
manner as shown in Iigure 3,thereby causing the price oI oil to rise.
The increasing demand Ior oil Irom rapidly developing nations such as china also has a
aIIect on supply and demand curve to the right as shown in the Iigure 4.

Figure 4 .increase in oil demand

supply

price new equilibrium price.

demand
quantity
the increase in demand Ior oil has the same eIIect as a reduction in supply, that being the
price oI oil responds sharply to an increase in demand. In the long run oil supply and
demand is elastic, because Iuture alternatives give the potential Ior reduce demand and
increase supply.
For example, oil supply may be increased through new extraction technologies or the
discovery oI new oil Iields which will shiIt the supply curve to the right and reduce oil
prices. Demand may be decreased through development oI green technologies such as
hydrogen Iueled cars thereIore shiIting the demand curve to the leIt and lowering oil
prices. ThereIore in the long run oil prices will be less volatile because iI oil prices get
too high people will use cheaper substitute and when prices are high producer will supply
more oil. However such development will take time to implement, meaning that until
they are implemented the price oI oil will remain volatile in short run.
Supply
D1 d2 s1 s2

Price

Demand
Quantity
Long run oil supply and demand
Ans2a) A Iirm has an opportunity to charge diIIerent prices to diIIerent customers when
the Iirm is not in a perIect competition. because Iirms in perIect competition charge the
some price Ior a homogeneous product regardless oI the quantity. ThereIore the Iirm has
to be a price taker which has the power to set its own price.
4 Differences in the price elasticity of demand between the markets: There must
be a diIIerent price elasticity oI demand Irom each group oI consumers. The Iirm
is then has the ability to charge a higher prices to the group with a more price
inelastic demand and a relatively lower price to the group with a more elastic
demand. By implementing such a strategy, the Iirm can increase its total
revenue and profits (i.e. achieve a higher level oI producer surplus). To proIit
maximize, the Iirm will seek to set marginal revenue to marginal cost in each
separate (segmented) market.
4 arriers to prevent consumers switching from one supplier to another: The
Iirm must be able to prevent ~market seepage or ~consumer switching
deIined as a process whereby consumers who have purchased a good or service at
a lower price are able to re-sell it to those consumers who would have normally
paid the expensive price. This can be done in a number oI ways, and is probably
easier to achieve with the provision oI a unique service such as a haircut rather
than with the exchange oI tangible goods. Seepage can be prevented by selling a
product to consumers at unique and diIIerent points in time Ior example with the
use oI time speciIic airline tickets that cannot be resold under any circumstances.
4 The long run is the period over which all Iactors are variable. These conditions
result in diIIerent cost curves and diIIerent outcomes Ior the marginal output and
shut-down rules. In the long run, the Iirm has the opportunities to substitute one
Iactor Ior another. Because the Iirm has more opportunities to make adjustments,
the long-run supply curve is more price elastic.
4 For example,
4 1). irline Industries:-
The low cost airlines always tend to involve in diIIerent pricing strategies to
achieve main objective oI company. Consumers who book their Ilights earlier Iind
accessible low prices Ior their journey. When the date gets closer Ior Ilights, the
prices rises which Ialls under the category oI inelasticity and hence the demand
Ior Ilight becomes more precise. People who usually book their Ilights late always
willing to pay a much high price to reach their speciIic destination. In Airlines,
this term Ialls under the category oI price discrimination.
4 2). -commerce and Price Strategies:-
Various research sources have Iound that excessive use oI e-commerce is
providing unparallel Ilow to the manuIacturers which bring them to experience
diIIerent pricing strategies. Consumers usually provide their whole biography
about them and their buying habits which directly Iocus sellers to apply price
discrimination. For example, the Iirm 'DELL charges same price on web pages
as well as on Iranchises.

Ans2b). The price elasticity oI demand Ior coca-cola can be determined by the existence
oI substitutes. Because iI you can easily switch Irom one good to another, the price
elasticity oI demand Ior either oI the goods tends to be elastic.
For example, iI the price oI coca-cola rises in market people will switch over to the
consumption oI Pepsi cola which is its close substitutes. So the demand Ior coca cola is
elastic. ThereIore, the quantity demanded (Qd) will decline and the decrease in (Qd) Ior
coke cola will increase in lead to demand Ior Pepsi which will lead to increase in price oI
Pepsi, Cateris paribus. And vice versa iI the market price oI Pepsi increases. So the price
oI substitute products is said to be direct related.
In the below given Iigures, the increase and decrease in demand Ior coca cola can be
illustrated:-

The original equilibrium (with the green supply and red demand) occurs at the price oI P1
and quantity (bought and sold) oI Q1. As the demand curve moves (to the purple curve),
the equilibrium price increases to P2 and the quantity (bought and sold) increases to Q2.
Buyers buy more oI the good, but must pay a higher price to get it.
O incomes oI buyers are increased (normally, although this is not true Ior "inIerior
goods")
O substitutes become more expensive or less available
O complements become less expensive or more available
O number oI consumers increases (due to population, demographics)

The original equilibrium (with the green supply and red demand) occurs at the price oI P1
and quantity (bought and sold) oI Q1. As the demand curve moves (to the purple curve),
the equilibrium price decreases to P2 and the quantity (bought and sold) decreases to Q2.
Buyers buy less oI the good, and pay a lower price to get it.
Demand can decrease (moving the demand curve to the leIt) iI
O substitutes become less expensive or more available
O number oI consumers decreases (due to population, demographics)
O inIormation about the good (including advertising) decreases desire Ior the good
O changes in the buyers' environment (weather, time oI year, laws) makes the good

Ans3a) II there is change in supply it will eventually result in a shiIt oI the supply curve
which Iurther causes imbalance in the market that is corrected by implementing changes
in prices and demand. II the change in supply increases the supply curve tilts towards
right, whereas a decrease in supply Irom a change in supply will shiIt the supply curve
leIt.
In the drug market when the supply and demand are stable then the market will produce
equilibrium price and quantity. II the demand changes Ior the product then the
equilibrium price and quantity change in the same direction (increase in demand leads to
increase in price and quantity) and iI there is a change in supply then the equilibrium
price changes in the opposite direction and the equilibrium quantity changes in the same
direction (increase in supply leads to decrease in price and increase in quantity)
ThereIore when there is increase in demand the price and quantity both show increase as
shown in the Iigure below.
The original equilibrium (with
the green supply and red
demand) occurs at the price of
P1 and quantity (bought and
sold) of Q1.
As the demand curve moves
(to the purple curve), the
equilibrium price increases to
P2 and the quantity (bought
and sold) increases to Q2.
but must pay a higher price to
get it.

And iI there is decrease in demand the price and quantity decreases.

The original equilibrium (with the green supply and red demand) occurs at the
price of P1 and quantity (bought and sold) of Q1.
As the demand curve moves (to the purple curve), the equilibrium price
decreases to P2 and the quantity (bought and sold) decreases to Q2. Buyers
buy less of the good, and pay a lower price to get it.
When supply increases for one of these reasons, it will move the equilibrium, and
thus decrease the price and increase the quantity traded of the good:

The original equilibrium (with
the green supply and red
demand) occurs at the price of
P1 and quantity (bought and
sold) of Q1.
As the supply curve moves (to
the purple curve), the
equilibrium price decreases to
P2 and the quantity (bought
and sold) increases to Q2.
Sellers sell more of the good,
but get paid a lower price to
sell it.
When supply decreases Ior one oI these reasons, it will move the equilibrium, and thus
increase the price and decrease the quantity traded oI the good:

The original equilibrium (with
the green supply and red
demand) occurs at the price of
P1 and quantity (bought and
sold) of Q1.
As the supply curve moves (to
the purple curve), the
equilibrium price increases to
P2 and the quantity (bought
and sold) decreases to Q2.
Sellers sell less of the good,
but get paid a higher price to
sell it.

A Summary...
Event Effect on Price
Effect on Quantity
bought and soId
Demand ncreases Price ncreases Quantity ncreases
Demand Decreases Price Decreases Quantity Decreases
Supply ncreases Price Decreases Quantity ncreases
Supply Decreases Price ncreases Quantity Decreases

So we can clearly see that change in supply and demand can make the price rise and Iall.
Ans4b) One oI the major reasons Ior the Iall oI drug prices is the production oI generic
drugs which cost less then the branded drugs. And the majority oI people without
insurance buy generic drugs instead oI branded ones. The shortage occurs since the
physical manuIacturing constraints are unable to change as quickly as the market
changes.
The shortage occurs due to input constraints input called active pharmaceutical ingredient
or API so constraints occur when drug manuIacturers Iaces limitation on the amount oI
API they can purchase to produce the generic drug.
Market conduct issue where decisions made by drug manuIacturers are eIIecting the
generic drug market either directly or indirectly leading to shortages.
A Iinal market reason is proIitability and government imposed because some government
agencies Iound some type oI manuIacturing violations and other reasons such as ceiling
and trade bans are seriously economically

Ans4a Perfect competitor:-
PerIect competitor can be explained as the complete market strategy and its structure. It is
known as the spot where the other market strategies and its organizational structure is
considered as the key element.
Nowadays people are not well aware oI the diIIerent promotions and services oI products.
So to keep them well inIormed oI the happenings going on in business as well as their
brands, and oIIers oI various companies. For example:-
1. Coca cola vs. Pepsi

When it comes to Coca-cola vs. Pepsi, both oI them give perIect and tough
competition to each other. Everyone knows that the taste is almost the same but
the things which actually separates them Irom each other is the advertisements,
promotions, commercials, branding regulators etc. Coca cola takes lead in this
competition by advertising their brand and products on not only advertising as
promotional sales are more oIten seen in universities and campuses. Compare to
last year revenue, Coca cola has takeover the market oI all soIt drink
manuIacturing companies.

2. Armani vs. Gucci:-

When it comes to Fashion and clothing, Armani takes on Gucci and other brands
like nonetheless. The reason behind this success is the branding and advertising oI
company. Armani tends to get more involve in taking superstar oI almost all the
proIessions to make their brand and name widely renowned. Armani also adverts
though the diIIerent sources like World Wide Web, which is the most common
source nowadays. They provide and promote the sales and advertise, products like
perIumes, clothing, shoes etc are considered as the vital elements oI this Iirm.
While Gucci cannot climb up to that extent because the advertisement team oI this
Iirm is limited to banners and commercials. No high proIile stars and people have
been seen working with this brand at most oI the time. The credit mainly goes to
Armani who has ability to tend the superstars as their co-partners as well as the
promoters oI their brand.

hy I choose the perfect competitor?
The reason Ior choosing the perIect competitor is to make the selI-made critics thinker
sure that advertisement plays important role in promoting diIIerent products etc. the
advertisements keep people aware oI the instant and new arrivals in the market. Mostly
the target oI most Iirms is set to make revenue but one thing should also be kept in mind
that every success needs a unique and diIIerent step to start and come toe to toe with
other competitors. advertisements also regulates and exhibits the most oI the items which
people want to wear, listen, see etc. people always keep on dreaming and looking Ior new
things in town and advertisements are the only key elements and source which can bring
people oI diIIerent places at same place. Advertisements provide u right thing at right
place on right time.

rowth in Revenue due to dvertisements

ReIerencing ...
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th
2008 (online) the becker.
Available Irom www.becker.posner.blog.com/archives (accessed November 11 2011)
Easterbook.j (2005)Katrina wrecks havocon oil market cbs news
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November)
Goose. P the oil drum(2007) the economic oil
Available at www.theoildrum.com (Accessed at November 11
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Parkin.m.powell and Matthews, k (2010), microeconomics 7
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WTRG economics 2009 available thorough www.wtrg.com
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