Part A

Applied Study (1)

Scenario (1):
If the Saudi Arabic movement reduces the tariffs on imported coffee, this will lead to
increase in the supply of coffee will increase in Saudi Arabic market because reduced
tariff will reduce the cost for importers. This will lead to the rightward shift in the
supply curve and demand curve will stay the same. As a result equilibrium quantity
will increase and equilibrium price will fall. Initial equilibrium was at point A with
quantity Q* and price P* after US government reduces tariffs the supply curve shifts
to the right and the new equilibrium is at point B with equilibrium quality Q 1 and
price P1. The equilibrium price falls and equilibrium quantity increases.
Scenario (2):
If study funding states that drinking coffee reduces the probability of having a colon
cancer this will create positive impact on the consumers of consuming more coffee
as a result this will lead to a rightward shift of demand curve. The increase demand
will lead to higher prices and higher quantity at new equilibrium.

Initially the original demand curve was D and supply curve was S. The equilibrium
was at point A where equilibrium quantity was Q * and price was P*. After the study
got published the demand for coffee increases indicated by the right ward shift in
demand curve. The new demand curve is D * and the new equilibrium shifts to point
B where the equilibrium price is P1 and equilibrium quantity is at Q1.
Scenario (3):
In this case both the demand and supply curves will shift.

As you can see above the initial demand and supply curve was D1 and S1 respectively
and the equilibrium was at point A where equilibrium quantity and price is Q1 and P*
respectively. After the reduction in tariffs the supply curve shifts right wards at S2
and as study got published the demand curve shifts to the right to D2 and now new
equilibrium is at point B where the equilibrium quantity is at Q2 and price remains
the same as before at P*. In this scenario equilibrium quantity increases while price
remains the same.
 Applied Study (2)
# of pizza 1 2 3 4 5 6 7
Total Utility 60 108 138 156 162 166 166
60-0 108-60 138-108 156-138 162-156 166-162 166-166
Marginal
60 48 30 18 6 4 0
Utility
60/6 48/6 30/6 18/6 6/6 4/6 0/6
Marginal
10 8 5 2 1 0.667 0
Utility riyals

# of chocolate 1 2 3 4 5 6 7
Total Utility 44 76 100 120 136 148 152
44-0 76-44 100-76 120-100 136-120 148-136 152-148
Marginal
44 32 24 20 16 12 4
Utility
44/4 32/4 24/4 20/4 16/4 12/4 4/4
Marginal
11 8 6 5 4 3 1
Utility riyals

Marginal utility is the additional utility which consumers get by consuming one more
unit of goods.
Budget is 34

6 x + 4 y = 34

X-Intercept = 34/6 which is 5.67

Y-intercept = 34/4 which is 8.5

 Chocolate

8.5

Pizza
5.67

Although chocolate are cheaper, one can purchase only about 8 chocolates or 5
pizzas. Pizzas offer a higher utility thus should be purchased. If a combination of the
two goods is to be bought, the consumer should buy them till their marginal utilities
of the last dollar spent on the two goods are equal. This will be when 3 pizzas and 4
chocolates are bought. This bundle is also feasible as it is within the budget constraint.
The total amount of utility from the purchase made above would be 258.
Max Utility = 138 + 120 = 258
 Part B
What Is Elasticity?
Elasticity is a financial concept that describes the responsiveness of 1 variable
to adjustments in another variable.
In enterprise and economics, elasticity is usually used to describe how much
call for a product changes as its price increases or decreases. That is called charge
elasticity of call for. Fee elasticity of call for refers to the degree to which individuals,
purchasers, or producers alternate their call for—or the amount supplied—in
response to price or profits modifications.
Fee elasticity of demand is expressed as a percentage; it is the proportion
exchange in the quantity demanded of a great or service divided by way of the
proportion change in the fee.

How Elasticity Works

While a product is elastic, an exchange in charge quickly consequences in a
trade in the quantity demanded: there's an increase in demand while the charge
decreases and a lower in call for when the charge increases. Spa days, as an
example, are enormously elastic because they aren't a vital top; an increase within
the rate of journeys to the spa will cause a more decline within the demand for such
services. Conversely, a lower inside the fee will cause a greater than proportional
boom in call for spa remedies.
Whilst a very good is inelastic, there may be little change in the quantity of
call for even if the fee of the coolest modifications. As an instance, insulin is a
distinctly inelastic product. For human beings with diabetes who want insulin, the
demand is so tremendous that rate increases have very little impact on the quantity
demanded. Rate decreases additionally do not affect the quantity demanded; most
of folks who want insulin are not keeping out for a lower price.
If the market price of an elastic precise decreases, firms are in all likelihood to
lessen the range of products or services they're inclined to supply. If the
marketplace charge goes up, firms are possibly to increase the quantity of products
they're willing to promote.
Types of Elasticity
 Elasticity of Demand
The quantity demanded of an awesome or service depends on a couple of
elements, which include price, earnings, and choice. Every time there is an
exchange in these variables, it causes a trade in the amount demanded of the
coolest or service.
Price elasticity of call for is a financial degree of the sensitivity of demand
relative to a trade in fee. Its miles a measure of the trade in the quantity
demanded due to the exchange in the fee of a good or carrier.

 Income Elasticity
Income elasticity of call for refers to the sensitivity of the amount
demanded to modifications inside the actual earnings of purchasers, preserving
all different matters consistent. The method for calculating earnings elasticity
of demand is the percentage trade in amount demanded divided via the
percentage alternate in income.

 Cross Elasticity
The cross elasticity of demand is a financial idea that measures the
responsiveness in the quantity demanded of one desirable whilst the charge for
every other true adjustments. additionally referred to as go-charge elasticity of
demand, this dimension is calculated by taking the percentage change in the
quantity demanded of 1 true and dividing it by way of the share change inside
the rate of the alternative exact.

 Price Elasticity of Supply

Price Elasticity of Supply measures the responsiveness to the delivery of
an amazing or provider after a trade in its market fee. In line with simple
economic principle, the supply of an excellent will increase while its price rises.
Conversely, the supply of an excellent will decrease when its price decreases.
Factors Affecting Demand Elasticity
There are three main factors that influence price elasticity of demand.
 Availability of Substitutes
In fashionable, the greater precise substitutes there are, the greater elastic
the call for an excellent can be. As an example, if the rate of a cup of espresso
went up through 25 riyals, consumers might replace their morning caffeinated
beverage with a cup of caffeinated tea. Which means espresso is an elastic top
due to the fact a small growth in price will reason a large decrease in demand
as purchasers start shopping for more tea than espresso.

But, if the fee of caffeine itself were to head up, we might in all likelihood
see little alternate in the consumption of espresso or tea because there may be
few exact substitutes for caffeine. Most of the people, in this case, won't
willingly surrender their morning cup of caffeine, regardless of the price.
Therefore, it is able to be assumed that caffeine is an inelastic product. At the
same time as a selected product inside an industry may be elastic due to the
provision of substitutes, a whole industry itself tends to be inelastic.
 Necessity
If a good or service is needed for survival or comfort, people will continue
to pay higher prices for it. For example, people need to use transportation,
usually cars, to get to work. Therefore, even if the price of gas doubles (or
triples), people will still need to fill up their tanks.
 Time
The third influential factor is time. For instance, if the price of cigarettes
goes up to 15 riyals per pack, consumers with very few available substitutes
will most likely continue buying their daily cigarettes. This means that tobacco
is an inelastic good; the price change will not have a significant influence on
the quantity demanded (in part, due to the addictive nature of nicotine).
However, if a person who smokes cigarettes finds that they cannot afford to
spend the extra 15 riyals per day and begins to reduce their tobacco
consumption over a period of time, the price of cigarettes for that consumer
becomes elastic in the long run.