The price elasticity of demand of product X is 1.5; and the price elasticity of supply of product X is 2.6. The equilibrium price is P1 and the equilibrium quantity is Q1.
Due to the recent trade war some of the product X suppliers are making loss. Many suppliers are closing down and leaving the market.
A. Illustrate with a diagram what will happen to the equilibrium price and equilibrium quantity of product X when many suppliers are leaving the market.
KK Group is one of the product X suppliers that manage to stay in the market. Suppose you are the sales manager of KK Group. In one meeting your boss says, “The price of product X was up last week but our total revenue was down. I don’t understand why.”
B. Use the theories in price elasticity to explain to your boss about his observation. Your boss then asks you, “How many percent should the price rise or fall in order to have a 20% increase in quantity demanded?”
C. Calculate the answer for your boss. (All percentage changes are from min-point method).