Market Economy

Suppose that your demand curve for going to the Moonshine Club is given by the equation

P=20 – 0.5Q
P is the cost of entry (Price)

Q is quantity demand at each price (i.e. the number of times you would go to the Moonshine Club in the current academic year at each price.)

The current price of entry is £14.00.

PART A

Using the data above:

construct your demand schedule for going to the Moonshine Club. Use prices from 0 to £20.

plot and explain your demand curve for going to the Moonshine Club

demonstrate and comment on the way that your price elasticity of demand changes along the length of your demand curve. (Use price changes of £2.00 when calculating the price elasticity.

PART B

Explain, using relevant graphs, the way that your demand for going to the Moonshine Club might reasonably be expected to change in relation to each of the following:

1. a reduction in the cost of entry to the local cinema (a substitute good) from £8 to £7.50. Assume the change in the number of visits to the Moonshine Club, at any price charged by the Moonshine Club, to be 2.

2. a 10 percent increase in your annual income. Assume a 20 percent change in the number of visits to the Moonshine Club at each price.

PART C

If your demand curve is typical for all consumers would it be better for the Moonshine Club management to raise the cost of entry to £16.00 or to lower the price to £12.00. Explain why the Moonshine Club management should change the price in the direction you have chosen.

FURTHER DETAILS

Answer in essay/report format, including a short introduction and a short conclusion of no more than 100 words in total between them. Limit your answer to each of the three component parts of the assessment as follows: 350 words for Component/Part A, 350 words for Component/Part B and 200 words for Component/Part C. Include graphs in each of the three components/parts as appropriate. Please ensure that each component/part is clearly identifiable, as we will be using a marking scheme for feedback purposes based on the three components/parts.

Primarily base your answer on the data provided and not on data you may find in textbooks. However you can provide additional numerical and graphical illustrations if you think they are appropriate and add to your answer.

There is no requirement for the essay/report to be typed/word processed. If you use Excel to produce the graphs, or any other charting package, please be aware that it might not automatically put the lines in the correct places.

The essay requires you to demonstrate the following:

a) your knowledge and understanding of demand and different elasticity measures of demand.

b) your ability to analyse and interpret, using basic algebraic, numeric and graphical skills, data relating to demand.

c) your communication skills: the use of the written word, numbers and graphs to explain the way economists deal with demand and different measures of elasticity of demand.