Reference no: EM132092744

Principles of Economics for Accountants Assessment Task -

Instruction - Responses to article. Read the article and answer the questions.

Article - Inelastic demand for rubber gloves by P.Aruna from The Star Online 16 September 2017.

(1) P Aruna claims that "the demand for both natural...and nitrile...rubber gloves is perceived as inelastic or unaffected by changes in pricing".

(a) What is meant by inelastic demand?

(b) Explain the price elasticity of demand concept.

(c) Use the graph below to explain why the quotation above is misleading. Ensure you provide at least two examples of different points on the demand schedule, and provide a written explanation.

(d) If demand is inelastic, explain to the Board of Directors why price increases will not necessarily maximize profit from rubber glove sales.

(2) The article states that "Manufacturers seem generally unfazed by the rising costs...".

(a) Excluding exchange rate impacts, what rising costs are being referred to? Do they impact the Demand or Supply curve and what would the impact be?

(b) The diagram below shows the market for rubber gloves. Q* is the quantity of rubber gloves demanded.

I. Show and label a supply curve and equilibrium price for rubber gloves.

II. Shade in and label the original consumer and producer surpluses before the supply curve shifts.

III. Now, suppose that the supply curve shifts inward reflecting higher production costs. Explain, using the graph above, how this would this affect the consumer and producer surpluses.