# ECO401 Economics Assignment No 1 Solution Fall 2012

Background:
Toyota is one of the world’s biggest manufacturers of motor vehicles. It has worldwide market spreading from Asia to North America, Europe and other parts of the world. Toyota has different designated models which are produced specifically for the country. Depending upon the market demand and supply conditions, Toyota keep on revising their prices.
The case:
Suppose demand and supply conditions of Toyota cars in year 2011 have been given below.

 Month Total Price Total Total charged In Quantity Quantity ‘000000000 sold In ‘000 Demanded In ‘000 July 2.6 3.33 3.50 August 2.4 3.06 3.20 September 2.8 3.30 3.60 October 2.9 3.37 3.80 November 3.1 3.88 4.20 December 2.9 3.74 4.15

It has been observed that the sales of Indus Motor Company’s (IMC) Toyota cars– the highest selling cars in the country – decreased 24% in August 2012 to 2,800 units, from 3,060 units in August 2011. There are many reasons of declining trend in the sale of Toyota cars. One of the main reasons is that during the last six months almost 25,000 used vehicles have been imported, amounting to 25 per cent of the total market demand for automobiles in the country and causing an annual loss of sales revenue worth Rs.20 billion to the parts-manufacturing industry. Another reason is that the Indus Motors was short-sighted in making the necessary change to bring cars to match the Euro-II standards and thusly, had to increase the prices overnight when the deadline of July to swap to Euro-II standards had passed and companies hastily switched over to the new Euro standards.

Requirement:
Part A:
Keeping in view the demand supply conditions of Toyota cars given in the table:
a. Calculate the point elasticity of demand and supply of Toyota cars from August-July 2011.
b. Calculate the Arc elasticity of demand and supply of Toyota cars from December-July 2011. Marks 🙁 5+5)
Part B:
a. Why the sales revenue of Toyota cars has decreased in 2012? Elaborate your answer by keeping in view the calculated answers in part A.
b. What will be the effect on the equilibrium situation of Toyota cars demand curve as Toyota did not converted their cars on Euro-II standards? Illustrate graphically by taking supposed equilibrium condition of Toyota cars.
c. As an Economic advisor, if you suggest Pakistan’s department of transportation to impose costly regulation on manufacturers of imported in order to facilitate domestic infant industry. What will be the impact of costly regulation on the equilibrium situation of Toyota cars? Illustrate graphically.
Marks 🙁 4+3+3)

Solution:

A)    Calculate  point elasticity quantity supplied :

Calculate the point elasticity of demand and supply of Toyota cars from

August-July 2011.

Calculate point elasticity of supply:

Point elasticity of  Supply = % change in quantity of supply / %change in price

Involves two steps:

1.    Firstly Calculate % Change in quantity of Supply

Supply new=3.06

Supply old=3.33

% Change in quantity of supply =Supply new- Supply old / Supply old

=3.06-3.33 /3.33

=0.27 /3.33

=0.081

2.    Second step  is calculate %change in price

New Price =2.4

Old Price =2.6

% change in price =New Price-Old price / Old price

=2.4-2.6 /2.6

=0.2 /2.6

=0.076

Now put the both values in formula

Point elasticity of  Supply = % change in quantity of supply / %change in price

=.081 /0.076

=1.066

Calculate Point elasticity of demand:

Point  Elasticity of Demand = % change in quantity of demand / %change in price

1.    Firstly calculate % change in quantity of demand

Demand  new=3.20

Demand  old=3.50

% Change in quantity of Demand = Demand new-  Demand old / Demand old

B)    Calculate Arc elasticity:

Part 2;