Question

Taiwan is a major world supplier of semiconductor chips. A recent earthquake severely damaged the production facilities of Taiwanese chip-producing companies, sharply reducing the amount of chips they could produce. a. Assume that the total revenue of a typical nonTaiwanese chip manufacturer rises due to these events. In terms of an elasticity, what must be true for this to happen? Illustrate the change in total revenue with a diagram, indicating the price effect and the quantity effect of the Taiwan earthquake on this company's total revenue. b. Now assume that the total revenue of a typical nonTaiwanese chip manufacturer falls due to these events. In terms of an elasticity, what must be true for this to happen? Illustrate the change in total revenue with a diagram, indicating the price effect and the quantity effect of the Taiwan earthquake on this company's total revenue.

Short answer

Answer: The total revenue of a non-Taiwanese chip manufacturer can either increase or decrease due to the Taiwan earthquake, depending on the price elasticity of demand for semiconductor chips. If the demand is inelastic (E < 1), the increase in price outweighs the decrease in quantity demanded, leading to an increase in total revenue. If the demand is elastic (E > 1), the decrease in quantity demanded is greater than the increase in price, resulting in a decrease in total revenue.

Step-by-step solution

1. Define price elasticity of demand

Price elasticity of demand is a measure of how sensitive the quantity demanded of a good is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. This can be represented as: E = (\text{percentage change in quantity demanded})/(\text{percentage change in price})

2. Analyze the case where total revenue increases

If the total revenue of a non-Taiwanese chip manufacturer increases after the earthquake, it means that the increase in price outweighs the potential decrease in quantity demanded. For this to happen, the price elasticity of demand must be inelastic (E < 1). This is because, when demand is inelastic, consumers are less sensitive to price changes, and an increase in price will lead to a decrease in quantity demanded that is proportionally smaller than the price increase. Thus, total revenue will increase in this case.

3. Illustrate the change in total revenue with a diagram

To show this change in total revenue, we can draw a demand curve (D) that represents an inelastic demand for semiconductor chips. When the Taiwan earthquake occurs, the supply of chips decreases, leading to an increase in price (P1 to P2) and a decrease in quantity demanded (Q1 to Q2). Since the demand is inelastic, the decrease in quantity demanded will be smaller than the increase in price, leading to a higher total revenue (P2 * Q2 > P1 * Q1). [Insert a graph of inelastic demand with the changes in price and quantity] #b. Total revenue decreases#

1. Analyze the case where total revenue decreases

If the total revenue of a non-Taiwanese chip manufacturer decreases after the earthquake, it means that the increase in price doesn't outweigh the decrease in quantity demanded. For this to happen, the price elasticity of demand must be elastic (E > 1). This is because, when demand is elastic, consumers are more sensitive to price changes, and an increase in price will lead to a decrease in quantity demanded that is proportionally greater than the price increase. Thus, total revenue will decrease in this case.

2. Illustrate the change in total revenue with a diagram

To show this change in total revenue, we can draw a demand curve (D) that represents an elastic demand for semiconductor chips. When the Taiwan earthquake occurs, the supply of chips decreases, leading to an increase in price (P1 to P2) and a decrease in quantity demanded (Q1 to Q2). Since the demand is elastic, the decrease in quantity demanded will be larger than the increase in price, leading to a lower total revenue (P2 * Q2 < P1 * Q1). [Insert a graph of elastic demand with the changes in price and quantity]

Key concepts

total revenue

Total revenue is an essential concept in economics, especially when discussing changes in price and demand. It refers to the total amount of money a company receives from selling its goods or services. It is calculated by multiplying the price per unit by the quantity sold:

1. Total Revenue = Price × Quantity

Understanding how total revenue changes is crucial when analyzing how a market reacts to external events like natural disasters.
For example, if a semiconductor company can sell its chips at a higher price after an earthquake disrupts production, it might initially seem beneficial. However, the actual impact on total revenue depends on how much the quantity demanded changes in response to the price increase.
A graph representing total revenue's change can show whether a market experiences a price increase and if this is significant enough to offset a decrease in quantity, ultimately impacting total revenue either positively or negatively.

supply and demand

Supply and demand are the core forces in any market economy. They determine prices and quantities in any market, from simple commodities to complex technologies like semiconductors. When supply is disrupted, as with the earthquake affecting Taiwanese chip production, these dynamics can shift dramatically.
The supply curve represents the relationship between price and the quantity of a good that producers are willing to sell. With fewer chips available due to the earthquake, the supply curve shifts left, leading to higher equilibrium prices and lower quantities.
The demand curve, meanwhile, shows how much consumers want to buy at each price level. Understanding how demand reacts to price changes is fundamental to predicting how total revenue will be affected. Shifts in supply and demand reflect changes in the economy and can significantly impact market prices and availability.

inelastic and elastic demand

Demand elasticity is a measure of how much the quantity demanded of a good changes when its price changes. It's a critical factor in determining the impact on total revenue.

• Inelastic Demand (E < 1): In this case, consumers' quantity demanded doesn't change much with price increases. An increase in price might decrease quantity sold slightly, but the total revenue can still increase because the higher price compensates for the drop in quantity.
• Elastic Demand (E > 1): Here, consumers are responsive to price changes. A price increase will lead to a significant reduction in the quantity demanded. Consequently, total revenue can decrease because the lost sales are not compensated by the higher price.

Thus, whether a market is elastic or inelastic influences whether total revenue will rise or fall when external circumstances, like a supply disruption, force price changes.