Assignment for Economics - Demand and Supply Theory
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Added on 2020-05-28
Assignment for Economics - Demand and Supply Theory
Added on 2020-05-28
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Running Head: ASSIGNMENT FOR ECONOMICSAssignment for economicsName of the StudentName of the UniversityAuthor Note
1ASSIGNMENT FOR ECONOMICSTable of ContentsSection A:..................................................................................................................................2Answer to question 1:................................................................................................................2Answer to question 2:................................................................................................................3Answer to question 3:................................................................................................................4Answer to question 4:................................................................................................................6Section B:...................................................................................................................................8Answer to question 1:................................................................................................................8Answer to question 2:..............................................................................................................12Answer to question 3:..............................................................................................................18
2ASSIGNMENT FOR ECONOMICSSection A:Answer to question 1:a) Without international trade, there will be equilibrium in the domestic market. That is atthis level, quantity demanded of rise will be equal to quantity supplied. Quantity demanded ofrose is equal to quantity supplied at US $ 175 per container. b) At price US $ 175, UAE has comparative advantage in producing roses compared to restof the world, as wholesaler can get roses at lowest price within their domestic country.c) The lowest possible price cannot be less than $ 125 where roses can be purchased inauction. Hence, if wholesalers buy rose at $ 125, then they will get only 2 million containers ofroses and they need to import 10 million containers. Answer to question 2:a) The supply curve will be a vertical line as blue period work of Picasso is not availableand hence supply cannot be increased. It will remain fixed at 1000 canvases.
3ASSIGNMENT FOR ECONOMICSb) Demand is the only factor determining the price of Picasso blue period work as supplyis fixed. Any change is price is impacted by change in demand. It can be illustrated by diagrambelow:c)Requirement ofPicasso blue period has become essential for rich art collector and this lead to increase inquantity demanded.Increase indemand is shifting demand curve from D1 to D2 and quantity supplied remaining unchanged,price increases from P1 to P2.
4ASSIGNMENT FOR ECONOMICSAnswer to question 3:Market failure occurs due to inefficient resources distribution that is dealt by governmentthrough adoption of various tools and responding to market failures to varying degrees. Some ofthe tools that are taken by government for dealing with market failures are as follows:Direct provision of merit and public goods- Goods supply that have positive externalitiescan be controlled by government by way of supplying high amounts of parks, educationand libraries to public. Community benefits of public goods can be maximized byintervention of government in regulation, production, management and maintenance. Itwould also help in congestion or over exploitation of resources. Allocative inefficiencyin allocation of resources of merit goods such as healthcare and education can be done bygovernment intervention by way of subsidization (Patterson 2015). This will help indealing with market inefficiency of such goods. Subsidies- Government takes the measures of reducing goods price that is based onbenefits received by public. This particular tool is considered appropriate for encouragingbehavior generating positive externalities. Subsidy tool enables consumers paying theprice that is socially efficient comprising of external benefits and thereby leading togreater social efficiency. Government efforts to subsidize public transport will motivatepeople to use public transport and reducing negative externalities of private vehicles(Feenstra 2015).
5ASSIGNMENT FOR ECONOMICSTaxation- Government to deal with inefficiency in market intends to place taxes oncertain goods that would assist in discouraging its usage and leading to external costinternalization (Hursh and Roma 2016). This can be explained with the help of anexample, taxing tobacco products and this would have subsequent impact on tobaccoconsumption cost that is leading to increase in consumption cost. Property rights extension and tradable permits- Government take measures for creatingprivatization of some public goods such as rivers, lakes and beaches and this is intendedto create market for pollution of these non private goods. Fines are imposed onindividuals for polluting these areas. Tradable permits is another considerable toolintended to create market efficiency that gives firms permission to produce somethingcalled pollution in association with goods production (Gwartney et al. 2014). In order toincrease or decrease the production, any one firm can trade permits with one another.This helps in reducing pollution as it is the basis behind cap and trade. Controlling domestic price movements (Maximum and Minimum price)- One of theintervention measures of government to deal with market failure is imposition of pricecontrol. Government might impose price ceiling if the market clearing price for servicesand goods is considerably higher. Price ceiling imposition is the setting of maximumlegal limit price of goods and services. Such ceiling is imposed on merit and essentialgoods and monopolist charging unusual higher price. Railway industry can increase thetickets price to an unreasonable extent because of monopoly power. Imposition ofmaximum price by government will assist in keeping tickets at reasonable level. In caseof minimum price, government takes the effort of setting minimum legal limit forparticular goods and services. This particular measure is undertaken by government to
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