Desklib - Online Library for Study Material with Solved Assignments, Essays, Dissertations

Desklib is an online library that provides study material with solved assignments, essays, dissertations, and more. The library offers high-quality content for various courses and exams. The platform is designed to help students with their academic needs and provide them with the necessary resources to succeed.

Running Head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
Student ID
Course ID

1ECONOMIC PRINCIPLES
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Answer a......................................................................................................................................2
Answer b......................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................7
Answer a......................................................................................................................................7
Answer b......................................................................................................................................8
Answer 5..........................................................................................................................................8
Answer a......................................................................................................................................8
Answer b......................................................................................................................................9
List of References..........................................................................................................................11

2ECONOMIC PRINCIPLES
Answer 1
Demand curve for a normal good is downward sloping from left to right. This indicates
an inverse relation between price and demand. According to law of good, all other things,
holding constant surge in price of good lowers demand and vice-versa. It is observed that sales of
beef is increasing along with its price. Apart from, other determinants factors of demand include
income, price of related goods, taste and preference and others1. Therefore, increase in sales of
beef does not necessarily influence by price and therefore, it is not possible to indicate a direct
positive relation between price and demand and therefore, a positively sloped demand curve.
One factor that might increases sales of beef is the increased price of substitutes chicken. It
might be the case that people increases their purchase of beef as other substitutes has become
more expensive.
Answer 2
Answer a
The harvest of wine grapes affects production of wine. Poor harvesting of wine grapes
indicate interruption of supply of grapes in the French wine industry. Lack of input supply leads
to a reduced output for final problem. Wine producers in France now faces a contraction in the
supply of grapes2. This affects wine production in the form of a lower production of wine. The
dynamic of French wine market can be understood from the figure given below
1 Fine, Ben. "Microeconomics." University of Chicago Press Economics Books (2016).
2 Pouw, Nicky. An Introduction to Gender and Wellbeing in Microeconomics. Routledge, 2017

3ECONOMIC PRINCIPLES
Figure 1: Condition in the French wine market
Because of a lower supply of grapes, French wine production will be reduced. The contraction of
wine supply in the French market is seen from a leftward shift of the supply curve from SS to
S1S1. The equilibrium in the market now shifts up to E1. Associated with new equilibrium, price
surges up to P1 while the available wine in the market goes down to Q1.
Answer b
The demand theory predicts a close association between demand of a product and price of
its substitutes. An increase in the price of substitutes reduce demand for the good making people
attracted towards substitutes3. This is what Australian wine market experiences after an increase
in price of French wine. The poor harvest of wine grapes reduces domestic supply or French
wine. French wine is now available at a high price4. The high price of French wine shifts
3 Rader, Trout. Theory of microeconomics. Academic Press, 2014.
4 Friedman, Lee S. The microeconomics of public policy analysis. Princeton University Press, 2017.

4ECONOMIC PRINCIPLES
consumer demand towards Australian wine. The demand for Australian wine increase causing a
resulted increase in price and output.
Figure 2: Condition in Australian wine market
As the demand for Australian wine increase, the demand curve shifts rightward. The new
equilibrium, E2 corresponds to a higher wine price in association with a greater wine output.
Answer 3
Except price, there is numerous factors affect demand and supply. The effect of external
factors causes a change in demand and supply. The equilibrium outcome changes with a change
in demand and supply condition. It is possible that there is change in market demand, market
supply or both demand and supply. Apple juice is a substitute product for orange juice. Fall in
the price juice helps to attract a higher consumer demand. Some customers who previously
consume orange juice now shift their demand to apple juice because of a lower relative price.
Consequently, there is a decline in price of apple juice causes a decrease in demand for orange

5ECONOMIC PRINCIPLES
juice. Decrease in demand generally causes a decline in equilibrium price and quantity5. In
addition to demand for orange juice, the supply side facto also needs to be considered. When
wage given to orange grove workers increases then then the wage cost of orange firms’
increases. Workers being one major input of orange juice production the rising wage cost reduce
supply of orange juice. As supply contract, equilibrium quantity is likely to be decreased while
price increases from reduced.
Therefore, as described above fall in demand for orange juice due to a decrease in price
of apple juice tend to reduce both equilibrium price and output. The reduce supply caused by a
resulted increase in labor cost tend to increase equilibrium price and a fall in equilibrium
quantity. At new equilibrium in the orange juice market equilibrium quantity decreases from
both demand and supply side change. In case of price the demand and supply side forces works
in opposite direction6. Lower demand tends to reduce price while lower supply tends to increase
price. The new equilibrium price depends on magnitude of active demand and supply force. The
three possible cases are described below
5 Stoneman, Paul, Eleonora Bartoloni, and Maurizio Baussola. The Microeconomics of Product Innovation. Oxford
University Press, 2018.
6 Arrow, Kenneth. "Microeconomics and operations research: Their interactions and differences." Information
Systems Frontiers 17.1 (2015): 3-9.

6ECONOMIC PRINCIPLES
Case a
Figure 3: Supply effect dominates and price rises
Case b
Figure 4: Demand effect dominates and price falls

7ECONOMIC PRINCIPLES
Case c
Figure 5: Equal proportionate change in demand and supply
Answer 4
Answer a
Taxi owners/drivers are willing to raise fares in order to increase their revenue. This is
possible only when demand is inelastic. Elasticity of demand indicates flexibility of demand to
change in response to price. Revenue is the earned income of a business firm and determined by
the sales volume and charged price by the business firm. The direction and magnitude of revenue
change depends on elasticity and hence an important role in pricing decision of business firm.
An increase in price does not necessarily increase revenue if there is a larger fall in sales volume

8ECONOMIC PRINCIPLES
indicating a relatively elastic demand7. For elastic demand price decline is a more suitable
strategy as it raises revenue by increase sales by a greater proportion. Taxi owners/drivers
assume the demand for taxi ride to be inelastic and hence, increase in fares leads to an increase in
revenue.
Answer b
Number of factors are at play is making demand for taxi rides to be inelastic. People can
make a much comfortable journey by taxi than by public transport. People are willing to avoid
heavy crowd in public transport. Choosing taxi as means of transport gives them comfortable and
time saving journey than public transport can ever does8. On time availability of service further
increase preference toward taxi rides and therefore, make the demand less effective from the
change in price.
Answer 5
Answer a
Short run price (P) = $4.50
Short run output (Q) = 50
Revenue = Price * Quantity = ($4.50 * 50) = $225
Average total cost = $5.00
7 Hill, Cynthia, and Bradley Schiller. The Micro Economy Today. McGraw-Hill Higher Education, 2015.
8 Maurice, S. Charles, and Christopher Thomas. Managerial Economics. McGraw-Hill Higher Education, 2015.

9ECONOMIC PRINCIPLES
Total cost = (output * average total cost) = (50 * $5.00) = $250
Profit = Total revenue – Total cost = $225 - $250 = - $25.
The firm thus makes a loss in the long run.
Figure 6: Short run scenario of monopolistically competitive firm
Answer b
As observed above, the short run price and output choice of the monopolistically
competitive firm leads to an economic loss. The equilibrium point however corresponds to the
profit maximization point as marginal revenue = marginal cost = $3.00. Loss arises as market
price is lower than average total cost. The price thus fails to cover total cost results in net loss.
The average variable cost however is lower than price9. Firms should continue operation in the
9 Rader, Trout. Theory of microeconomics. Academic Press, 2014.

10ECONOMIC PRINCIPLES
market with this amount of output till price is above the minimum average variable cost. If the
firm continues to make a loss even in long run than it should depart from the industry.

11ECONOMIC PRINCIPLES
List of References
Arrow, Kenneth. "Microeconomics and operations research: Their interactions and differences." Information
Systems Frontiers 17.1 (2015): 3-9.
Fine, Ben. "Microeconomics." University of Chicago Press Economics Books (2016).
Friedman, Lee S. The microeconomics of public policy analysis. Princeton University Press, 2017.
Hill, Cynthia, and Bradley Schiller. The Micro Economy Today. McGraw-Hill Higher Education, 2015.
Maurice, S. Charles, and Christopher Thomas. Managerial Economics. McGraw-Hill Higher Education, 2015.
Pouw, Nicky. An Introduction to Gender and Wellbeing in Microeconomics. Routledge, 2017.
Rader, Trout. Theory of microeconomics. Academic Press, 2014.
Stoneman, Paul, Eleonora Bartoloni, and Maurizio Baussola. The Microeconomics of Product Innovation. Oxford
University Press, 2018.

12ECONOMIC PRINCIPLES