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Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the student
Name of the university
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1:...................................................................................................................................2
Answer 2:...................................................................................................................................4
a).............................................................................................................................................4
b)............................................................................................................................................6
Answer 3:...................................................................................................................................8
Answer 4:.................................................................................................................................11
a)...........................................................................................................................................11
b)..........................................................................................................................................12
Answer 5:.................................................................................................................................13
References:...............................................................................................................................17

2ECONOMICS ASSIGNMENT
Answer 1:
The Palo Alto has received huge demand for their foods within the market, while
another restaurant, providing same kind of services with comparatively higher prices, cannot
increase its demand. According to the demand law, increase in price of foods can lead the
quantity demanded of those items in an opposite direction (Amir, Erickson and Jin 2017). In
this context, other factors, like income, tastes and preferences of consumers along with
impact of related commodities are considered as constant. This is because; those factors can
also influence the demand for foods significantly.
The popular restaurant has excess demand for their foods compare to the supply.
According to the demand and supply concept, excess demand influences the price of a
product to increase further (Tian 2016). Hence, this concerned restaurant can also increase
prices for their foods to earn higher amount of revenue.
Figure 1: Excess demand for the popular restaurant
Source: (created by author)
The figure 1 has represented a negatively sloped demand curve of the restaurant.
Moreover, this figure has also depicted an upward rising supply curve of this restaurant. By
equating these two curves, the popular restaurant can obtain an equilibrium price level along

3ECONOMICS ASSIGNMENT
with its corresponding level of output. In this figure, Pe and Qe are represented those amounts
price and output, respectively. However, according to the given situation, this concerned food
seller has charged a lower price to its customers. The figure has denoted this price by P1.
Thus, according to the figure, this popular restaurant has Q1Q2 amount of excess demand at
this lower price level. In this context, it can be mentioned that, the seller has not increaseed
its supply to fulfill this excess demand. From this, it can be stated that the concerned food
seller has enough opportunity to increase its price of foods up to Pe level. By increasing the
amount of price, this popular restaurant can earn more revenue.
On the other side, restaurant with empty seats may decrease their prices for attracting
more customers. Due to higher amount of prices, the demand of this restaurant has decreased
and consequently excess supply has occurred (Goldenberg et al. 2017). Hence, it can be
beneficial for this specified restaurant to decrease its price level. This can also be described
with the help of a diagram.
Figure 2: Excess supply for the empty seat restaurant
Source: (created by author)
In figure 2, the demand and supply curves of this restaurant with empty seats have
been drawn, while each curve has possessed its normal slope. By equating these two curves,

4ECONOMICS ASSIGNMENT
MC
AC
AVC
AR=MR
O
Output
Price
S
J
Q0
P0
C
equilibrium amount of price and corresponding level of output of this restaurant can be
determined. Those amounts equilibrium amount of price and output are Pe and Qe,
respectively. However, this less popular food seller has charged higher amount of price, that
is, P2, compare to its actual market price. Consequently, this empty seat restaurant has Q3 Q4
amount of excess supply at this higher price level. Hence, by attracting more customers, this
restaurant can reduce its excess supply. For doing so, this concerned food seller may reduce
its prices for foods by P2Pe amount.
Answer 2:
a)
In a perfectly competitive market, a seller has an upward slopping supply curve,
which can be obtained from the upward rising portion of the marginal cost curve (Gerakos
and Syverson 2017). From this positive slope of supply curve, it can be said that an increase
in price can lead the concerned seller to supply more amount of goods.
Figure 3: Short-run supply curve in a competitive market

5ECONOMICS ASSIGNMENT
MC
AC0
AR=MR
O
Output
Price
Q0
P0
C0
C1
Q1
AC1
Source: (created by author)
According to this figure, the short-run supply curve of is seller can be denoted by SJ
portion of the total marginal cost curve. S is the minimum level of production below which a
seller needs to shut down its business activity. That means this is the minimum level of
production from where the seller can bear its fixed costs only. However, beyond this point,
the seller cannot bear its total cost and it becomes beneficial for the concerned seller to stop
production. Hence, form this, it can be stated that a seller has possessed an upward slopping
supply curve, under this competitive market. Here, this concerned person is supplying Q0
amount of output at price level P0. Moreover, the concerned seller has gained P0C amount of
profit from this market.
Now, the seller can restrict the amount of product supply in the short-run under
perfectly competitive market. This implies that, at initial price level, the concerned person is
now supplying fewer amounts of foods. However, by restricting the amount of supply, the
seller can bear less amount of production cost (Azevedo and Gottlieb 2017). This implication
can be represented with a suitable diagram.

6ECONOMICS ASSIGNMENT
Figure 4: Supply restriction of a seller under short-run
Source: (created by author)
According to above figure, the seller has restricted its supply of production by Q1Q0
unit. However, the concerned person, being a price-taker, can charge P0, as before. In
addition to this, the production cost of this seller has also decreased by C0C1 amount. Hence,
in this situation, this person can earn higher amount of profit, compare to before. In the above
figure, it can be seen that the amount of P0C1 is greater compare to the P0C0.
b)
According to the assumptions of perfect competition, the number of buyers and sellers
is large within the market. Moreover, each seller and buyer has perfect knowledge regarding
the activities of other buyers and sellers (Keyhani, Lévesque and Madhok 2015). Each seller
is supplying identical products to their customers. Consequently, a buyer can substitute one
item with another, as each goods are close substitute of each other. The market price is
determined by equating market supply of industry with market demand of all customers
(Kirzner 2017). Hence, a unique price is charged at which every seller can sale their products
and every buyer can buy the one. This means, each buyer and seller is price-taker. However,
in the given case study, two restaurants have charged different prices for their foods. This is
not the characteristic of a perfectly competitive market. Hence, those restaurants are not
performing under this market environment.
According to the given situation, restaurants are operated under monopolistically
competitive market, where characteristics of both perfect competition and monopoly can be
seen. Under this monopolistically competitive market, large numbers of sellers sell products
to the large number of buyers (Assenza, Grazzini, Hommes and Massaro 2015). Here,
products, which are sold in the market, can be said as close substitute but the not the perfect
one and this in turn has helped a seller to behave like a monopolist. Consequently, each seller

7ECONOMICS ASSIGNMENT
Price and cost
Output
O Qe
Pe
P0
D=AR=P
MR
MC
AC
faces a negatively sloped demand curve and can charge any prices. Based on those different
prices, consumers decide their quantity of demand. Moreover, each seller bears an extra cost
for advertisement due to product differentiation. This helps them to attract customers (Dorn et
al. 2017). The seller can enjoy normal profit, excess profit or can incur loss during their
short-run operation. However, in the long-run, those sellers can leave the market if they incur
only loses. This means, a firm can freely enter into the market or can leave from the one.
Based on the above discussion, it can be said that, under this perfectly monopolistic
market, different firms can set different amount of prices. This phenomenon has also
happened in the given extract. Here, two different restaurants have charged two different
levels of prices. Moreover, due to this phenomenon, two restaurants have also experienced
different level of demand for their products. On the other side, under a perfectly competitive
market, those restaurants need to charge same amount of prices (Gerakos and Syverson
2017). This is because; each seller and buyer acts as a price-taker under this competitive
market.

8ECONOMICS ASSIGNMENT
Figure 4: Monopolistic competitive market
Source: (created by author)
In figure 4, an equilibrium condition under this concerned market structure, is
represented. According to this diagram, the equilibrium amount of output is Qm while the
corresponding level of price is Pm. Here, the seller is enjoying normal profit.
Based on the characteristics of this monopolistic competitive market, it can be stated
that all restaurants also follow the same market structure, where each of them sell similar
products but these can be slightly different based on quantities and qualities (Frick, Gergaud
and Matic 2017). Hence, they can charge different prices for their products and advertise their
products to attract more customers.
Answer 3:
Under monopoly market, a seller either can increase the amount of revenue by
charging higher prices or can sell higher amount of output by charging lower prices.
According to the concept of monopoly, a single firm enjoys the entire market power and this
in turn helps the concerned organization to charge any price for its output (Dawes 2017).
Hence, the firm faces a negatively sloped average revenue curve or the demand curve. This
implies a negative relation between prices, charged of the firm, with its quantity demanded.

9ECONOMICS ASSIGNMENT
Price and cost
Output
O Qe
Pe
P1
D=AR=P
MR
MC
AC
Q1
Figure 5: Monopoly Market
Source: (created by author)
The above figure has depicted an equilibrium condition of monopoly market, where
Pe denotes the equilibrium amount of price and Qe represents the corresponding level of
output. If the seller charges higher amount of price by Pe P1 unit, then the amount of quantity
demanded can be decreased in the market by Q1 Qe unit.
However, under the assumption of “value of exclusivity”, a seller has decided to
restrict its amount of output, keeping the price at lower level. According to this phenomenon,
the seller is now selling lower amount of output at a fixed price (Peres and Van den Bulte
2014). As the monopolist does not possess any supply curve, the impact of supply restriction
influences the demand curve of that concerned person. The concept of excludability along
with lower price helps a seller to increase its demand for product my significant amount.
Consequently, the demand curve and marginal revenue curve of the concerned person have
shifted to the right. This can be explained with the help of below diagram.

10ECONOMICS ASSIGNMENT
Figure 6: Impact of value of restriction on a Monopoly seller
Source: (created by author)
According to figure 6, the initial level of demand curve for this seller is represented
by D1 curve. Hence, the corresponding marginal revenue (MR) curve of this person is
represented by MR1. By equating the marginal cost (MC) curve with MR1, the seller can get
equilibrium amount of output and its corresponding level of price. The above diagram has
represented those amounts output and price by M1 and P. After implementing supply
restriction, the new demand curve of this seller has become D2 and the corresponding
marginal revenue curve has become MR2. Hence, at Price P, the quantity demanded for the
output has increased by M1M2 amount. Consequently, the concerned person can earn
OPBM2 amount of revenue compare to the previous level. This has helped the seller to earn
more profit as cost has remained at E2M2 unit. This amount is low compare to the previous
amount of cost, that is, E1 M1 unit.
Hence, the seller has not incurred any loss in this context. By charging lower prices,
the concerned person has led the demand to increase further. On the other side, by charging

11ECONOMICS ASSIGNMENT
Price
O
P1
P0
OutputQ0
MC
D0
D1
MR0MR1
AC
C
higher prices, seller can influence the demand adversely and this in turn can force the profit
of that person to decrease by significant amount.
Answer 4:
a)
Through price discrimination, a monopolist can charge different prices for same
product. This phenomenon is also applicable for a restaurant (Ding and Wright 2017). After
restricting the quantity supplied, a seller can adopt some illegal activities to offer the same
product at higher prices. This concept can be described in the following diagram.
Figure 7: Price discrimination under monopoly at fixed price level
Source: (created by author)
The above diagram has represented a condition of price discrimination for a
monopoly seller. According to this figure, the initial demand curve and marginal cost curve
are D0 and MR0, respectively. The seller can receive equilibrium amount of price and output

12ECONOMICS ASSIGNMENT
by equating demand curve or average revenue curve with marginal cost curve. The initial
amount of price is P0, at which the seller is selling Q0 amount of output. To produce Q0
amount of output, the seller needs to bear some costs, which are represented by average cost
(AC) curve. However, after applying sale restriction, the concerned person can charge higher
price, that is, P1 through applying illegal activities for providing same amount of output
(Heywood, Wang and Ye 2018). The cost structure of this concerned person has remained
stable position. Thus, the seller can earn higher amount of profit. This can also be described
with the help of figure 8. The initial amount of profit is P0C while, after price increment, this
amount can be represented by P1C unit. According to the figure, the difference between C
and P1 is greater compare to the difference between C and P0.
In this context, the seller can charge P0 price for some customers and P1 price for
others, who want to pay higher prices. Here, legal price is P0. As the product has huge
demand in market, producers can increase this demand more by restricting supply. However,
the concerned person cannot practice this illegal activity, if the market demand has been
decreased significantly for this higher amount prices (Schulte and Pibernik 2017). This is
because, under monopoly market, a firm or seller cannot influence both price and its quantity
demanded. Consumers influence the demand for a product, based on its prices.
b)
According to the nature of monopoly power, price discrimination can be divided into
two parts. Those are anti-competitive and pro-competitive. Under anti-competitive price
discrimination, the monopolist can enjoy the entire market and no other firms can enter into
it. The chief reason behind this anti-competition is the pricing strategy of the monopolist
(Agostini, Willington, Lazcano and Saavedra 2017). The person set the price level in such a
way that this discourages other firms to enter. This happens when the seller charges lower

13ECONOMICS ASSIGNMENT
price. As other firms cannot charge this lower level of prices, the monopolist does not
experience any competition.
Pro-competition, on the other side, describes the opposite concept. In this
competition, other firms can enter into the market and consequently, the market has turned
into a competitive one (Jora et al. 2017). In this situation, other firms can charge same
amount of prices like the monopolist. Hence, the impact of price discrimination has become
ineffective.
In the given case study, price discrimination can be seen in the form of anti-
competitive. According to this concept, a large seller or restaurant can charge lower price on
its product to restrict other small sellers from expanding their business (Agostini, Willington,
Lazcano and Saavedra 2017). This in turn can help this large restaurant to reduce its
competition level. Moreover, this restaurant can practice price discrimination by large extend.
Answer 5:
According to the law of demand, price and quantity demanded has a negative
relationship. This implies that, an increase in price of a particular commodity can decrease its
quantity demanded, significantly. Moreover, the opposite situation can also be occurred
(Spinner, Casale, Brosig and Kounev 2015). In this situation, a decrease in price can
influence the quantity demanded for this commodity to increase further. However, demand
curve can be influenced by other factors as well. For instance, changing income or tastes and
preferences of a consumer can influence the demand for this product when price level
remains unchanged. Hence, by considering those factors as constant, the negative relation
between price and quantity demanded can be discussed.
Based on the above discussion, it can be stated that a negatively sloped demand curve
can be seen for a particular product. This is also true for the houses, gold. Those items have
possessed elastic demand curve with negative slope (Hilber* 2017). In this context, the

14ECONOMICS ASSIGNMENT
Price of houses and gold
Quantity demanded for houses or gold
P0
P1
O
Q0 Q1
Demand curve
concept of price elasticity can be mentioned. According to this concept, a small change in
price can influence the demand for those products by large extend. When housing prices or
price of gold has decreased by small amount, the demand for those products has increased
significantly (Diederich and Goeschl 2017). The following diagram can show this.
Figure 8: Elastic demand curve for houses and gold
Source: (created by author)
The above figure has represented an elastic demand curve for houses and gold. Based
on this figure, it can be described that the demand for those products has increased by Q0Q1
unit when their price has decreased by P0P1 unit. Moreover, the amount of Q0Q1 is greater
compare to that of P0P1.
On the other side, company shares have faced a positively sloped demand curve. This
means, the demand law is not applicable here. Consumers demand more amounts of company
shares when their prices have started to increase (Bayoumi and Eichengreen 2017). The
opposite situation has occurred when prices of those products have started to decline. This
can also be represented with help of above diagram.

15ECONOMICS ASSIGNMENT
Price of a company share
P1
P0
O
Q0 Q1 Output
Demand curve
Figure 9: Upward rising demand curve for company shares
Source: (created by author)
Figure 9 has represented an upward slopping demand curve for company shares.
According this figure, the demand for company shares has increased by Q0Q1 unit while the
price of this product has also increased by Q0Q1 unit.
Hence, from the above discussion, it can be stated that the houses and gold has
followed the law of demand. However, this law is not applicable for company shares.
The demand curve today for both houses and gold can shift to the right, if consumers
expect that the demand for those products can increase in future (Burt et al. 2017). This is
because; an increase in demand can lead the prices of those products to increase in future.
Hence, the demand for those products may increase today at same price level.

16ECONOMICS ASSIGNMENT
Price of houses or gold
Quantity demanded for houses or gold
P0
O
Q0 Q1
D0
D1
Figure 10: shift in demand for houses and gold
Source: (created by author)
Figure 10 has represented that the initial demand curve for houses has remained at Q0
while price is remained at P0. However, after future prediction of consumers, this demand
curve has shifted to the right. Hence, at same price level, consumer can demand Q1 amount
of output.
Moreover, for company shares, the same situations can occur. In this context,
consumers can shift along the demand curve and this in turn can lead the buyers to move
along the demand curve (Ammenberg 2018). Figure 10 has represented this situation.
Increase in demand for houses, gold and company shares can lead the price of those
products to increase in future. Prices of those items can decrease in future (Venizelou et al.
2018). However, based on predictions, consumers have started to demand those items by
more amounts. This excess demand further can influence the price to increase in today and
consequently consumers can assume this increasing trend in future.

17ECONOMICS ASSIGNMENT
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18ECONOMICS ASSIGNMENT
Ding, R. and Wright, J., 2017. Payment card interchange fees and price discrimination. The
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