Economic Principles: Demand and Supply Dynamics, Elasticity, and Monopolistic Competition

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

1ECONOMIC PRINCIPLES
Table of Contents
Question 1........................................................................................................................................2
Question 2........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................3
Question 3........................................................................................................................................4
Question 4........................................................................................................................................7
Question a....................................................................................................................................7
Question b....................................................................................................................................7
Question 5........................................................................................................................................8
Question a....................................................................................................................................8
Question b....................................................................................................................................9
Reference list.................................................................................................................................10

2ECONOMIC PRINCIPLES
Question 1
The theory of demand suggests an inverse relation between price and quantity demanded
of a commodity. This implies if other demand determinant factors remain constant then rise in
price of a good is associated with a decline in demand. Following this law of demand, a
downward sloping demand curve is obtained. An upward sloping demand curve on the other
hand indicates rise in demand along with a rise in price. In the give scenario, it has observed that
sales of beef increases despite increase in price (Carlton and Perloff 2015). However, only from
this observation it cannot be said that the demand curve slopes upward. This is because apart
from price there are several other factors that influence demand and sales. The sales of beef
might be increased because of a much greater increase in price of substitutes like chicken, lamb
or such others. If price increase of beef is relatively lower than that of its substitutes then beef
demand increases. With a relatively lower price, beef seems to be cheaper alternative. Therefore,
with knowing condition of other factors influencing demand, it is not possible to derive demand
relation with price.
Question 2
Question a
Supply of a good depends on the available supply of inputs. The main input in wine
production is wine grapes. The poor harvest of wine grape in France affects supply of wine
grapes in the wine industry. The reduced supply of wine grapes thus hampers the production of
wine French wine. The reduced production of French wine shifts he supply curve upward
(Varian 2014). The shortage of wine supply in French market increases equilibrium price while
reducing equilibrium supply of French wine.

3ECONOMIC PRINCIPLES
Figure 1: Effect of poor wine harvest on French wine
(Source: as created by Author)
The poor harvest thus reduces supply of French wines, which leads to an increase in wine price
to P1 and reduces available supply to Q1.
Question b
Australian wine is a substitute to French wine. The supply shortage of French wine
increases price French wine. Faced with a higher price, consumers of wine in France now try to
find an alternative cheaper substitute (Baumol and Blinder 2015). High price of French wine
thus make Australian wine relatively cheaper. People now tend to consume more Australian
wine. As demand for Australian wine increase, market of Australia wine expands with an
increase in both equilibrium price and quantity.