Elasticity and Costs of Production

ECONOMIC
PRINCIPLES
STUDENT ID:
[Pick the date]

TASK 2: Elasticity
1) The higher price elasticity of demand would be observed for ‘overseas trip’. This is
because price elasticity tends to be higher for luxury goods and lower for necessity goods.
‘Overseas trip’ is a luxury item owing to which in case of price hike there would be a host
of cheaper alternatives or the trip can be deferred. However, this is not possible for
prescription medicines.
2) ‘Coffee’ sold in a cafe would have higher elasticity in comparison to the ‘hotel
accommodation’ during Sydney Olympics. The key determinant is number of substitutes
available which is higher for coffee owing to existence of close substitutes. This is not true
for hotel since limited accommodation would be available in Sydney in the vicinity of the
events during Olympics.
3) The relevant diagram capturing the situation is shown below.
In the given case, the original equilibrium existed at q1 quantity with P1 price. However,
owing to destruction of pineapple crop for some farmers, there is a reduction in supply
causing a shift in the supply curve from S1 to S2. The demand curve remains constant owing
to which prices have increased to P2 from P1. Even though quantity demanded has decreased
but the decrease is much lower than the increase in prices. As a result, the pineapple farmers
as a whole would be better off because of the floods (Samuelson & Marks 2013, p. 201).

Task 3: Costs of Production
1) The application of license fee would lead to an increase in the fixed cost as the quantum of
fee is the same for each of the networks irrespective of the number of viewers that each
network has.
2) The new contract would change the variable costs as the ‘camera lens’ is used in mobile
phones owing to which the impact would depend on the number of mobile phones
produced.
3) The relevant diagram for minimum efficient scale is indicated below.
The minimum efficient scale may be defined as the lowest production level which a business
would have to achieve in order to ensure that long run average cost is minimum. For the firms
that are not able to reach the minimum efficient scale, it is highly likely that such firms would
have to close down in case of competitive markets as the other producers in the long run
would produce at MES. However, a monopolist can operate in the long run without achieving
MES so as to maximise profits (Arnold 2017, p. 145).