ECONOMICS Economics Name of the Student Name of the University Course ID

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

1ECONOMICS
Table of Contents
Answer 1....................................................................................................................................2
Answer a.................................................................................................................................2
Answer b................................................................................................................................3
Answer c.................................................................................................................................4
Answer 2....................................................................................................................................5
Answer 3....................................................................................................................................6
Answer 4....................................................................................................................................8
Answer a.................................................................................................................................8
Answer b................................................................................................................................9
Answer 5....................................................................................................................................9
Reference list............................................................................................................................12

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Answer 1
Answer a
Price of related goods is a significant determinant of demand. For substitute goods,
change in price of one good has a positive effect on demand of the related good. With
increase in price of one good, demand for the substitute good increases and vice-versa. Now,
given that leather jackets are substitutes of woollen jumpers, a decrease in price of leather
jacket decreases the demand for woollen jumpers (Cowell 2018). This is because, with a
decrease in price of leather jacket, the relative price of woollen jumpers increase, which
reduces its demand. The equilibrium adjustment in the market of woollen jumper is described
below.
Figure 1: Impact of a price decrease of leather jacket
(As created by Author)
In figure 1, the initial demand and supply condition in woollen jumper market are
portrait by the respective demand and supply curve of DD and SS. Now, following a decline
in price of leather jackets, demand for leather jacket increases (Friedman 2017). As people

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purchase more leather jackets, demand for woollen jumpers fall. Consequently, demand curve
for woollen jumpers shifts inward to D1D1. Lower demand reduces equilibrium price of
woollen jumpers to P1. The equilibrium quantity falls to Q1.
Answer b
The adaption of new machines, which has increased the productivity of knitting
industry increase supply of woollen jumpers in the industry. At each price, there is now a
larger quantity of woollen jumper available in the market. The increase in supply of woollen
jumpers increases equilibrium quantity and reduces equilibrium price (Stoneman, Bartoloni
and Baussola 2018). The process of equilibrium adjustment in the market is explained with
the help of following figure.
Figure 2: Impact of new productive technology in knitting industry
(As created by Author)
The resulted increase in supply following adaption of new technology increase supply
of woollen jumpers. The supply curve shifts outward. The new supply curve is obtained as
S1S1. New equilibrium in the market occurs where new supply curve and existing demand

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curve intersect (Mankiw 2014). Corresponding to new equilibrium price lowers to the level
P1. The equilibrium quantity in the market increases to Q1.
Answer c
Income has a positive effect on demand of a normal good. That is demand increases
when there is a gain in income. Demand on the other hand reduces when there is decline in
income. Given that, woollen jumpers are normal goods, an increase in income leads to an
increase in demand (Varian 2014). Following a demand expansion, market reaches to a new
equilibrium as illustrated in the figure below.
Figure 3: Impact of an increase in income
(As created by Author)
For a given expansion of income, woollen jumpers’ demand increases causing
demand curve of woollen jumpers to shift rightward. The excess demand in the market
increases equilibrium price to P2. The higher demand increases equilibrium quantity sold in
the market. The new equilibrium quantity is Q2.

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Answer 2
The statement confuses between the change in quantity demand and that of a change
in demand. Former causes a shift of the demand curve while the latter causes movement
along the demand curve. The health study showing that eating clove of a garlic has a
beneficial effect on health in term of preventing heart diseases, people increases demand for
garlic. As people eat more and more garlic, demand for garlic increases shifting the demand
curve rightward to D2D2. The increase in garlic demand increase equilibrium price and
equilibrium quantity in the garlic market (Cowen and Tabarrok 2015). Equilibrium price of
garlic increases to P2. The statement stating, “Consumers, seeing that the price of garlic has
gone up, reduce their demand for garlic resulting in a fall in the price of garlic. Therefore,
the ultimate effect of the study on the price of garlic is uncertain” is economically incorrect.
Increase in price of garlic cause no further decline in demand as change in own does not alter
demand (Mochrie 2015). It only changes quantity demand. As there is decline in quantity
demanded and not demand, it will not have any effect of price eliminating the possible
uncertainty as stated.
Figure 4: Change in demand of garlic

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(As created by Author)
Answer 3
The combined forces of demand and supply determines equilibrium in the market.
Change in either demand or supply or both change the equilibrium position altering
equilibrium price and quantity. The demand for chicken in Sweden decrease due to the
discovery of bird flu. Contraction in demand causes the demand cure to shifts to left. Decline
in demand likely to cause a decline in both equilibrium price and equilibrium quantity
(Kolmar 2017). At the same time, precautionary measures taken by the government reduces
the stick of chicken in the country. The fall in supply causes equilibrium quantity to increase
while equilibrium quantity falls. As both demand and supply, push equilibrium quantity of
chicken downward, the equilibrium quantity of live chicken decreases at the new equilibrium.
The effect on equilibrium price however is ambiguous. The decline in demand pushes down
equilibrium price while a fall in supply creates an upward pressure on equilibrium price.
Price can either increase or decrease or stays same. The net effect on price depends on the
magnitude of forces of demand and supply. The three possible change in the market for live
chicken is described below.
Case 1: Demand changes more than supply
Figure 5: Demand changes more than supply

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(As created by Author)
In this situation, the decline in demand exceeds that of the supply contraction.
Accordingly, demand curve shifts from DD to D1D1. The shift n supply curve is relatively
small from SS to S1S1. As the demand effect dominates, there is a decline in equilibrium price
and quantity.
Case 2: Supply changes more than demand
Figure 6: Supply changes more than demand
(As created by Author)
Under this situation, contraction in supply is more than the contraction in demand. As
a result, the magnitude of shift in supply curve is more than the shift in demand curve
(Moulin 2014). At the new equilibrium position, equilibrium quantity declines while
equilibrium price increases.

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Case 3: Change in demand is same as change in supply
Figure 7: Change in demand is same as change in supply
(As created by Author)
This is a situation where demand curve shifts by the same magnitude as that of the
supply curve. As change in demand and supply is the same, there is no effect on equilibrium
price. The equilibrium price remains at the same level as previous and equilibrium quantity
declines.
Answer 4
Answer a
Price elastity of demand= Percentage change∈ quantity demand
Percentage change∈ price
¿ Δ Q
Δ P × Paverage
Qaverage
¿ Q2−Q1
P2−P1
×
P1 + P2
2
Q1 +Q2
2

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¿ 500−475
8−10 ×
10+8
2
475+500
2
¿ 25
−2 × 9
487.5
¿−12.5× 0.0185
¿−0.2313 −0.23
Answer b
The concept of price elasticity of demand has implication in the decision of revenue
maximization. Firms aim to maximize revenue by altering price. Revenue of a firm depends
on price and quantity sold of the commodity. The amount of change in total revenue for a
given change in price that depends on price elasticity of demand (McKenzie and Lee 2016).
For a relatively elastic demand, the proportion of change in quantity demanded exceed that of
the proportion of change in price. In such a situation firms benefit from lowering price. This
is because, if demand is elastic then as increase in quantity demanded is larger than the
decline in price, business revenue increases. If demand is relatively inelastic then change in
quantity demanded is less than the change in price. In this situation, revenue can be
maximized by increasing price. Given relatively inelastic demand, buyers cannot adjust their
demand much even when price increases (Nicholson and Snyder 2014). As the decline in
quantity is proportionately less than increase in price revenue increases following an increase
in price.
Answer 5
An industry where existing firms enjoy an economic profit attracts more and more
new firms to enter the industry. Now whether the profit sustains in the long-run, that depends

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on entry barriers in the industry. If new firms are free to enter the industry then new firms
continue to enter. As more firms supply the industry, there is an increase in market supply.
Excess supply in the market then creates a downward pressure on price (Mahanty 2014).
With decline in price, profit gradually reduces. Entry stops when profit goes down to normal
profit. In contrast, if there are strict barriers to entry in the industry then firms can sustain the
economic profit even in the long run.
Firms in the given industry are enjoying an economic profit. Creation of internet
platform has broken down all the entry barriers allowing large number of firms to enter the
industry. The entry of large number of firms reduces industry supply largely. The resulted
increase in market supply shifts the supply curve to the right. This leads to a decline in
market price that firm face. With a lower price, profit of the existing firms reduce. Entry in
the market continues to occur until profit declines to normal profit or zero economic profit
(Jain and Ohri 2015). The market adjustment process in shown in the following figure.
Figure 8: Impact of entry of new firms
(As created by Author)

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The market demand and market supply in the industry are shown by the respective
curve of DD and SS. Current equilibrium is at E. The industry operates with an equilibrium
price of P* along with an equilibrium quantity of Q*. Now suppose, the market price is above
the average cost of the operating firms resulting in an economic profit for the firms. The
resulting economic profit attracts new firm. Given no entry barriers (as internet has broken
down all the entry barriers), new firms enter the industry. As industry supply increases, the
supply curve shift to the right (Sloman and Jones 2017). The new market supply curve in the
industry S1S1. The equilibrium price declines to P1 and equilibrium quantity in the industry
increases to Q1. The lower price reduces profit of the existing firms. New firms will stop
entering the industry as the profit falls to zero.

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Reference list
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University
Press.
Jain, T.R. and Ohri, V.K., 2015. Principal of Microeconomics. FK Publications.
Kolmar, M., 2017. Principles of Microeconomics. Springer International Publishing.
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Mankiw, N.G., 2014. Essentials of economics. Cengage learning.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Mochrie, R., 2015. Intermediate microeconomics. Macmillan International Higher Education.
Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction (Vol. 313).
Princeton University Press.
Nicholson, W. and Snyder, C., 2014. Intermediate microeconomics and its application.
Nelson Education.
Sloman, J. and Jones, E., 2017. Essential Economics for Business. Pearson.
Stoneman, P., Bartoloni, E. and Baussola, M., 2018. The Microeconomics of Product
Innovation. Oxford University Press.

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Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.