Principle of Economics

Running head: Principle of Economics
Principle of Economics
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Principle of Economics1
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer 5..........................................................................................................................................7
References........................................................................................................................................9

Principle of Economics2
Answer 1
(a) Wine-grape harvest has been poor in France. Owing to that the production of French wine has
reduced, since grape is the key component required for manufacturing wine. Therefore, due to
poor production the supply for French wine will be low. Therefore, due to decline in the supply
the price of French wine will rise. As a result, the demand for French wine will decrease (Becker
2017). Thus, the market of French wine will contract and quantity decreases from Q to Q1 and
its revenue will fall. The graphical illustration is given below.
Figure 1:
Contraction in market of French Wine
Source: (Created by the Author)
(b) The French wine supply has reduced and as a result a difference between quantities supplied
is lower than the market demand. This gap in supply and demand is thus fulfilled by the
Australia wine. The consumers now will purchase more Australian wine and as a result the

Principle of Economics3
quantity of Australian wine increased by the amount of French wine market contract (Pindyck
and Rubinfeld 2015). This happens due to increase in demand of Australian wine, owing to
which the supply of the wine increased by the manufacturers realizing the profit prospect. Thus,
increase in the supply pulls down the price back to previous level. The graphical illustration of
the phenomenon is shown in the figure below.
Figure 2: Expansion in market of Australian wine