BEO1105 Economics Assignment: Microeconomic Principles and Analysis

This economics assignment delves into the principles of microeconomics, examining concepts such as opportunity cost, market equilibrium, and the effects of shifts in supply and demand. It uses graphical analysis to illustrate the impact of various events on the beef market, including changes in wages, access to cattle feed, and government interventions. The assignment also analyzes the heroin market, focusing on the effects of law enforcement actions on supply and price elasticity. Furthermore, it discusses the implications of setting maximum retail prices, using the example of super chicken in China, and explains the rationale behind firms continuing operations despite losses, based on the shutdown rule. The solutions are detailed and supported by relevant diagrams.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
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Table of Contents
Question 1........................................................................................................................................2
Question a....................................................................................................................................2
Question 2........................................................................................................................................2
Question a....................................................................................................................................2
Question b....................................................................................................................................3
Question c....................................................................................................................................4
Question 3........................................................................................................................................6
Question a....................................................................................................................................6
Question 4........................................................................................................................................8
Question 5........................................................................................................................................9
References......................................................................................................................................10

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Question 1
Question a
In the theory of microeconomics, the concept of opportunity cost associated with a choice
refers to the most valuable choice among the alternatives that has been sacrificed to make the
choice. It is the cost associated with sacrifice of next best alternative for making a particular
choice (Mochrie 2015). In last week, I went to watch movie with friend instead of studying for
internal assessment. The opportunity cost of spending time on watching movie is the marks
sacrificed in the assessment due to studying less hour.
Question 2
Question a
A sharp fall in wages significantly lowers income of household. For a normal good,
demand for the good increases with increase in income. Given that beef is a normal good, a
decline in household income following a sharp fall in average wage increases demand for beef.
The increased beef demand shifts the demand curve to the right. As demand increase with the
given supply of beef, equilibrium in the beef market moves up (Kreps 2019). At the new
equilibrium position, both equilibrium price and equilibrium quantity of beef increases.

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Figure 1: Effect of a sharp fall in average wages
Question b
High quality of cattle feed that reduces time for getting ready for the market increase
supply of beef within the given time. As farmers now need less time to ready their cattle, they
can supply more beef. The excess supply of beef shifts the market supply curve of beef to the
right. In the beef market, the new equilibrium is achieved at the intersection of new supply curve
and the existing demand curve (Kolmar 2017). At new equilibrium, equilibrium price lowers and
equilibrium quantity increase.

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Figure 2: Effect of access to high quality cattle feed
Question c
Government order of mass slaughter of cows reduces supply of beef in the market. This
shifts the supply curve of beef to the left. At the same time, the government warning to consumer
about dangers of consuming beef reduces demand for demand. The decline in beef demand shifts
the supply curve of beef inward. As both demand and supply changes equilibrium quantity in the
market decreases. The effect on price is however ambiguous. The lower demand tend to lower
price in the beef market. The reduced supply in contrast tends to increase market price. The
effect on price depends on magnitude of change in demand and supply (Cowell 2018). There are
three possible cases depending on change in supply and demand. If demand changes more than
supply, then there is a decline in price. If supply changes more than demand, then price
increases. If demand and supply change by the same proportion, price remain unchanged. In all
the cases, equilibrium quantity declines in all the three cases.

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Figure 3: Change in demand is more than change in supply
Figure 4: Change in demand is less than change in supply

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Figure 5: Change in demand is equal to change in supply
Question 3
Question a
If the law enforcement agencies successfully arrest several major heroin suppliers, this
will drastically lower the supply heroin in the market. The lower supply causes an inward shift in
the supply curve. Now, given the demand a lower supply decreases equilibrium quantity and
increases equilibrium price. The demand of heroin is relatively inelastic. Therefore, in response
to increased price demand does not reduce much (Baumol & Blinder 2015). As increase in price
is proportionately greater than reduction in equilibrium quantity revenue increases. This is
explained in the figure below.

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Figure 6: Effect of arresting major heroin suppliers
Initial equilibrium in the heroin market is at E. Price and quantity at equilibrium are P*
and Q* respectively. As agencies arrest heroin suppliers, the supply curve shifts to the left.
Equilibrium in the market shifts up from E to E1. Equilibrium price increases to P1 and
equilibrium quantity declines to Q1. As demand is relatively inelastic proportionate increase in
price is greater than proportionate decreases in equilibrium quantity revenue increases from
OP*EQ* to OP1E1Q1.

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Question 4
Figure 7: Effect of setting a maximum price of super chicken
The figure above shows the impact of setting a maximum retail price for super chicken in
China. The increased pressure of demand due to New Year Celebration likely to increase price
by increasing demand (Mankiw 2016). The free market equilibrium price in the market is at P*.
The associated equilibrium quantity is Q*. Now suppose in order to prevent increase in retail
price, government sets the maximum price limit to P1, lower than the equilibrium price. The
lower price increases Chicken demand to Q2 by making super chicken more affordable. The
lower price in contrast lower the equilibrium supply to Q1 by reducing profitability of sellers
(Cowen & Tabarrok 2015). The low price creates a supply shortage of the amount (Q2 – Q1).
The policy of price intervention thus creates a supply shortage in the market. There might be

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some unintended consequences of this kind of policy such as black marketing, long queue and
others.
Question 5
Figure 8: Shut down point of a firm
The rationale for firms to continue operation with a loss depends on the explanation of
shut down rule for firm. In the above figure, at any price above P1, the concerned firm enjoys a
profit. At price P1 (minimum of average total cost), price just equals the average cost equating
total revenue and total cost. The firm earns only normal profit at this price. This point is called
break-even point of the firm. At any price below P1, price is less than average cost resulting in a
loss for firm. Now whether to continue operation or not that depends on total revenue and total
variable cost (Thompson 2016). Despite loss, firm continues its operation as long as price is
greater than variable cost. Firm continues operation as firm can recover its variable cost and
some of the fixed cost. However, if price is below P2 (minimum of average variable cost), then

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firm recovers neither variable cost nor fixed cost and hence, shuts down immediately. Point B is
called shut down point of the firm.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Kolmar, M. (2017). Principles of Microeconomics. Springer International Publishing.
Kreps, D. M. (2019). Microeconomics for managers. Princeton University Press.
Mankiw, N. G. (2016). Principle of Microeconomics. Cengage Learning.
Mochrie, R. (2015). Intermediate microeconomics. Macmillan International Higher Education.
Thompson, G. E. (2016). Microeconomics: A Computational Approach: A Computational
Approach. Routledge.