BEO1105 Assignment: Market Dynamics, Veblen Goods, and Supply Analysis

This document presents a comprehensive solution to a BEO1105 economics assignment. It analyzes the impact of poor wine harvests in France on both the French and Australian wine markets, including the adjustment process towards a new equilibrium. The assignment further explores the concept of Veblen goods, using Apple products as an example, and explains how their demand defies the law of demand with graphical support. Finally, the solution addresses the effects of simultaneous decreases in both the demand and supply of commercial apartments. The assignment also examines the impact of government intervention in the alcohol market, specifically focusing on minimum pricing policies and their effects on consumer behavior and market dynamics, using diagrams to illustrate the concepts. It provides a detailed analysis of supply and demand curves, price elasticity, and the implications of these factors on market equilibrium and consumer surplus. The solution is supported by relevant references and demonstrates a strong understanding of economic principles.

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BEO 1105
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Question 1
According to the EU department for Agriculture, adverse weather conditions such as
heavy hailstorms, frosts and drought facilitated a low harvest historically as evidenced in 2017
(French, 2017). Due to the adverse climatic conditions witnessed across Europe, most of the
wine-growing regions faced a low yield. This led to France winemakers anticipating a reduction
in their production. The low harvest meant that the supply of wine reduced drastically, thus
reducing wine production. Thus, such a low supply means that there will be high prices for
French wine.
i)How a change in the French wine market affect the market for Australian wines in France
The adverse weather conditions translated to a poor harvest, which has an effect of
lowering the production of wine. This means that the supply of wine in the market will reduce
triggering an increase in the prices of wine. An increase in the price of French wine leads to a fall
in demand for such wine in the market compared to other wines from different countries.
French wine and Australian wines are substitute products. The increase in demand for
one substitute product translates to a decline in the demand for the other substitute product. In
the context of French wine, the poor harvest means a decline in supply, thus translating to high
prices. On the other hand, the Australian wine will be in demand leading to an increase in
demand due to low prices charged compared to French wine.
Question 2

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Apple has been reputed for producing high-quality products with amazing and excellent
features. However, despite the high prices charged for Apple products, people continue
purchasing them in bulk. The demand for Apple products increases with price increments, and
this makes them match the definition of a Veblen good. A Veblen good is a commodity whose
demand rises as the price increases since people perceive higher price is a mark of great status.
The reason why people purchase more with price increases, particularly with Veblen
goods since they are of the view that the more expensive goods get, then the superior the quality
and some individuals purchase more. It is worth noting that Apple products fit the description of
a Veblen commodity. The demand curve for a Veblen commodity slope in the opposite direction.
Thorstein Veblen is the man behind Veblen goods. Thorstein was an unorthodox economist who
discovered the conspicuous consumption where he postulated that the motivation for purchasing
products was to show off to people in the society.
Question 3

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A decrease in both demand and supply will lead to a shift in supply curve from S to S1.
Demand curve also will shift from D to D1 following decrease in demand. Also, as result of
decline in both demand and supply, the quantity demanded will reduce from Q to Q1. Prices will
also reduce from P to P1.
Question 4
i)Effect of an increase in the supply of a product on an elastic demand curve
An increase in supply means a shift in the supply curves. In this case, the supply curve
shifts downwards; there is a shift of supply curve to the right from S to S1. EP is the initial price
and EQ the equilibrium quantity. An increase in supply would move the supply curve from S to
S1, where the new supply curve S1 cuts the demand curve (Muley, 2016). Thus, the equilibrium
point shifts to E1 and the equilibrium quantity demanded and supplied also increases to EQ1.In

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this case, an increase in supply leads to a proportionate decrease in price, which leads to a
corresponding increase in quantity from EQ to EQ1.
ii)Effect of an increase in the supply of a product on an inelastic demand curve
An increase in supply will lead to a shift in the supply curve from S to S1, and this will
lead to a disproportionate decrease in price from P to P1. The considerable reduction in price
leads to a marginal increase in quantity from Q to Q1. The equilibrium dropped from E to E1.

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Question 5
Many economists opine that it, if the government is to do anything regarding control of
alcohol, then the tax should be increased in as much as four times. Such a move is to make up for
the external costs linked to alcohol spanning from drunk driving to Cirrhosis and the
transmission of sexual diseases. However, other policies could be employed to raise the price of
alcohol (Lopez, 2017). For instance, lawmakers want to address this issue amicably, they could
set a minimum unit price. Such a strategy has borne fruits in places such as in Scotland in the UK
where it was allowed to legislate its minimum pricing policy. The minimum pricing policy has
the leverage of being more targeted compared to a tax. Despite tax being applied to all alcoholic
beverages, a minimum price is more probable to have the most significant impact on cheap
booze that is always bought to be consumed in excess.
Setting a minimum price for alcohol could target the behaviour of consumers as one of
the intended consequences. It has been found some cases of violence related to alcohol stem

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from individuals preloading drinks at their residences before they visit the pubs and clubs. Thus,
setting a minimum price on alcohol retailing in retail outlets would assist in controlling drinking
at home since the marginal private cost of doing that will increase. The diagram below indicates
that higher prices lead to contractionary demand, the proportion which relies on the price
elasticity of demand for a variety of alcoholic beverages. Thus, the level of consumer surplus
will fall. A potential spillover arising from an end to super-cheap alcohol at disposal from
supermarkets is that more individuals will opt to visit pubs instead, perhaps playing a critical role
of reversing the pattern of pub closures as observed in many years.
Thus, setting a minimum price on alcohol is an intervention that is justified. A minimum
price would help reduce consumption to levels that are closer to the social optimum, and this will
translate to a change in behaviour for both the producers and consumers. (Pettinger, 2017)

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References
French, P., 2017. EU:Wine harvest set for 36-year low. [Online]
Available at: https://www.thedrinksbusiness.com/2017/10/eu-wine-harvest-set-for-36-year-low/
[Accessed 20 September 2019].
Lopez, G., 2017. The case for setting a minimum price on alcohol. [Online]
Available at: https://www.vox.com/science-and-health/2017/12/26/16738722/alcohol-minimum-
price
[Accessed 21 September 2019].
Muley, R., 2016. Effects of Price Control by Government. [Online]
Available at: http://www.economicsdiscussion.net/price/effects-of-price-control-by-
government/17043
[Accessed 21 September 2019].
Pettinger, T., 2017. Government Intervention in Markets. [Online]
Available at: https://www.economicshelp.org/microessays/equilibrium/govt-intervention/
[Accessed 20 September 2019].