Economic Principles: Demand, Supply, Market Analysis & Externalities

This report explores the principles of economics, focusing on demand and supply dynamics. It examines factors affecting the demand and supply of sanitary items, including the impact of political tensions, income growth, and substitute goods. The report analyzes optimal output quantity and profit, co...Read More

PRINCIPLES OF
ECONOMICS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Q1.)..............................................................................................................................................3
Q2.)..............................................................................................................................................3
Q3.)..............................................................................................................................................5
Q4.)..............................................................................................................................................6
Q5.)..............................................................................................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
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INTRODUCTION
The report is on economics of demand and supply. Factors affecting demand and supply of
sanitary items were discussed. Optimal output quantity was discussed along with some relevant
economic terms of negative production externality and monopoly graph assessed.
Q1.)
a) The political and trade tensions between Australia and China have led to 100% tariff import
which will mean price of wine almost doubling up. This will mean that demand will be affected
on the negative side and people searching for substitutes which are less expensive. Thus, the
factor of demand determinant i.e. price of substitute or complements will come into play
(Hafezalkotob and et.al., 2018).
b) Income in China growing rapidly can be a factor in people taking up Australian Wine even
though it is costly. People will see it as a status symbol and determinant of demand i.e. income
will come in a role to play. Through rise in income, people will be shelling out extra money to
get imported wine and demand will increase.
c) French wine price becoming less expensive can stimulate demand for French wine if
consumer taste for it is good and thus, it can decrease demand for Australian wine. Here, two
factors come to work price of complement getting less expensive and consumer tastes and
preferences. If consumer gets a complement less expensive offering the same quality, demand
for the first product will decrease.
Q2.)
a) Sanitary pads saw an increase in sale from pandemic start due to uncertainty and there were
millions of orders for masks and sanitizers. The production and inventory however could not
meet the demand upsurge and a supply shortage occurred (Valentinov and Thompson, 2019). As
time went by, sanitary pads saw an increase in the middle of lockdown as cases went up. This
was panic buying period and it led to increase in prices of these sanitary items. The prices of
masks and sanitizers doubled due to shortage of supply. As slowly, the lockdown started lifting
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and less number of cases were reported, the price of sanitary items came to their original and the
demand upsurge got comparatively lesser.
b) Demand and supply curve
The law of demand says as demand increases, price too increases of the product. The resource
availability being limited affects the price to increase. There is an upward shift seen in demand
curve as demand increases. There is increase in demand seen in sanitary items during pandemic.
Thus, price also increases on the graph (Hafezalkotob and et.al., 2018).
c) Demand and supply model for illustration of return of price to normal level
The demand upsurge was seen initially when the pandemic was at a high level, the prices were
high of sanitary with sudden increase in demand and demand curve saw an upward shift.
Thereafter, the price fell as the cases went down and the reasons can be attributed to people now
feeling a comfort than earlier in venturing out of homes and also increase in production
meanwhile. Thus, prices returned to normal. In this wake, it can be seen that prices got normal
leading to decrease in demand from earlier. Also, vaccination being started can too be cited as
the reason for the decline in demand (Valentinov and Thompson, 2019).
Supply increase also was seen in mid of pandemic lock down. As supply increased, price started
decreasing because there were many options available then. This also contributes to price
decrease factor.
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Q3.)
Output Fixed
cost
Variable
cost
Total
cost
Average
Fixed
Cost
Average
variable
cost
Average Total
cost
Marginal
cost
0 10 10 20 1.42 7.89 9.32
1 10 12 22 1.42 7.89 9.32 2
2 10 15 25 1.42 7.89 9.32 3
3 10 19 29 1.42 7.89 9.32 4
4 10 24 34 1.42 7.89 9.32 5
5 10 30 40 1.42 7.89 9.32 6
6 10 37 47 1.42 7.89 9.32 7
7 10 45 55 1.42 7.89 9.32 8
8 10 54 64 1.42 7.89 9.32 9
9 10 64 74 1.42 7.89 9.32 10
10 10 75 85 1.42 7.89 9.32 11
11 10 87 97 1.42 7.89 9.32 12
12 10 102 112 1.42 7.89 9.32 15
13 10 117 127 1.42 7.89 9.32 15
14 10 138 148 1.42 7.89 9.32 19
b) The optimal output quantity was 9 tonnes as can be seen from table where marginal cost
equals market price. Producer could make a profit of 10-9.32=0.68 per unit and thus total profit
was 0.68*9000=6120 AUD.
c) Due to panic buying, the price increased to 12. Producer thus made profit of 12-9.32=2.68 per
unit and thus total profit as optimal output quantity stands to be 11 tonnes as per table, will be
2.68*11000=29480 AUD.
Q4.)
a) Market equilibrium is price P1 if negative externality is removed.
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b) External cost per unit of output is Private cost—Social cost/Quantity at private cost-Quantity
at Social cost.
c) P2 will be the socially efficient equilibrium price.
d) Social equilibrium cab can be achieved when demand equals social marginal costs (Ponte and
et.al., 2017).
e) P2 is the social efficient equilibrium price and Q1 is the social efficient equilibrium quantity.
Q5.)
a) Average total cost curve is D.
b) Marginal cost curve is C.
c) Demand curve is A.
d) Marginal revenue curve is B.
e) Output would be difference in price which touches demand curve that is P3 and P0 which
meets average total cost curve.
f) Price charged shall be P2.
g) Total revenue is addition of all the prices multiplied by their respective quantities i.e.
(P0*Q1+P1*Q2+P2*Q3+P3*Q4)
h) Total costs will be the P0, price touching the average total cost curve from the initial point 0
making a rectangle.
i) Total profit will be P3 minus P0 where P0 touches average total cost curve.
j) Quantity of efficient allocation of resource will be where P2 touches demand curve and P0
meets average total cost curve.
CONCLUSION
The report discussed demand and supply determinants. Table was illustrated for optimal output.
Monopoly graph was assessed. Negative production externality graph was assessed.
REFERENCES
Books and Journals
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Durand, C., & Milberg, W. (2020). Intellectual monopoly in global value chains. Review of
International Political Economy, 27(2), 404-429.
Hafezalkotob, A., Mahmoudi, R., Hajisami, E., & Wee, H. M. (2018). Wholesale-retail pricing
strategies under market risk and uncertain demand in supply chain using evolutionary
game theory. Kybernetes.
Ponte, A. D., Delton, A. W., Kline, R., & Seltzer, N. A. (2017). Passing it along: Experiments on
creating the negative externalities of climate change. The Journal of Politics, 79(4),
1444-1448.
Valentinov, V., & Thompson, S. (2019). The supply and demand of social systems: towards a
systems theory of the firm. Kybernetes.
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