Term 3 2020 ECO100 Assignment: Economic Problem Analysis and Solutions

This document presents a comprehensive solution to an ECO100 Introduction to Economics assignment. The assignment addresses several key economic concepts, including the determination of equilibrium price and quantity in the tea market using demand and supply equations. It analyzes the im...Read More

ECONOMICAL PROBLEMS

Table of Contents
Question 1........................................................................................................................................3
a. Equilibrium price and quantity................................................................................................3
b. Impact of government tax on equilibrium quantity.................................................................3
c. Demand supply diagram..........................................................................................................4
Question 2........................................................................................................................................6
b. Situation in the banana market................................................................................................6
c. Change in equilibrium..............................................................................................................6
Question 3:.......................................................................................................................................7

Question 1
a. Equilibrium price and quantity
P = 10 – Q
P = Q – 4
10 – Q = Q – 4
2Q = 14; Q = 7
Hence, putting Q value, we will get, P = 3
So, equilibrium price = 3; and quantity = 7
b. Impact of government tax on equilibrium quantity.
New price after tax, P = 3 + 1 = 4
Putting the value of P in the equation we get;
Demand curve:
P = 10 – Q
4 = Q – 4
Q = 6
Supply curve:
P = Q - 4
4 = Q – 4
Q = 8
Thus new equilibrium quantity will be 6
Tax incidence
The market achieves equilibrium with a price of $4 and a quantity of 6. The result of this per
unit tax is a higher price and a decrease in the quantity exchanged, just like any decrease in

supply. In fact, the inclusion of a tax has much the same affect on a market as an increase in any
resource price. The price goes up and the quantity goes down.
Inefficiency:
The inefficiency of the tax = Quantity Supplied – Quantity demanded
= 8 – 6 = 2
The inefficiency shows misbalance between quantity supplied and quantity demanded due to
change in price. After imposition of tax; the present equation is no more equilibrium.
c. Demand supply diagram
Demand and supply curve (a)

Demand and supply curve (b)

Question 2
a) Graph
Equilibrium price = 2.5; equilibrium quantity = 2250 boxes
Because, at this point both demand and supply curves intersects; and both price and demand are
equal at this point.
b. Situation in the banana market
If the price of the banana falls to $1.5, then quantity supply would declined, as demand curve has
direct relationship with price. Thus decrease in price would decrease the quantity supplied. On
the other hand, quantity demanded would increase due to opposite relationship between quantity
and price.
c. Change in equilibrium
The market supply will decline with the increase in price of quantity demanded, previously
equilibrium price was = 2.5; at 2250 boxes. After decline in the quantity supply, the new

equilibrium price will increase to $3; and equilibrium quantity will decline to 2000 boxes of
banana.
Question 3:
a) Negative impact of COVID-19
The equilibrium quantity and price will change; as at high price quantity supply will increase,
while quantity demanded will decrease. This will create inefficiency in the market, because of
gap between quantity demanded and supplied.
b) Change in consumer surplus
The demand curve designs the ability of customers to pay for different amounts. The amount that
people would want to pay without the amount they paid is called the buyer’s amount. We can
understand this idea graphically; the excess customer is identified by the land named \ text {F}
Text Fstart, F, termination text in the graph below: the segment in terms of market cost and
below the curve of the interest.

The supply curve shows what the quantity that firms are willing to supply at each price. For
example, the starting point text \ text {K} K, final text in the graph above shows that if rice cost
$ 45, companies would be willing to take past 14. Those manufacturers who might have been
happy to offer the tablets for $ 45 but were willing to cut a $ 80 offsetting cost got an extra edge
over what they needed to deliver the item.
c. Impact of new policy
After getting subsidy, the cost of the rice will decline, and this will impact the price of the rice.
With the decrease in the price, demand will increase and it will change equilibrium price into
disequilibrium.
d. Which policy is better
Subsidies involve governments that give money directly to producers. Basic cost is the point at
which the public authority commits a fair value that costs cannot fall below that level. The
lowest costs will create a livelihood for farmers. Cultivation can involve unforeseen costs as
supply can change and demand is volatile. This means that season could lead to stock expansion
and cost reductions. This could put farmers at risk of bankruptcy as low costs lead to low living
standards. For this situation, the public authority may want to centralize. Best grant performance
or basic value guarantee.

Subsidies will cost the government and will involve higher responsibilities and also lower public
spending. However, lower costs will lead to higher costs for customers. Excessive food costs can
cause problems for those on low wages. With the payment of the grant, the public authority can
choose how the burden should fall on the whole population.