Economic Principles Assignment: Analysis of Supply, Demand, and Market

This economics assignment delves into fundamental economic principles. It begins by addressing opportunity cost and its implications, followed by a discussion of positive versus normative statements. The assignment then analyzes changes in demand and quantity demanded, illustrating these concepts with examples. It further explores the impact of shifts in supply and demand on market equilibrium, including scenarios where demand changes more than supply. The assignment also examines emission trading and carbon taxes as environmental policies, along with the effects of price controls. Finally, it investigates the impact of supply reduction on the market for an addictive good and the relationship between price elasticity of demand and revenue maximization. The analysis includes graphical representations to illustrate the concepts.

Running head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
Student ID

1ECONOMIC PRINCIPLES
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Answer 3..........................................................................................................................................3
Answer 4..........................................................................................................................................4
Answer 5..........................................................................................................................................5
Answer 6..........................................................................................................................................6
Answer 7..........................................................................................................................................7
Answer 8..........................................................................................................................................8
References......................................................................................................................................10

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Answer 1
a)
The time available to Mike is fixed. With fixed time, it is not possible for Mike to engage
in three different things at the same time. Mike has to make choice among the available options
given the time constraint.
b)
Opportunity cost implies value of something that individual has to give up to choose
some other thing. For Mike an alternative to go to the university is to do a full time job.
However, by choosing to go to University Mike forgoes the salary that would have been earned
from the job. This forgone income from the full time job is the opportunity cost of Mike to go to
University (Newman 2017).
c)
Few days back I bought Pizza and using the same amount of money I could have
purchased a hot dog and a drink. The opportunity cost here is the forgone satisfaction from the
hot dog and drink.
Answer 2
One primary difference between positive and normative economic statement is that the
formal is subjective while the latter is objective. Positive statements are made on the basis of
facts while normative statements are based on opinion, judgement and values (Reiss 2017). The
statement saying “a cut in income tax increase incentives for the unemployed to find jobs” is an

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example of positive statement. The statement that “unemployment might be more harmful that
inflation” is one example of normative statement.
Answer 3
a)
Figure 1: Change in quantity demanded
When change in demand follows from own price change, this is called change in quantity
demanded (Buechner 2018). As beer price falls by 30 percent due to Happy Hour in the pub
Mike demanded more beers (three beers instead of two beers). This represents a change in
quantity demand and is captured by movement from point A to B on the demand curve.
b)
Figure 2: Change in demand

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When factor other than price affects demand of a good, it is called change in demand.
Mike purchased a new runners considering its superior. Demand for runners increases because of
change in preference towards the new runners (Case, Fair and Oster 2019). This represents
change in demand and is shown by rightward shift of the existing demand curve.
Answer 4
An increase in supply generally reduces price. Despite increase in supply of face masks
price of face mask increases. This is possible only when demand changes more than the supply
(Hutchinson et al. 2017).
Figure 3: Demand and supply analysis of face mask
In the above figure, increase in production of face mask is shown as shift of the supply
curve from S1S1 to S2S2. Now, if demand changes from D1D1 to D2D2, which is more than change
in supply, there will be a shortage in the market. The equilibrium adjusts to E2 and price
increases to P2.

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Answer 5
In Malaysia demand for yoga service increases along with a fall in supply of yoga service
providers. This indicates a simultaneous movement of demand and supply curve of yoga. As a
result, equilibrium price of yoga service increases definitely. The impact on equilibrium quantity
however is ambiguous (Perea 2017). Equilibrium quantity increases if increased demand
dominates fall in supply. Equilibrium quantity decreases if decreased supply dominates increase
in demand. Quantity remains some change in demand and supply occurs in the same magnitude.
Figure 4: Demand effect dominates supply effect
Figure 5: Supply effect dominates demand effect

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Figure 6: Demand effect is same as supply effect
Answer 6
a)
Emission trading refers to an environmental policy that reduces level of pollution by
imposing a limit and issuing certain number of permits which is consistent with the chosen limit.
The polluters are allowed to exchange the permits among themselves creating a market of
emission trading (Becchetti, Bruni and Zamagni 2019). In the market the supply of permits is
fixed by the pollution level. Therefore, an increase in demand increases price of permits making
pollution costlier and giving polluters incentive to lower level of pollution.

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Figure 7: Market for emission-trading
b)
United State and Australia have introduced carbon taxes. In United State, current price of
Carbon is $15/Metric ton. The same for Australia is $10/Metric ton.
Answer 7
Figure 8: Impact of setting maximum price for eggs

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Supposes, the equilibrium price of eggs under free market condition is P1 and
corresponding equilibrium quantity of eggs is Q1. The government now sets a maximum price of
eggs at PM. At the lower price demand for exceeds the available supply causing a shortage in the
market amounts to (Q3 – Q2) (Guell 2017).
Answer 8
a)
Figure 9: Market for Heroin
Heroin being an addicted item, has a relatively inelastic demand shown by a demand
curve D1D1. Now if supply of Heroin reduces in the market the supply curve shifts left to S2S2.
The shortage in the drug market increases price of Heroin (Mohammed 2017). Because of
inelastic demand, demand falls by lesser magnitude than price and revenue increases from
OP1AQ1 to OP2BQ2.
b)
In the business, if demand is found be to relatively elastic then price should be decreases
to raise revenue. On the other hand, if demand found to be relatively inelastic then price should

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be lowered to gain a larger revenue (Hajy et al. 2019). Suppose, price of an ice cream cone
increases from $2 to $2.20 which causes a decrease in demand for cones from 10 to 8 indicating
a relatively elastic demand. Because of relatively elastic demand, an increase in price decreases
revenue from $20 to $17.60.

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References
Becchetti, L., Bruni, L. and Zamagni, S., 2019. The Microeconomics of Wellbeing and
Sustainability: Recasting the Economic Process. Academic Press.
Buechner, M.N., 2018. A comment on the law of supply and demand. Journal of Philosophical
Economics, 11(2), pp.67-80.
Case, K.E., Fair, R.C. and Oster, S.E., 2019. Principles of Economics, Global Edition. Pearson
Education Canada.
Guell, R.C., 2017. Issues in economics today. McGraw-Hill Education.
Hajy Alikhani, P., Sadeghi Moghadam, M.R., Razavi, S.M. and Mohaghar, A., 2019. Revenue
management and seller pricing decisions in retail industry: An agent-based model. Journal of
Industrial Engineering and Management Studies, 6(2), pp.25-43.
Hutchinson, E., Nicholson, M., Lukenchuk, B. and Taylor, T., 2017. Principles of
Microeconomics. University of Victoria.
Mohammed, A.M., 2017. Cigarette, Alcohol, and Drug Demand for Young Population. Expert
Journal of Economics, 5(2).
Newman, J., 2017. Contemporary debates on opportunity cost theory and pedagogy. In The
Economic Theory of Costs (pp. 11-26). Routledge.
Perea, A., 2017. D Microeconomics. Journal of Economic Literature, 55, p.218.
Reiss, J., 2017. Fact-value entanglement in positive economics. Journal of Economic
Methodology, 24(2), pp.134-149