Economic Principles Assignment: Demand, Supply, and Competition

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Homework Assignment
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This economics assignment explores fundamental principles of economics, including demand, supply, and market equilibrium. The assignment analyzes the relationship between price and quantity demanded, illustrating the concept of elasticity and its impact on revenue. It examines market scenarios, such as changes in demand and supply due to factors like price changes, substitute goods, and the number of producers. The analysis extends to specific examples like the solar panel market and the watermelon market in summer. Furthermore, the assignment investigates the effects of government regulations and free market entry on market outcomes and firm profits in a competitive industry. The solution includes graphical representations and calculations to support the economic concepts discussed.
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Running head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
Author note
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1ECONOMIC PRINCIPLES
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................4
Answer 3....................................................................................................................................7
Answer 4....................................................................................................................................8
Answer 5..................................................................................................................................11
Answer 6..................................................................................................................................12
References................................................................................................................................14
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2ECONOMIC PRINCIPLES
Answer 1
Figure 1: Change in demand and change in quantity demanded for hats
(Source: as created by Author)
In economics, demand implies willing of buyers to buy something backed by their
purchasing power. Now demand for goods depend on a number of factors. Price is the
foremost important factor in determination of demand. Other factors influencing demand are
income, taste and preferences for the good, and price of the related good such as substitutes
and complementary good. Demand curve depicts the relationship between price and quantity
demanded of a good, keeping other factor constants. When price rises the demand for a good
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3ECONOMIC PRINCIPLES
generally decreases (Kolmar, 2017). Similarly, when price decreases then quantity demanded
increases given other factors.
Change in quantity demanded reflects changes in demand because of a change in price. As
shown in the figure, when price of hat decreases from P1 to P2 then quantity demand for hats
increases from Q1 to Q2. Correspondingly, the points on the demand curve shift from A to
point B. A further decrease in price from P2 to P3 leads to a further increases in demand from
Q2 to Q3. The points on the demand curve again shifts from B to C. This represents change in
quantity demanded. Here, there is no change in the demand curve. There is movement along
the concerned demand curve from either left to right or right to left depending on the
movement of price. Change in quantity demanded assumes there is only a change in price and
income, taste and preferences or price of related goods remain constant.
Now, the concept of change in quantity demand is a narrow concept to capture
changes that demand for a good face. In real life, it is very much unlikely that all other factors
stay constant. The changes occur in demand due to factors other than price is called change in
demand. The expansion of demand is reflected from a rightward shift in the demand while
that of contraction in demand is seen by a leftward shift of the demand curve (Zinn et al.,
2016). In case of demand change there is a shift in the entire demand curve rather than
movement along the same demand curve.
Factors causing change in demand can be a increases or decreases in income. When
income increases then demand for a normal good increases and demand curve shifts outward.
Demand curve shifts inward for a decrease in income as demand generally decreases with
income. Another factor is taste and preferences. When preference for any good increases,
then demand also increases and shifts rightward.
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Answer 2
a)Price of solar panel is above the market equilibrium price
Figure 2: Effect of price above equilibrium
(Source: as created by Author)
Above figure describes the market scenario in the solar panel market. The condition
of demand is shown the demand curve DD and the supply situation is described by the supply
curve SS. Point E symbolizes equilibrium in the market with P* as equilibrium price and Q*
as equilibrium quantity. Consider, an upward revision of price that pushes price above the
equilibrium price, say at P1. When price increases then demand goes down as it becomes
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5ECONOMIC PRINCIPLES
costlier for people to purchase the product (Kolmar, 2017). Demand can be reduced or two
reasons. Some of the buyers leave the market and those who still purchase the goods demand
less o the good. Supply on the other hand increases. An increase in the price increases profit
of the suppliers and thereby encourages them to supply more in the market. With this
situation, supply in the market overflowed its demand leading to excess supply in the market.
Excess supply pushes the price down towards equilibrium.
b)The price of electricity for an average household has decreases by 50 percent
Figure 3: effect of a decline in electricity price
(Source: as created by Author)
Other than price demand for and goods depends on several factors. Price of available
substitutes and complementary good is one import factor determining demand. Electricity is a
close substitute of solar panel. When price of electricity for average household decreases by
50 percent, then household increases demand for electricity. Solar panel then becomes
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6ECONOMIC PRINCIPLES
relatively costlier for them (Kolmar, 2017). This depresses demand for solar panel causing a
leftward shift of the demand curve. D1D1 is the new demand curve for solar panel. With a
change in demand curve a new equilibrium is obtained. Price in the new equilibrium is P1 and
quantity is Q1.
c)The number of solar panel producers have increased by 50 percent
Figure 4: effect of an increase in number of producers
(Source: as created by author)
When the number of solar panel producers increases then supply in the market
increases. Increase in supply causes rightward shift of the supply curve. The new supply
curve is S1S1, obtained from outward shift of the old supply curve SS. Equilibrium in the
market is where new supply curve matches with old demand curve. The price falls from P* to
P1. Because of increased number of producers, quantity increases from Q* to Q1 in the new
equilibrium.
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Answer 3
Figure 5: Market for watermelon in summer
(Source: as created by author)
In summer, watermelon is available at a low price despite having highest demand in
summer. An increased demand tends to increase price in the market. The low price of water
melon in summer is explained by the fact that price in a market depends not on the demand
but also on the available price. Demand and supply together determines price and quantity in
the market. P*and Q* in the above figure give the equilibrium price and quantity prevailing
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in the market. However, situation changes with change in seasons and consequent demand
and supply condition in the market (Kolmar, 2017). Watermelon is harvested in summer. This
means production of watermelon is the highest in summer. The demand of watermelon is
also highest during this time. Therefore, demand and supply curves shift simultaneously. The
increased demand pushes price up while the increased supply pushes down price. If the
supply effect dominates then price will reduce in the market. This explains low price in the
watermelon market in summer. In summer, the equilibrium price is P1, lower than the
standard equilibrium price and available quantity in the market is Q1, higher than that
available for rest of the year.
Answer 4
In the market for yoga service, the demand for yoga services increases shifting the
demand outward. At the same time government enforce strict regulation reducing the number
of yoga service providers. There are now two opposite forces affecting the market outcome.
High demand tends to increases both demand, price while reduced supply tend to reduce
supply, and increases price (Zinn et al., 2016). Therefore, the effect on price is unambiguous
that is price will definitely as for price both the forces have similar effect of raising price. The
effect on quantity is ambiguous and it depends on specific situation. There are three possible
cases as described below.
Case 1
In this case, both price and quantity increases in the new environment. This is possible
only when rise in demand dominates decrease in supply (Zinn et al., 2016). Change in
demand is shown by the magnitude of change in the demand curve. Demand curve shifts
from earlier DD to the new position D’D’. The supply curve shifts leftward by the magnitude
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of supply change. The new supply curve is S’S’. Clearly, change in demand is greater than
the change in supply. The new price is P1 and new quantity is Q1.
Figure 6: demand increases more than decrease in supply
(Source: as created by the author)
Case 2
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Figure 7: change in supply dominates the change in demand
(Source: as created by Author)
In this case, supply changes are greater than the demand change. Therefore, the
supply effect dominates here. The supply curve changes from SS to S’S’ because of a
leftward shift of the supply curve. As above, demand curve also shifts from DD to D’D’
because of an increase in demand. The magnitude of supply change is greater than the
magnitude of demand change. Hence, the effect on quantity is determined by the impact of
supply change. As a result, in the new equilibrium price raises as stated and quantity reduces.
Case 3
An extreme or hypothetical case is described here. Here, market quantity remains
unaffected. Only change in market outcome is increases in the price.
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Figure 8: same proportionate change in demand and supply
(Source: as created by Author)
This happens when supply in market reduces in the same proportion as demand in
demand. The effects of opposite forces on cancels out leaving market quantity unchanged
(Kolmar, 2017). As seen from the figure quantity in the market remain fixed at Q* while
price raise from P* to P1
Answer 5
a) Price elasticity of demand=Changedemand percent
Change price percent
The estimated demand change for Universal Music CD is 40 percent. The price slashed for
CD is $15 from $21. The percentage change in price is obtained as
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