Economics Assignment: Supply, Demand, and Market Equilibrium Analysis

This economics assignment, completed for BEO1105, explores several key economic concepts. It begins by analyzing the impact of a poor wine-grape harvest in France on both the French and Australian wine markets, including the adjustment process towards a new equilibrium. The assignment then examines Apple's iPod sales, explaining how product differentiation allows for higher prices despite a sluggish market. Next, it investigates the effects of simultaneous decreases in the supply and demand for new commercial apartments, considering how changes in the price are determined. The assignment further analyzes the effects of elastic and inelastic demand curves on market outcomes. Finally, the assignment concludes with a discussion of a minimum price policy on alcohol in Western Australia, evaluating its impact and suggesting alternative approaches like taxation and restricted sales.

Running head: Principle of Economics
Principle of Economics
Name of the Student
Name of the University
Student ID

1Principle of Economics
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer 5..........................................................................................................................................7
References........................................................................................................................................9

2Principle of Economics
Answer 1
(a) Wine-grape harvest has been poor in France. Owing to that the production of French wine has
reduced, since grape is the key component required for manufacturing wine. Therefore, due to
poor production the supply for French wine will be low. Therefore, due to decline in the supply
the price of French wine will rise. As a result, the demand for French wine will decrease (Becker
2017). Thus, the market of French wine will contract and quantity decreases from Q to Q1 and
its revenue will fall. The graphical illustration is given below.
Figure 1:
Contraction in market of French Wine
Source: (Created by the Author)
(b) The French wine supply has reduced and as a result a difference between quantities supplied
is lower than the market demand. This gap in supply and demand is thus fulfilled by the
Australia wine. The consumers now will purchase more Australian wine and as a result the

3Principle of Economics
quantity of Australian wine increased by the amount of French wine market contract (Pindyck
and Rubinfeld 2015). This happens due to increase in demand of Australian wine, owing to
which the supply of the wine increased by the manufacturers realizing the profit prospect. Thus,
increase in the supply pulls down the price back to previous level. The graphical illustration of
the phenomenon is shown in the figure below.
Figure 2: Expansion in market of Australian wine

4Principle of Economics
Source: (Created by the Author)
Answer 2
The market of Apple IPods is sluggish but even in this situation Apple introduced new
line of Apple IPods with more storage and more features at higher price. The reason for this
decision is product differentiation. Thus, by adding more features and storage Apple
differentiated the new IPod and created a different market for them where buyers are willing to
purchase the product at higher prices (Brander and Spencer 2015). Thus, the decision is not
against the theory of demand and supply. Therefore, both the demand and price of the newly
launched IPod is higher than the previous model of IPod. The mechanism is shown graphically in
the below figure.
Figure 3: New
Apple IPods – Product Differentiation
Source: (Created by the Author)

5Principle of Economics
Answer 3
The supply and demand of the new commercial apartments occurred at the same time.
This change will affect quantity and price at the equilibrium. As both the supply and demand has
declined the quantity of new commercial apartments traded in the market will reduce. However,
the change in price depends on the scale of variation in demand and in supply (Zhang et al.
2015). It means that if the decline in demand is greater than supply then price will fall whereas if
the decline in supply is greater than fall in demand then price will rise. Additionally, if the
amount of decline in both the supply and demand are same then the level of price will remain the
same. To explain the change in equilibrium it is thus considered that the decline in demand and
supply is equal. Hence, in figure 4 both the supply curve and demand curve moved leftward
causing quantity to fall to Q1, however price remain same at P*.
Figure 4:
Quantity and price of new commercial apartment market at equilibrium
Source: (Created by the Author)

6Principle of Economics
Answer 4
(i) Demand curve is flatter than usual when it is elastic rather it is very flat and responds too
weakly to change in price. It means quantity demanded changes much lower than the change in
price (Liu and Tomsovic 2015). However, in this case impact of increase in supply on price,
quantity and total revenue will be examined. The risen supply shifts the supply curve from S1 to
S* and this increases equilibrium quantity from Q1 to Q* and decreases the price from P1 to P*.
It is evident from the figure that amount of increase in quantity is much larger than amount of
price fall. Thus, the revenue of the firm increases in this case.
Figure 5:
Elastic demand curve and rise in supply
Source: (Created by the Author)

7Principle of Economics
(ii)
Figure 6: Inelastic demand curve and rise in supply
Source: (Created by the Author)
In case of inelastic demand curve the slope of the curve is very steep. Thus, in this case
when supply increases equilibrium quantity increases and price declines (Behboodi et al. 2017).
However, due to inelastic demand curve the magnitude of the rise of quantity in equilibrium is
lesser than the magnitude of decline in price. The amount of revenue the firm generated before
increase in supply was P*Q* and this revenue is higher than the revenue the firm generated after
increase in supply. The new revenue of the firm is given by P1Q1.

8Principle of Economics
Answer 5
Figure 7:
Minimum price policy
Source: (Created by the Author)
The government of Western Australia implemented minimum price policy on alcohol in
order to reduce the consumption of alcohol and thereby mitigate the associated illness. In figure
7 PM is the minimum price set by the government (Keatley et al. 2015). Due to this policy the
sellers get the opportunity to earn extra profit by charging high price. Apart from that, there
occurs dead weight loss. Alcohol is consumed by people of every segment, poor and rich. This
increase in price due to minimum price policy the price burden on poor increases and
exploitation of this segment occurs. Thus, to avoid the cost of minimum price government can
impose tax on alcohol such that the government can earn revenue and use it to improve the
society (Sacks et al. 2015). In addition to that the government can also restrict the number of
sellers or limit the per day sales to reduce the total consumption of alcohol.

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References
Becker, G.S., 2017. Economic theory. Routledge.
Behboodi, S., Chassin, D.P., Djilali, N. and Crawford, C., 2017. Interconnection-wide hour-
ahead scheduling in the presence of intermittent renewables and demand response: A surplus
maximizing approach. Applied energy, 189, pp.336-351.
Brander, J.A. and Spencer, B.J., 2015. Intra-industry trade with Bertrand and Cournot oligopoly:
The role of endogenous horizontal product differentiation. Research in Economics, 69(2),
pp.157-165.
Keatley, D., Hardcastle, S.J., Carragher, N., Chikritzhs, T., Daube, M. and Hagger, M.S., 2015.
Attitudes and beliefs of the general public towards a minimum price policy for alcohol in
Western Australia: A qualitative study. Drug and Alcohol Review, 34(S1), p.38.
Liu, G. and Tomsovic, K., 2015. Robust unit commitment considering uncertain demand
response. Electric Power Systems Research, 119, pp.126-137.
Pindyck, R.S. and Rubinfeld, D.L., 2015. Microeconomics. Boston: Pearson.
Sacks, J.J., Gonzales, K.R., Bouchery, E.E., Tomedi, L.E. and Brewer, R.D., 2015. 2010 national
and state costs of excessive alcohol consumption. American journal of preventive
medicine, 49(5), pp.e73-e79.
Zhang, G., Yang, K., Wei, J., Xu, K. and Liu, P., 2015, April. Virtual resource allocation for
wireless virtualization networks using market equilibrium theory. In 2015 IEEE Conference on
Computer Communications Workshops (INFOCOM WKSHPS) (pp. 366-371). IEEE.