Economics Principles Assignment: Market Analysis and Demand

This economics assignment analyzes several key economic principles. It begins with an examination of the French and Australian wine markets, exploring how a poor grape harvest in France impacts both markets, including shifts in supply and demand, and the resulting changes in equilibrium prices and quantities. The assignment then addresses product differentiation using Apple's iPods, explaining how new features and higher prices can coexist with the law of demand through graphical analysis. The next section analyzes the impact on equilibrium price and quantity when both demand and supply decrease simultaneously in the market for commercial apartments. The assignment also delves into the concepts of elastic and inelastic demand, demonstrating how changes in supply affect industry revenue under each scenario. Finally, the assignment considers the impact of a minimum price on alcohol, discussing its effects on consumer behavior, seller revenue, and potential deadweight loss, along with alternative policy solutions such as taxation and supply restrictions.

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

1Economics Principle
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................3
Answer 3..........................................................................................................................................4
Answer 4..........................................................................................................................................5
Answer 5..........................................................................................................................................8
References......................................................................................................................................10

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Answer 1
(a) Wine-grape is the key component for production of wine. France is facing poor harvest of the
wine-grape. Thus, the wine industry has not been able to get enough wine-grape manufacture
enough wine to meet the market demand1. It indicates that the low production of French wines
declined and thus the supply in the market has fallen as well. Therefore, the supply decline in
supply in French wines increase their price and thus consumers will reduce the consumption of
French wines. As a result the demand for French wine reduced and the price moves back to
previous level P* as shown in figure 1. Hence, the market of the French wine market declines
and its revenue also falls. Therefore, French wine market contracted. The graphical illustration is
given in figure 1.
Figure 1: French wine
market contraction
Source: (Created by the Author)
(b) Owing to poor harvest of wine-grape in France the supply of French wines decreased and
their price increased. Thus, due to the price rise the wine consumers will reduce French wine
1 Becker, G.S., 2017. Economic theory. Routledge.

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consumption and increases consumption of close substitute that is wine of some other brand such
as Australian wine. Therefore, the demand for Australia wines increases in France. Initially the
increase in demand for Australian wines will increase the price. Perceiving, the increase in
demand of the wines in France, Australia will increase supply of wines in France in order to gain
more profit. Thus, further increase in supply of Australian wines in France will move the supply
curve towards right and as a result price will slightly fall and the quantity sold in the market
increases hugely. Therefore, due to change in French wine market adversely the revenue of the
Australian wine companies operating in France will increase. Therefore, the market for
Australian wine expands. The graphical illustration is given in figure 2.
Figure 2: Australian wine
market expansion
Source: (Created by the Author)
Answer 2
Apple introduces new line of IPods with more features and greater storage capacity with
the higher price even if the market is soaring because the Apple is making product differentiation

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and thus it is associated with high cost due to research and development2. Thus, demand for
entire market of IPods is low but for those newly introduced IPods with new features. Thus, it is
not going against the law of demand. Hence, the new IPods deals in a different market of its
own. Therefore, the equilibrium price and quantity of the new IPods are PI and QI respectively in
figure 3 given below which is higher than the market price and quantity. The graphical
illustration is given in figure 3.
Figure 3: Product differentiation
Source: (Created by the Author)
Answer 3
The decline in demand and supply of the new commercial apartments has occurred
simultaneously. The fall in the supply and the demand will have effect on the equilibrium
quantity and price of the apartment market. The fall in demand and supply will diminish the
quantity traded in the market and thus the equilibrium quantity will reduce. However, the impact
on price depends on the proportion of change in the supply and demand, if fall in supply is
2 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.

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greater than fall in demand then the price of the mew commercial apartments will rise.
Alternatively, if the fall in demand is greater the fall in supply then the price will decrease3.
However, the price will remain the same if
the proportion of decrease in demand
and supply is the same.
Figure 4: Fall in commercial apartment market equilibrium
Source: (Created by the Author)
Therefore, impact on the equilibrium quantity and price depends on the change in
magnitude of the demand and supply4. However, there will be stagnation in the new commercial
market apartment due to the fall in both the supply and demand. Considering, the supply and
demand fell by the same proportion that decreased the equilibrium quantity which is given as Q1
and price at equilibrium remained the same at P* as shown in figure 4.
3 Azevedo, E.M. and Leshno, J.D., 2016. A supply and demand framework for two-sided
matching markets. Journal of Political Economy, 124(5), pp.1235-1268.
4 Menzio, G. and Trachter, N., 2018. Equilibrium price dispersion across and within
stores. Review of Economic Dynamics, 28, pp.205-220.

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Answer 4
(i) Elastic demand curve means that the demand curve is very flat. A market where demand
curve is elastic, change in price impacts the quantity demanded equal to or more than
proportional change in price5. Due to change in unit price if the change in demand occurs by the
same amount then it is called unit elastic. However, in this case it is supposed that the demand is
more than unit elastic. Therefore, rise in product supply will move the supply curve to the
rightward to S1 from S as shown in figure 5. Increase in supply decreases the price. However,
due to the elastic nature of the demand curve fall in price is low and it fell to P2 from P1. On the
other hand, the quantity demanded increased more than the decrease in price as consumers are
more responsive to the change in the market price with elastic demanded and thus the quantity
demanded increased more than the fall in price and the demand rises from Q1 to Q2. Thus,
revenue of the industry increases due to increase in supply when demand in the market is elastic.
The graphical illustration is given in figure 5.
5 Collin‐Dufresne, P. and Fos, V., 2016. Insider trading, stochastic liquidity, and equilibrium
prices. Econometrica, 84(4), pp.1441-1475.

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Figure 5: Elastic demand and increase in supply
Source: (Created by the Author)
(ii) Inelastic demand curve means that the customers are less reactive to a price change that
means the due to a certain amount in alteration in the price of the product the alteration in it
demands is less than proportionate6. Demand curve is steep when it is inelastic as shown in
figure 6. Therefore, increase in supply in a market where demand curve is inelastic, cause price
to fall by significant amount but the fall in price is unable to impact the demand of the market
effectively and the change in quantity
demanded is less than proportionate change
in price7. The price fell from P* from
P and the rise in quantity is from
Q* to Q. Thus, the total revenue
decreases in a market with
inelastic demand curve due to rise in
supply of the product. The
graphical illustration is
given in figure 6.
6 Schwartz, L.P., Roma, P.G., Henningfield, J.E., Hursh, S.R., Cone, E.J., Buchhalter, A.R., Fant,
R.V. and Schnoll, S.H., 2019. Behavioral economic demand metrics for abuse deterrent and
abuse potential quantification. Drug and alcohol dependence, 198, pp.13-20.
7 De Grauwe, P., 2018. Economics of monetary union. Oxford university press.

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Figure 6: Supply increase and inelastic demand curve
Source: (Created by the Author)
Answer 5
In order to minimize the risk of alcohol associated illness, the Western Australian
Government set a minimum price on alcohol. The minimum price is over the free market price,
that is to buy alcohol consumers need to pay more price and thus might get discouraged to
consume alcohol and the illness associated with alcohol will fall8. However, due to the minimum
price the sellers get the chance to charge high price for alcohol and appropriates the consumer
surplus. Thus, the alcohol seller gets the benefit of high price. Apart from that, due to high price
of alcohol many consumers will shift local liquors that will affect the health of consumers
further. For minimum pricing on alcohol there is occurrence of dead weight loss also9. Thus, to
suitable measure to address the issue generated due to minimum price is to impose tax on alcohol
such that the government get extra revenue that can be used for public benefit10. On the other
8 Kapferer, J.N. and Laurent, G., 2016. Where do consumers think luxury begins? A study of
perceived minimum price for 21 luxury goods in 7 countries. Journal of Business
Research, 69(1), pp.332-340.
9 Amir, R., Jin, J.Y., Pech, G. and Tröge, M., 2016. Prices and deadweight loss in multiproduct
monopoly. Journal of Public Economic Theory, 18(3), pp.346-362.
10 Lensvelt, E., Liang, W., Gilmore, W., Gordon, E., Hobday, M. and Chikritzhs, T., 2016. Effect
of the Australian “alcopops tax” on alcohol-related emergency department presentations for
injury in two states. Journal of studies on alcohol and drugs, 77(5), pp.730-739.

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hand, the government can also restrict
number of producers in the market to
restrict sales of alcohol and thereby
reduce risk of illness due to alcohol
consumption.
Figure 7: Minimum price on alcohol
Source: (Created by the Author)
In figure 7, PM is the minimum price and the P* is the competitive market price and QM is
the quantity at minimum price and Q* is the competitive market quantity.

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References
Amir, R., Jin, J.Y., Pech, G. and Tröge, M., 2016. Prices and deadweight loss in multiproduct
monopoly. Journal of Public Economic Theory, 18(3), pp.346-362.
Azevedo, E.M. and Leshno, J.D., 2016. A supply and demand framework for two-sided
matching markets. Journal of Political Economy, 124(5), pp.1235-1268.
Becker, G.S., 2017. Economic theory. Routledge.
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.
Collin‐Dufresne, P. and Fos, V., 2016. Insider trading, stochastic liquidity, and equilibrium
prices. Econometrica, 84(4), pp.1441-1475.
De Grauwe, P., 2018. Economics of monetary union. Oxford university press.
Kapferer, J.N. and Laurent, G., 2016. Where do consumers think luxury begins? A study of
perceived minimum price for 21 luxury goods in 7 countries. Journal of Business
Research, 69(1), pp.332-340.
Lensvelt, E., Liang, W., Gilmore, W., Gordon, E., Hobday, M. and Chikritzhs, T., 2016. Effect
of the Australian “alcopops tax” on alcohol-related emergency department presentations for
injury in two states. Journal of studies on alcohol and drugs, 77(5), pp.730-739.
Menzio, G. and Trachter, N., 2018. Equilibrium price dispersion across and within
stores. Review of Economic Dynamics, 28, pp.205-220.

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Schwartz, L.P., Roma, P.G., Henningfield, J.E., Hursh, S.R., Cone, E.J., Buchhalter, A.R., Fant,
R.V. and Schnoll, S.H., 2019. Behavioral economic demand metrics for abuse deterrent and
abuse potential quantification. Drug and alcohol dependence, 198, pp.13-20.