Economics Assignment: Market Equilibrium, Elasticity, and Firm Entry

This economics assignment solution addresses key microeconomic concepts, including demand and supply, market equilibrium, and price elasticity. It analyzes the impact of various factors, such as changes in consumer preferences, technological advancements, and income levels, on market equilibrium. The assignment also examines the effects of bird flu on the chicken market, considering the relative changes in demand and supply. Furthermore, it calculates the price elasticity of demand and discusses its implications for revenue. Finally, the solution explores the impact of a new firm entering the market on industry prices and profits, concluding with an analysis of normal profit conditions. Desklib provides this assignment as a valuable resource, offering students access to a wide range of past papers and solved assignments to enhance their learning.

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ECONOMICS ASSIGNMENT

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Contents
Question 1..................................................................................................................................3
Question 2..................................................................................................................................5
Question 3..................................................................................................................................6
Question 4..................................................................................................................................7
Question 5..................................................................................................................................7
Reference....................................................................................................................................9

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Question 1
a) As the price of a leather jacket decreases, customers will shift to the market of leather
jacket and demand for woollen jumpers will reduce. The demand curve for woollen jumpers
will shift to the left and hence both price and quantity will reduce (Friedman, 2017).
Figure 1: Reduction in demand for woollen jumpers
(Source: Friedman, 2017)
b) Adoption of the new knitting machine which increases the productivity will allow the
sellers to produce more good at any given cost. That means the supply curve will shift to the
right and new equilibrium price will be lower and the quantity will be more than the initial
equilibrium.

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Figure 2: Rightward shift in the supply
(Source: Cowell, 2018)
c) Assuming that woollen jumpers are normal good, the rise in income will increase the
demand. At any price level, consumers will demand more quantity of woollen jumpers. The
demand curve will shift to the right leading to an increase in both the equilibrium price and
the quantity in the market (Thompson, 2016).
Figure 3: increase in demand for woollen jumpers

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(Source: Postlewaite and Horner, 2017)
Question 2
The flaws in the reasoning in the statement are that demand curve shifts when price remains
constant and any external factor changes. In the first case the demand curve shifts as
preferences of the consumers in the market change. Now as the price for garlic rises, then
there will not be any shift in the demand curve, the quantity demanded will change along the
demand curve. Therefore, the price will not be uncertain, it will increase as shown in the
figure below.
Figure 4: Shift along the demand and shift in the demand curve
(Source: Taylor, 2019)
Question 3
Now, in this case, both the demand and the supply curve for chicken would shift to the left
side. Now, the impact on the new price and the equilibrium quantity depend on the relative
changes in demand and supply (Stoneman, Bartoloni and Baussola, 2018). If the decrease in
demand due to bird flu is more than culling rate which is 50%, both the price and quantity
reduce as shown in figure 5(a). On the other hand, if the reduction in demand is less than the
reduction in supply, the price will increase and quantity demanded will fall as shown in figure
5(b).

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Figure 5: Two cases of changes in price and quantity
(Source: Serrano and Feldman, 2018)
Question 4
a)
Now using the midpoint method,
% change in the quantity demanded= ((500-475)/((500+475)/2))*100= 5.128 (Approx)
% change in the price= ((8-10)/((8+10)/2))*100 = -22.22 (Approx)
The price elasticity of demand= (5.128/-22.22) = -0.23
|-0.23|<1 => Inelastic demand
b)
Now as the demand is inelastic, quantity will reduce proportionately less than the increase in
price. That would increase the product of price and quantity. Thus, Revenue can be increased
by increasing the price of this good.

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Question 5
Figure 6: The changes in the market as a new firm enters
(Source: Foley, 2016)
As the new firm enters the market, the number of sellers will increase and hence the supply
curve will shift to the right. That, in turn, will bring the price of the product in the industry.
Now the as the price comes down, it will coincide with the lowest point of the AVC as shown
in figure 6.
Therefore, P=MC=AC
=> No economic profit and only normal profit.

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Reference
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Foley, D.K., 2016. Keynes’ Microeconomics of Output and Labor Markets. In Dynamic
Modeling, Empirical Macroeconomics, and Finance (pp. 183-194). Springer, Cham.
Friedman, L.S., 2017. The microeconomics of public policy analysis. Princeton University
Press.
Postlewaite, A. and Horner, J., 2017. Report of the Editor: American Economic Journal:
Microeconomics. American Economic Review, 107(5), pp.743-48.
Serrano, R. and Feldman, A.M., 2018. A short course in intermediate microeconomics with
calculus. Cambridge University Press.
Stoneman, P., Bartoloni, E. and Baussola, M., 2018. The Microeconomics of Product
Innovation. Oxford University Press.
Taylor, J.E., 2019. Deconstructing the Monolith: The Microeconomics of the National
Industrial Recovery Act. University of Chicago Press.
Thompson, G.E., 2016. Microeconomics: A Computational Approach: A Computational
Approach. Routledge.

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Reference