BEO1105 Assignment (Tri 1, 2018): Economic Principles Analysis

This economics assignment solution addresses several key concepts in microeconomics, including supply and demand, elasticity, and market equilibrium. The assignment analyzes how shifts in demand and supply affect the price and quantity of goods, such as beef, French wine, Australian wine, and orange juice. It explores the impact of factors like substitute product prices and production costs on market outcomes. Furthermore, the solution delves into price elasticity of demand in the context of the taxi market, examining the assumptions made by taxi owners. The assignment also involves cost analysis for a monopolistically competitive firm, determining whether the firm is making a profit or loss and whether it should adjust its output level. Graphs are used to support the answers, providing a visual representation of the economic principles at play. The solution provides a comprehensive understanding of market dynamics and the application of economic theories in real-world scenarios.

Running head: BUSINESS LAW ASSIGNMENT
Business Law Assignment
Name of the Student:
Name of the University:
Author note:

1BUSINESS LAW ASSIGNMENT
Price
Supply of beef
P1
P2
D1
D2
S
E2
E1
Q2Q1
Answer 1
Figure 1: Shift in demand for beef
Not necessarily the demand curve for beef is upward sloping. The demand curve can shift
rightwards for change in any other factor other than the price. For example, the price of
substitute meats, such as, pork, lamb or chicken, might have increased by a significant amount,
which has increased the demand for beef, and the demand curve shifted to the right. This would
cause the price of beef to rise, but since it is relatively cheaper than the alternatives, more beef
will be demanded.

2BUSINESS LAW ASSIGNMENT
Price of French grapes
Supply of French grapes
S1
S2
D
P1
Q1Q2
P2
Supply falls due to poor harvest
Answer 2
Figure 2: Shift in supply curve for poor grape harvest
(a) Poor grape harvest indicates a fall in the supply of wine grapes in the French wine
market, which in turn leads to a fall in the wine production. The decline in supply due to
poor harvest shifts the supply curve of wine grapes towards the left. Considering the
demand for grapes remaining unchanged, the leftward shift of the supply curve leads to a
rise in the price and fall in the quantity. Thus, the price of French wine increases while its
supply falls, creating a scope for excess demand in the wine market.
(b) The fall in French wine supply along with high price creates demand for imported
Australian wine, with the best price. As the import of Australian wines increases, the
Australian wine producers gain financially. Australian wines are substitute for the French

3BUSINESS LAW ASSIGNMENT
wine. Hence, as French wine becomes expensive, the Australian wine remains relatively
cheaper. The market supply is also more due to imports. Hence, demand for Australian
wine increases, leading to a rise in imports.
Answer 3
Orange juice and apple juice are substitute products. Hence, if the price of apple juice
decreases, the demand for orange juice decreases in the market. Thus, the demand curve for the
orange juice shifts to the left. On the other hand, the rise in the wage rate of the orange grove
workers increases the production cost of orange juice. This leads to a fall in the supply of orange
juice in the market, and the supply curve shifts to the left. The net effect of the shift of both the
demand and supply curve of orange juice decreases the equilibrium quantity but the impact on
equilibrium price is undetermined. If the fall in demand is more than the fall in supply, the shift
in the demand curve for orange juice is more than the shift in the supply curve, resulting in the
fall of the equilibrium price. On the other hand, if supply falls more than the demand, the shift in
supply curve is more than that in the demand curve, and hence, the equilibrium price rises.

4BUSINESS LAW ASSIGNMENT
S1
D1
S2
D2
Price of orange juice
Supply of orange juice
P1
P2
Q2 Q1
Supply of orange juice
Price of orange juice
Q1Q2
D2
S2
P2
P1
S1
D1
Figure 3: Demand shifts more than supply
Figure 4: Supply shifts more than demand

5BUSINESS LAW ASSIGNMENT
Price
Quantity demanded of taxis
Inelastic demand curve
1510
3
5
0
E1
E2
Answer 4
(a) The taxi owners or drivers in Australia assume that the price elasticity of demand for the
taxi rides is inelastic. Price elasticity of demand refers to the percentage change in
demand for a product or service due to one percent change in its price. Hence, according
to the law of demand, if price rises, the demand would fall for a product or service.
However, the taxi drivers or owners think that a rise in price would increase their
revenue, which would only be possible in case of inelastic demand.
Figure 5: Inelastic demand for taxis
As seen from the diagram, in the initial equilibrium, the total revenue was 3*15 = 45. When price
rises to 5, the quantity demanded falls from 15 to 10. However, the total revenue becomes 5*10
= 50. Hence, there is a rise in the total revenue.

6BUSINESS LAW ASSIGNMENT
MC
MR
D = AR
ATC
AVC
50
5
Price
3
4.50
4
Output
(b) The taxi owners or drivers have such an assumption because there are not many
substitutes for the taxis. Hence, the response to the price rise would be weak. Thus, the
assumption is realistic. However, it might not be realistic if there are many other
companies providing alternatives to taxis.
Answer 5
(a) TC = AC * Q = $5 * 50 = $250
TR = P*Q = $4.50 * 50 = $225
Profit = TR – TC = $225 - $250 = - $25
Figure 6: Cost curves for monopolistically competitive firm

7BUSINESS LAW ASSIGNMENT
It is seen that, at 50 units of output, the firm is incurring $0.50 economic losses per unit ($5.00 -
$4.50) for a total economic loss of $25 ($0.50 * 50 units). The total cost of the firm is $250 and
total revenue is $225. Thus, the firm is actually incurring loss. The firm cannot operate under
these conditions in the long run and will go bankrupt.
(b) However, the firm should not change the level of output because at the output level of 50,
the marginal cost of $3.00 is equal to the marginal revenue of $3.00. Hence, it is it is
maximizing profits at 50 units of output.