Economics Assignment: Economic Foundations and Market Forces - Task 1

This economics assignment solution addresses key economic concepts and market forces. It begins by defining and illustrating absolute advantage and opportunity cost using production data for motorcycles and guitars in Ireland and Australia. The solution then analyzes supply and demand curves, determining equilibrium price and quantity, and demonstrating the impact of price discrepancies on market dynamics. Further, it explores the effects of changes in related markets, such as the impact of dam water prices on the water tank market. Finally, the assignment examines the factors influencing avocado prices, including shifts in demand and supply, and assesses the strategic options for a cafe owner facing rising production costs, considering price elasticity of demand. The solution incorporates graphical representations to illustrate the concepts discussed, referencing relevant economic literature throughout.

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TASK 1
Question 1
Absolute advantage refers to the ability of a party to produce a greater output in comparison
to the other party using the same amount of resources. Ireland has the absolute advantage for
motorcycles since it takes lesser hours to produce 1 motorcycle than Australia. Australia has
the absolute advantage for guitar as it takes lesser hours to produce i guitar than Ireland
(Arnold, 2017).
Question 2
Opportunity cost refers to the benefit foregone available from the next best use of the given
resources. To produce one motorcycle, Ireland requires 9 hours of manpower. In the same
amount of time (i.e. 9 hours), it would produce (9/6) = 1.5 guitars. Hence, opportunity cost
for 1 motorcycle in Ireland is 1.5 guitars. To produce one motorcycle, Australia requires 15
hours of manpower. In the same amount of time (i.e. 15 hours), it would produce (15/3) = 5
guitars. Hence, opportunity cost for 1 motorcycle in Australia is 5 guitars (Krugman, 2016).
Question 3
The requisite demand supply curve for Boost Juice is indicated below.
The equilibrium tends to exist at the point where there is intersection of the demand and
supply curve. Based on the graph shown above, the equilibrium price is $ 12 per unit while

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equilibrium quantity is 600 units. This is the equilibrium since there is no demand supply
mismatch at this point (Mankiw, 2016).
Question 4
The corresponding graph to highlight the demand supply mismatch at price $ 20 per unit is
indicated below.
If the price is $ 20 per unit, the corresponding demand is 200 units. However, the supply at $
20 from the graph is 800 units. It is evident that since supply is greater than the demand,
hence there is a surplus of supply. This is indicated in the graph shown above. Owing to
surplus of supply, this particular situation cannot sustain in the long run. The excess supply
would tend to put a downward pressure on the prices till the time all the surplus is absorbed
(Pindyck and Rubinfeld, 2016).
Question 5
Clearly, in the scenario presented, the dam water is a substitute to water tanks. As the cost
associated with procuring water from dam would fall, it is likely that more consumer would
prefer the dam option instead of water tanks. As a result, there would be a fall in demand for
water tanks as some consumers would make a shift to dam water. This would result in shift of
demand curve as indicated below (Krugman, 2016).

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The demand has shifted from D1 to D2. There is no change in the supply and hence the supply
curve remains unchanged at S. Clearly, the shift in the demand curve has altered the
equilibrium for the water tank market. There is a decrease in the equilibrium price from P1 to
P2. Also, the equilibrium quantity for water tanks would also decline from Q1 to Q2 (Mankiw,
2014).
Question 6
Avacado prices in America are increasing on account of two counts namely increasing
demand owing to change in customer preferences coupled with lower supply using to various
disruptions in key avocado producing areas. This is highlighted in the graph shown below.
It is apparent from the above that the demand has increased resulting in shift from D1 to D2.
Also, there is reduction in supply leading to shift from S1 to S2. The net result is that even
though equilibrium quantity has increased from Q1 to Q2. Also, the equilibrium price has
increased from P1 to P2 (Nicholson and Snyder, 2015).

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As a cafe owner selling sandwiches that require avocado, the increasing prices would lead to
higher production costs. The two options that would arise would be to either pass the
increased production cost to the customer or to absorb these costs thereby lowering the
profitability of the sandwiches. The option to be chosen would be dependent on the price
elasticity of demand of the sandwiches. If the demand for sandwiches in elastic, then increase
in price is not advisable as it would lead to proportionately higher decrease in quantity. As a
result, it makes sense that the prices should remain the same despite the higher production
costs (Arnold, 2017). Alternatively, if the demand for sandwiches is inelastic, then it is
expected that the increased production costs would be passed on to the consumers. This is
because even with higher prices, the proportionate decrease in quantity consumed would be
lesser and hence the profitability would not be adversely impacted (Mankiw, 2014).
The above two scenarios are graphically represented below.
The graph on the left indicates inelastic demand and higher consumer burden as increased
costs are passed on. However, the graph on the right indicates elastic demand when the
majority of the increased cost burden is borne by the producer (Krugman, 2016).

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References
Arnold, A.R. (2017) Microeconomics. 9th edn. Sydney: Cengage Learning, p. 63-64
Krugman, P. (2016) Microeconomics. 2nd edn. London: Worth Publishers, p. 104-105
Mankiw, G. (2014) Microeconomics. 6th edn. London: Worth Publishers, p. 79-81
Nicholson, W. and Snyder, C. (2015) Fundamentals of Microeconomics.11th edn. New York:
Cengage Learning, p. 97
Pindyck, R. and Rubinfeld, D. (2016) Microeconomics.5th edn. London: Prentice-Hall
Publications, p. 87-88