Economics Coursework: Market Equilibrium, Tariffs, and Price Floors

This economics assignment explores market equilibrium, price floors, import tariffs, and elasticity. It analyzes the impact of cyclones on banana markets, the effects of price floors on wheat markets (including consumer surplus, producer surplus, and deadweight loss), and the consequences of tariffs on tire markets. The assignment critiques the efficiency and fairness of price floor and import tariff policies, suggesting alternative approaches like direct income support for farmers and abandoning trade protectionism. It also discusses the income and cross-price elasticity of bicycle demand, examining factors influencing bicycle usage and recommending government encouragement of bicycling to address health and congestion issues. The document is available on Desklib, a platform offering a wide range of study resources for students.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

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Table of Contents
Question 1..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................2
Question c...............................................................................................................................3
Question d..............................................................................................................................3
Question 2..................................................................................................................................5
Question a...............................................................................................................................5
Question b..............................................................................................................................5
Question c...............................................................................................................................6
Question d..............................................................................................................................7
Question e...............................................................................................................................7
Question 3..................................................................................................................................9
Introduction............................................................................................................................9
Income and cross price elasticity of bicycle demand.............................................................9
Factors affecting bicycle demand.........................................................................................10
Conclusion............................................................................................................................10
References................................................................................................................................11

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Question 1
Question a
Figure 1: Market for banana
The price of bananas at equilibrium is approximately equals $2.5 per box. The
quantity of banana at equilibrium is nearly equals 2250 boxes. Equilibrium in the market
occurs where market demand equals market supply. At the given price and quantity of
bananas, quantity supplied of bananas equal the quantity demanded.
Question b
When banana’s price is at $1.50, then the price is below the equilibrium price. At a
price below market equilibrium, demand for bananas per box exceeds that of supply. This
results in a shortage of bananas in the market. With a shortage in the market, sellers tend to
increase price to eliminate some buyers from the market (Fine 2016). Price of banana
continue to increase unless supply and demand balances in the market.

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Question c
Figure 2: Impact of cyclone on banana market
Because of cyclone, the supply of banana lessened by 500 boxes. This shifts the
supply curve of banana inward leaving the demand same. Because of a decrease in supply of
bananas, equilibrium shifts up from E to E1. At the new equilibrium, price of bananas increase
to $3 and equilibrium quantity of bananas decreases to 2000 boxes per week.
Question d
Figure 3: Combined effect of demand and supply change on the banana market

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Given that demand for bananas increases by 500 boxes, demand curve for bananas
shifts leftward. Since demand increases by same proportion as the cut in supply, the
equilibrium quantity of bananas remain the same (Kreps 2019). The new equilibrium is at E1
where equilibrium quantity of bananas remains unchanged while equilibrium price increases
to $3.5.

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Question 2
Question a
Figure 4: Impact of price floor in the wheat market
In the above figure, the demand and supply curve of wheat are shown by the line DD
and SS respectively. Equilibrium is at E with resultant equilibrium price of P* and that of
equilibrium quantity of Q*. Now, in order to support farmer’s income, suppose price floor is
imposed at P1. Because of price floor, supply of wheat increase to Q1 while demand decreases
to Q2 creating a surplus of (Q1 – Q2).
Question b
Figure 5: Consumer surplus, Producer surplus and deadweight loss with price floor

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Because of price floor, consumer surplus decreases from the area AEP* to the area
ACP1. Before setting the price floor, produce surplus was give the area of the triangle of
P*EB. After the price floor, producer surplus is equivalent to the area P1CFB (Cowell 2018).
The deadweight loss to the society because of the price floor is given by the area of the
triangle CEF.
Question c
Figure 6: Impact of tariff on tyres
Because of tariff, price of tyres in US increases from PW to Ptariff . The higher price
increases tyres produced in US from QS1 to QS2 while demand for tyres in US lowered from
QD1 to QD2. Consumers in US suffers a loss in surplus given by the area B+D+E+G.
Producers in US gain in terms of a larger surplus (Moon 2018). The gain in producer surplus
is given by the area B. Government earns a revenue from the tariff given by area E. However,
society suffers a deadweight loss given by the area D+G.

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Table 1: Economic surplus from tariff
Economic Agent Change in surplus Winners/Losers
Consumers -(B+D+E+G) Losers
Producers +B Winners
Government E Winners
Society -(D+G) Loser
Question d
The policies of price floor and import tariff is neither efficient nor fair. The policies
are not efficient in the sense that the policies interrupt efficient functioning of free market
resulting inefficient allocation of resources. Since, resources are not fully utilized there is a
net loss of economic welfare in both the cases. The notion of fairness indicates equal
opportunities for all (Nesterov 2017). Both price floor and import tariff raise price of the
product above equilibrium level creating unequal opportunities in terms of affordability. Poor
people who are unable to afford the higher price will be deceived in both the case.
Question e
The President should abandon both the policies and implement some efficient policies
instead. In case of price floor farmers will end up having a surplus. Government need to
purchase the surplus at the higher price to make the policy successful. This will increase the
burden on government budget and should ultimately be borne by the taxpayers. Direct
income support program or subsidy to small farmers could be a better policy choice since
these do not distort direct market operation. In case of import tariff, trade protectionism
policies hurt the consumers in terms of higher prices (Hazari, 2016). Such policies also
reduce competitiveness of concerned industries. Moreover, there is a possibility of China to

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retaliate in response to imposed tariff by US. This will further hurt US economy by lowering
their export demand.

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Question 3
Introduction
In a world of growing health problem encouraging use of bicycle is one way to keep
people fit and healthy. Incentive to encourage bicycling as a means of transportation not only
addresses health problem but it also reduces congestions.
Income and cross price elasticity of bicycle demand
The cross price elasticity of demand between bicycle and motor vehicles is positive
meaning the two are substitutes in nature. Therefore, if incentives are given to increase use of
bicycle then people tend to substitute motor vehicles with bicycles lowering the demand for
motor vehicles. As the demand for motor vehicle reduces, pollution and congestion tend to be
reduced. Besides as people substitute motor vehicles with bicycle, it helps them to stay more
fit especially for those who do not exercise regularly.
Figure 7: Impact of increasing bicycle use on motor vehicles demand
So far as income elasticity of demand is considered bicycle is a normal good and
therefore has a positive income elasticity of demand. However, in comparison to motor
vehicles bicycles are inferior good and hence has a negative income elasticity as people tend

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to spend less on bicycles and more on motor vehicles with an increase in income (Browning
and Zupan 2020).
Factors affecting bicycle demand
Apart from petrol price there are some other factors that might influence demand for
bicycle. Travel habit is one such factor that determines demand for bicycle. People who are
more familiar of riding bicycle tend to bicycle more and vice versa. Age is another factor that
affects bicycle demand. Young people has a greater tendency of using bicycle compared to
older one (Barberan, e Silva and Monzon 2017). Demand for bicycle is subject to distance
travelled regularly. People who travel relatively shorter distance prefer bicycle more. Level of
household income is another determinant of bicycle demand. Low income household cannot
afford motor vehicle and therefore more tend to use bicycle.
Conclusion
Considering the benefits of using bicycle in terms of ease of transportation and
increasing fitness there is a tendency of increase in bicycle riding. In line with the projection
government therefore should encourage bicycle riding.

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References
Barberan, A., e Silva, J.D.A. and Monzon, A., 2017. Factors influencing bicycle use: a binary
choice model with panel data. Transportation research procedia, 27, pp.253-260.
Browning, E.K. and Zupan, M.A., 2020. Microeconomics: Theory and applications. John
Wiley & Sons.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.
Hazari, B., 2016. The Pure Theory of International Trade and Distortions (Routledge
Revivals). Routledge.
Kreps, D.M., 2019. Microeconomics for managers. Princeton University Press.
Moon, B.E., 2018. Dilemmas of international trade. Routledge.
Nesterov, A.S., 2017. Fairness and efficiency in strategy-proof object allocation
mechanisms. Journal of Economic Theory, 170, pp.145-168.