Economic Principles Assignment: BEO1105, Semester 1, University

This assignment solution addresses fundamental economic principles through a series of questions and answers. It begins by exploring the concept of scarcity and opportunity cost, using real-world examples to illustrate these ideas. The assignment then differentiates between positive and normative economic statements, providing clear examples of each. Subsequent questions delve into the concepts of change in quantity demanded and change in demand, utilizing graphical representations to demonstrate market adjustments. The analysis extends to market dynamics, examining the impact of simultaneous changes in supply and demand, such as the price of face masks during a pandemic. The assignment also considers the effects of government interventions like emission trading and price ceilings, analyzing their impacts on market outcomes. Finally, the solution explores price elasticity of demand, illustrating its importance in pricing strategies and revenue maximization, particularly in scenarios involving addictive goods. The solution includes relevant figures and references to support the analysis.

Running head: ECONOMIC PRINCIPLE
Economic Principle
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....................................................................................................................................2
Question 2........................................................................................................................................2
Question 3........................................................................................................................................3
Question a....................................................................................................................................3
Question b....................................................................................................................................4
Question 4........................................................................................................................................5
Question 5........................................................................................................................................6
Question 6........................................................................................................................................8
Question b....................................................................................................................................9
Question 7........................................................................................................................................9
Question 8......................................................................................................................................10
Question a..................................................................................................................................10
Question b..................................................................................................................................11
References......................................................................................................................................13

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Question 1
Question a
Given the limited availability of time it is not possible for Tom do all the three things at
the same time. Because of scarcity of resources (time here) Tom has to make choice among the
three available alternatives.
Question b
Opportunity cost of a resource refers to the forgone benefit that could have enjoyed from
putting the resource into the next best alternative use (Fine 2016). The opportunity cost of Tom’s
decision to go to University is the forgone earnings from full time works.
Question c
In the last weekend I gave up the decision to watch a movie with friends in order to study
for the test. The opportunity cost here is the forgone enjoyment from seeing the movie.
Question 2
Positive economic statements refer to the objective statements which can be examined,
accepted or rejected on the basis of available evidences. These kind of statements deal with the
objective explanation behind any stated fact or theories and rejection or acceptance of the
theories (Kreps 2019). Normative statements in contrast refer to the subjective statements based
on opinion instead of facts that can possibly be examine by considering the available evidences.
Positive economic statements dealwith the things stating what they are. They are
verifiable. Economists can test whether these statements are true or false. Normative economic
statements in contrast are fictions. They are not facts, instead they represent opinion of the

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economists based on their thinking (Mochrie 2015). This can either true or untrue and there is no
way to verify these statement based on evidences.
An example of positive economic statement is that is if government imposes a tax on a good, this
results in a decline in profit of the sellers.
An example of normative economic statement is that government should increase the retirement
age to 70 in order to prevent the problem of ageing population.
Question 3
Question a
Change in quantity demanded
Change in quantity demanded refers to the change in quantity demand of a good because
of a change in price. The law of demand proposes an opposite relation between price and
quantity demanded (Mankiw 2020). In the above case, Mike found bears to be 30 percent
cheaper than its usual price. The lower price of bears, encourages Mike to drink more beer. As a
result, Mike drank three beers rather than usual two beers. Since demand for beers increases
because of a lower price it presents the phenomenon of quantity demanded change
.

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Figure 1: Change in quantity demanded
Initial price of beer was at P*. Corresponding demand for beer was at Q*. Now because
of Happy Hour discount price of beer falls to P1. At the lower price given increase to Q1 shown
by the movement from E1 to A on the demand curve. There will be a shortage in the market of
the amount AB and price adjusts to reach to the equilibrium price.
Question b
Change in demand refers to a situation when demand curve shifts because of a change in
different factors influencing demand other than own price (Baumoland Blinder 2015). Mike
decided to buy the new runners because of his preference towards new “JOYRIDE” technology
based Nike running shoes considered to be superior by world’s best athletics. Since demand of
“NIKE” runners increases because of factors other than price, it represents a change in demand.

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Figure 2: Change in demand
The price of NIKE runners is initially at P*. Now, considering new “JOYRIDE”
technology based “NIKE” runners as superior by the standard of world’s best athletics, Mike’s
demand for NIKE runners increases and this shifts the demand curve right to D1D1. At the
existing price this leads to a shortage in the market causing equilibrium price and quantity to
increase.
Question 4
The price of face mask in China during the early stage of COVID-19 virus increases by
almost 10 times compared to price before the virus. Price has increased despite an increase in
supply of face mask. Now, price in a market is determined both from the demand and supply of
the concerned product. It should be taken into consideration that it is not the supply of masks that
have increased but also there is a surge in mask demand (Cowen and Tabarrok 2015).
Simultaneous increase in demand and supply has an opposing effect of price of mask. Increased
demand pushes price of mask up while increase in supply pushes down the price of mask. Price
will drive towards the direction of dominating force. Given that there is an increase in price of

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face mask, it is expected that increased demand for face mask outweigh its supply. The
adjustment process of price of face mask is illustrated in the figure below.
Figure 3: Price adjustment of face mask
In the market for face mask, demand and supply of face mask are depicted by the
respective DD and SS curve. Initial equilibrium in the marker is attained at E with corresponding
equilibrium price and quantity being P* and Q* respectively. Now supply expansion of mask
moves the supply curve to S1S1. In the awake of spread of the virus there will be an increase in
demand for face mask as well (Cowell 2018). This will move the demand curve for face mask to
the right to D1D1. Since demand changes by a greater magnitude than supply price under new
equilibrium (E1) increases to P1 compared to earlier price of P*.
Question 5
Given the simultaneous increase in yoga service demand along with a decline in number
of yoga service, there are three possible outcomes. An increase in demand has a tendency to
increase both price and equilibrium amount yoga service in Malaysia. The decrease in number of
Yoga service providers has the tendency to increase the price of yoga service and decrease in

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equilibrium amount of yoga service. There is three possible impact on equilibrium quantity of
yoga service (McKenzie and Lee 2016). First, if demand increases more than the decrease in
supply of yoga service then equilibrium quantity of yoga service increases and so is the price of
yoga service. Second, if demand increases less than the decrease in supply of yoga service
providers, equilibrium quantity falls and equilibrium price increases. Third, if demand increases
by the same magnitude as the supply, the equilibrium amount of yoga service remains the same
while price increase (Sexton 2015).
Figure 4: Demand for yoga services increases more than decrease in supply

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Figure 5: Demand for yoga services increases less than decrease in supply
Figure 6: Demand for yoga services increases by same proportion as decrease in supply
Question 6
Under emission trading system government first fixed the amount the pollution to the
desirable level by fixing the number of permits. As the total number of permits is limited,
polluters having different cost of lowering pollution trade the permits among themselves. Those
who have relatively lower cost of pollution sell their permits to first having a relatively larger

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cost of pollution (Browning and Zupan 2020). With increase in scarcity of emission permits
there is an increase in price of the permit. Fewer the number of permits higher will the price of
permits.
Figure 7: Impact of emission trading on pollution
The level of pollution was initially at Q1. Now of the government reduces supply of
emission permits from S to S* to lower the pollution level at Q1, there will be shortage of permits
which increase the price of permits to P2. The emission trading thus by increasing cost of
pollution reduces level of pollution at a pre-determined fixed level.
Question b
Two countries that have introduced a tax on a carbon tax are Canada and Britain. Current
price of carbon in Canada is $15 - $30 per metric ton and the price of Carbon in Britain is $25
per metric ton (Plumer and Popovich 2020).
Question 7
Government often takes different price control measure to keep the price at the standard
level. When government fixes the maximum price of a product in the market, the policy is

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known as price ceiling (Kolmar 2017). Driven by the high demand for eggs, price of eggs tends
to increase. Now to prevent price of eggs to reach to the excessive high level government sets the
maximum price for eggs. Now impact of imposed price ceiling in the market for eggs is
described in the figure below.
Figure 8: Impact of fixing maximum price of eggs
Suppose the market price of eggs is P*. Corresponding to this price equilibrium quantity
of eggs is Q*. Now, if government imposes a price ceiling (maximum price of eggs) at price P1,
demand for eggs increase to Q1while supply of eggs decreases to Q2. The discrepancy between
demand and supply lead to a shortage of eggs in the market given by the amount AB.
Question 8
Question a
Given that drug is an addicted item, people cannot change their demand for drug in
response to a change in price of drugs. Demand for drug is therefore relatively price inelastic
(Hutchinson et al. 2017). An arrest of drug dealers result in 50 percent reduction in supply of

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Heroin. The shortage in the supply of heroine increase price of Heroin in the market. Now, given
the relatively inelastic demand for Heroin, demand decreases by a relatively less proportion.
Since decline in equilibrium quantity is proportionately less than equilibrium price, there is an
increase in revenue of remaining Heroin drug dealers.
Figure 9: Impact on the revenue of drug dealers
The supply curve of Heroin is given as the SS. The corresponding demand curve for
Heroin is given by steeper line DD (Jain and Ohri 2015). Equilibrium is at E with price and
quantity of Heroin traded being P* and Q* respectively. Resulted revenue is given by area of the
rectangle OP*EQ*. Now, given 50 percentage reduction in Heroin supply the supply curve
moves to the leftward direction to S1S1. New equilibrium is attained at E1. Price of Heroin rises
to P1. Equilibrium quantity falls to Q1. The new revenue is given by the area OP1E1Q1. Since price
increases by a greater proportion than decrease in equilibrium price revenue of drug dealers
increase as shown by OP1E1Q1> OP*EQ*.
Question b