Microeconomics Assignment: Analysis of Economic Principles

This microeconomics assignment explores several core concepts. Part 1 examines the production possibility frontier (PPF) using a bow-shaped curve, illustrating opportunity costs and efficiency. It analyzes the combinations of goods that can be produced, the impact of resource changes, and the concept of inelastic demand. Part 2 delves into supply and demand analysis, calculating revenue, and price elasticity. It determines market equilibrium, consumer and producer surplus, and deadweight loss under different price scenarios. Part 3 investigates the effects of taxation, particularly on goods with inelastic demand. It discusses the incidence of tax, the inefficiency caused, and strategies to influence consumption through non-price factors, such as public awareness campaigns and social influence. The assignment provides a comprehensive understanding of economic principles and their practical applications.

A 1
a. The production possibility frontier between cars and bicycles (PPF) is shown below with cars on
the Y axis and bicycles on X axis. It isa bow shaped curve , which is concave to the origin.
b. A curve above shows the possible combinations of both goods that can be produced in Newland.
This graph assumes the following:
 Inputs used to produce cars and bicycles are unchanged when we draw this curve. The
quantity of inputs as well as their productivity is fixed.
 The technology to produce cars and bicycles is assumed unchanged or static. This means
that the same technology produces 1000 or 2000 bicycles. Technology does not change
with changes in output levels shown on a PPF.
According to the table given , Newland can produce a range of combinations of goods-
30000 cars and zero bicycles OR 5000 bicycles and zero cars are two extreme
combinations.
PROPERTIES OF PPF:

 SHAPE: A typical PPC is concave to the origin, and accordingly shaped like a bow when seem
from the origin. This shape is attributed to increasing opportunity costs of producing any good-
car or bicycle. Opportunity cost of a good X refers to the amount of good Y (alternative good)
that must be given up to get 1 more unit of X . So to get 1000 more bicycles (1000 to 2000 ) we
give up 4000 cars( =28000-24000). So 4000 cars in opportunity cost of 1000 bicycles.
As we increase bicycles we must give up more cars for the same additional 1000 bicycles. As we
go from 4000 to 5000 bicycles we have to give up on 10000 cars ( =10000-0). The opportunity
cost of same 1000 bicycles is now higher. This illustrates increasing opportunity costs concept.
This happens due to the fact that resources are fully used and all resources are not equally
efficient/productive at producing both cars and bicycles.
 EFFICIENCY ON PPC:
Any point that lies inside the curve reflects on unused resources. This is inefficient as idle
resources do not ad any value to society.
Any point that lies outside/beyond the curve is unachievable, though it may be desirable. Such a
point is reached by expansion in resources, or technical improvements that raise productivity
levels of existing resources or trade.
Any point on the curve is considered EFFCICIENT, as all resources are used.
c. We are at the point where 3000 bicycles and 18000 cars are made. We need to get 1000 more
bicycles and 2000 more cars. As shown this objective is achieved at A, which does not lie on the
PPC. Hence it is not possible to increase both cars and bicycles with existing resources. As per
data we can only make 10000 cars if we want 4000 bicycles. The only way to do so is to shift out
the PC by:
1. A rise in input levels.
2. An improvement /productivity increase of inputs due to better technology.
3. International trade can shift out PPC.

A 2:
Revenue is the product of price and quantity of demand
a. At a price of $400 the quantity of demand is 30 millions. Revenue = 30*400 = 12000 million or
12 billion.
At a price of $350 the quantity of demand is 35 million. Revenue = 35*350 = 12250 million or
12.25 billion. So revenue has increased.
b. Theory tells us that change in price and changes in revenues are related through the price
elasticity of demand . When demand is inelastic, then changes in price and revenues follow
same path. Any rise in price leads to higher revenues, while lower prices lower revenues.
When demand is elastic then changes in price and revenues take opposite paths. As price rise
revenues will fall and vice versa. We calculate revenues to see if demand for chips is elastic or
inelastic.
When price is 300 the revenues = 300*40= 12000 million or 12 billion
When price rises to 350 the revenues become 12.25 billion. Thus, a rise in price is accompanied
by a rise in revenues- demand is inelastic. Looking a price fall, when price falls to 250 then
revenues = 250*45 = 11250 million or 11.25 billion. Price fall causes revenues to fall. So
whether price falls or rises we have shown that demand is inelastic.
PART II

Qd= 100-5P
Qs = 5P
c. Equilibrium is achieved where demand equals supply.
100 – 5P = 5P
10P = 100
P= 10 and Q= 5*10=50
d. Consumer surplus = ½ *50*(20-10) = 250
Producer surplus = ½ *50*10 = 250
Total surplus = 500
e. As shown in the diagram / from the equation for Qd, when P= 15, demand < supply. So the
quantity in this constrained equilibrium will be Qd. Putting P = 15 in Qd gives us Q= 100-5*15
=25
Accordingly we calculate surplus with Q= 25 and P = 15.
The consumer surplus is = ½*25*(20-15) = 62.5.
Producer surplus = (15-5)*25 + ½ *5*25 = 212.5 total = 275.
Deadweight loss = ½ *(15-5)*25 = 125
In the same way we can show what happens when P= 5. Now supply < demand so the
constrained equilibrium quantity is given by Qs or 5*5 = 25. We use P= 5 and Q= 25 in our
calculations
Consumer surplus = = (15-5)*25 + ½ *5*25 = 212.5.
Producer surplus = ½ *5*25 = 62.5.
Deadweight loss = ½ *(15-5)*25 = 125.
f. Diagrams are shown below

A 3:
a. The result of a tax where consumption does not fall much and taxes are also not as expected, is
not surprising when we note that the good here has an inelastic demand. As alcohol is addictive,
changes in consumption are tough, despite a rise in price due to taxation.
Theory dictates that a tax imposition leads to higher price, which lowers consumption/demand
for a typical good. In some extreme cases it may not happen when demand is perfectly inelastic.
In general , ina diagram the tax imposition this is shown as an upward shift of supply curve. For a
typical down sloping demand curve and upward sloping supply curve, price rises and quantity
falls. The extent of change depends on the slope of the curves.
If the demand is inelastic ( as shown by a steep demand curve D) then there is a relatively small
change in quantity. This is the case of alcohol.
Such inelastic demand also leads to revenue losses when price rise. Both these facts- small
quantity reduction and fall in revenues is an indication of inelastic demand.
b. The incidence of tax refers to the final payer of the tax, rather than the point of collection of tax.
This based on the following mathematical rule- the ratio of consumer burden to producer
burden is directly related to the ratio of price elasticity of supply to price elasticity of demand.
Higher is demand elasticity lower is the burden on the consumer and producer is relatively more
burdened.
As we illustrated inelastic demand, the burden falls more on the consumer than the
seller/producer.

The new equilibrium is inefficient as it did not lead to higher revenues, nor did it reduce
consumption. The proportion of tax burden was greater on the consumer, which exaggerated
the inefficiency.
c. Since demand is inelastic for alcohol any change in consumption has to be sought from non price
factors. These include influence, fashion, tastes, among others.
The government must look to alter these factors through public awareness programs, special
drives, rehabilitation programs, public programs that not only raise awareness but also send this
message through public figures, icons and socially influential people. These may include
television stars, movie stars, sportspersons, fashion icons and others who belong to civil society.

REFERENCES
Anon., n.d. Shifts in demand and supply. [Online] Available at:
https://cnx.org/contents/ETAPPz5d@5/Shifts-in-Demand-and-Supply-fo [Accessed 3 Sep 2017].
CSun.edu, n.d. Microeconomics. [Online] Available at:
http://www.csun.edu/sites/default/files/micro3.pdf [Accessed 8 Sep 2017].
Econ.ohio-state.edu, n.d. Elasticity. [Online] Available at
http://www.econ.ohio-state.edu/jpeck/H200/EconH200L5.pdf [Accessed 3 Sep 2017].