Economics Assignment: Analyzing Trade, Quotas, Subsidies & Equilibrium

This economics assignment solution analyzes the impact of trade, quotas, and subsidies on various markets. It begins by examining the effects of a free trade agreement between Australia and Canada, specifically focusing on the beef trade. It uses graphs to illustrate the impact on consumers, producers, and the Australian economy, further exploring the consequences of import quotas imposed by Canada on Australian beef, including effects on price, consumer and producer surplus, and market efficiency. The solution also discusses the impact of these quotas on Australia's export volume and beef prices. Furthermore, it investigates the effects of government subsidies on beef exports, including domestic prices, production quantities, consumption, and surplus. The assignment then shifts to an analysis of the espresso coffee market in Australia, classifying firms as price makers in a monopolistic competition environment. It explains the explosion of coffee chains in Australia, analyzes long-run profitability, and assesses the impact of government subsidies on existing firms. Finally, the assignment calculates the equilibrium price and quantity in the tea market, examines the effects of a government subsidy on tea production, and illustrates these effects with supply and demand diagrams. This document is available on Desklib, a platform offering a wide array of study resources including past papers and solved assignments for students.

Economics 1
ECONOMICS
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Economics 2
QUESTION 1 SOLTION
Australia and Canada have a free trade agreement in which, Australia exports beef to
Canada.
(a) Draw a graph and use it to explain and illustrate the impact of trade on consumers,
producers, and the Australian economy.
Before the Free trade agreement, Canada imposed tariffs on Australian beef and
as illustrated Canadian producers supplied QS1 of beef while Canadian consumers
demanded QD1 obtained by summing local beef and imported beef. After the FTA,
Australian imports become cheaper for Canada. Canadian consumers would now pay
lower and demand more Australian beef at QD2. Australian producers would produce
more beef to meet beef demand in Canada. The FTA might negatively impact Canadian
beef producers since Australian cheap beef would flood its market (Feenstra,2015). The

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Australian economy would rise since the beef farming industry would improve as a result
of higher demand as ease of entry in to Canadian market.
(b) Now Canada imposes an import quota on Australian beef. Draw a graph and explain
how this quota would influence the following factors in Canada: (i) Price of beef (ii)
consumer surplus and producer surplus (iii) beef importers gain (iv) efficiency of the
beef market.
Imposition of import quotas on Australian beef by Canada limits amount of beef
exported to Canada. The price of beef in Australia will decline as a result of excess
supply while in Canada, prices would increase because if reduced supply. Before the

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tariff, price P2, it declines to P1 when quota is introduced since Australian producers
would be willing to sell beef at lower prices. Quantity demanded also reduces by X.
Therefore producer surplus would have declined while consumer surplus would have
risen. Canadian beef importers would reduce the amounts imported if quota is below
average import (Leamer and Stern,2017). The efficiency of Australian market would rise
since producers would improve their products as they compete for few customers.
(c) The volume of import quotas on Australian beef is less than Australia’s total export
volume of beef to Canada. Explain how this import quotas would influence the
following factors in Australia.
(i) Quantity of beef exported to Canada
The quantity of exports to Canada would decline
(ii) price of beef
Beef prices would increase in Canada and decline in Australia
(iii) Consumer surplus and producer surplus.
Consumer surplus increases while producer surplus declines
(d) Suppose that the government decides to subsidize exports of beef by paying a certain
amount for each tonne sold overseas. Explain how the export subsidy would affect the
following factors in Australia:
(i) domestic price of beef
Domestic prices of beef would rise since producers would prefer exporting their
product.
(ii) The quantity of beef produced

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More beef would be produced because subsidy would increase exports.
(iii) The quantity of beef consumed, and the quantity of beef exported
Quantity of beef consumed would decline while beef exported would increase.
(iv) Consumer surplus, producer surplus, and government revenue. [15 marks]
Consumer surplus increases, producer surplus declines while government revenue
declines. The decline in government revenue results from cost of the subsidy.

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QUESTION 2 SOLUTIONS
“More than one billion of cups of coffee are consumed in Australia’s cafes, restaurants and
other outlets each year, an increase of 65 per cent over 10 years. People are drinking less
‘instant coffee’ as espresso becomes more popular and new specialty coffee shops have been
popping up all over Australia to satisfy demand for daily caffeine fix. Not only are people
drinking more coffee, they are becoming more coffee-savvy and want premium brew even
if it costs more.”
(a) How would you classify the espresso coffee market; are firms price takers or price
makers?
Firms are price makers because they can decide to charge competitive prices up to
a reasonable range while customers are willing to consume premium brew even at a
higher prices. The market is monopolistic competition market although product
differentiation separates the sellers (Limao, 2016).
(b)With the aid of an appropriate economic model, explain why there has been such an
explosion in the number of coffee chains in Australia over the past ten years.
Higher demand attracts higher supply to satisfying the market need for coffee. The rise in
coffee consumption by around 65% in 10 years motivated the opening of new coffee chains. In a
monopolistic competition market, barriers to entry are slightly low thus new firms can enter the
market without much challenge from already existing firms (Plummer, Cheong & Hamanaka,
2011)
(c) Would firms in the market making positive economic profit in the long run? Explain.

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With little barriers to entry, firms can make surplus profits in the short run (Low, 2016).
As more coffee chains enter the market, earlier firms start making normal profits. The
introduction of too many coffee chains would reduce customers visiting each chain resulting
to negative economic profit.
(d) Would the impact of government subsidy to each existing firm change your answer in
part (c) in the short run? Explain.
No. Subsidies promote production and increase supply. The resultant effect would be
increased rate of entry of new coffee chains. The supply of coffee would in the short run be
higher than demand leading to lower prices. Therefore, the short run and long run profits
would tend to normal and later negative.

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QUESTION 3 SOLUTION
Suppose the tea market can be described by the following equations.
Demand: P=10-Q ………….. (I)
Supply: P=Q-4 ……………………. (ii)
Where p is the price in dollars and Q is the quantity in kilograms.
(a) What is the equilibrium Price and quantity
Equating demand and supply equations we have;
10-Q=Q-4
14=2Q
So Q=14/2=7 kgs
Also P=10-Q=10-7= 3 Dollars
(b) Suppose that the government grants a subsidy of $1 per kilogram of tea produced, what
will the new equilibrium quantity be? What price will the buyer pay? What amount per
kilogram including subsidy will the seller receive? What is the total cost to government?
What will the new equilibrium quantity be?
Subsidy changes supply equation to P+1=Q-4 Hence; Q=P+5
Demand equation remains as P=10-Q so Q=10-P
At equilibrium, P+5=10-P so P= 2.5 Dollars
Quantity= 10-P=10-2.5=7.5Kg
What price will the buyer pay?
Buyer pays amount equal to equilibrium price of 2.5 Dollars

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What amount per kilogram will the seller receive?
Seller receives selling price plus subsidy= 2.5+1=3.5 dollars
What will be the total cost to the government?
Multiply total quantity of the product produced and subsidy per unit.
Cost to government = 7.5* 1= 7.5 Dollars
(c) Draw the demand and supply diagram of the tea market and indicate the results in
parts (a) and (b) on it. [4 marks]
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TEA MARKET SUPPLY AND DEMAND
Quantity Demanded Quantity Suplied

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SUBSIDY EFFECT
Quantity Demanded subsidized prices

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References
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university
press.
Leamer, E.E. and Stern, R.M., 2017. Quantitative international economics. Routledge.
Limão, N., 2016. Preferential trade agreements. In Handbook of commercial policy (Vol. 1, pp.
279-367). North-Holland.
Low, P., 2016. International trade and the environment. UNISIA, (30), pp.95-99.
Plummer, M.G., Cheong, D. and Hamanaka, S., 2011. Methodology for impact assessment of
free trade agreements. Asian Development Bank.