ECO100 Individual Assignment: Economic Principles and Applications

This ECO100 assignment delves into fundamental economic principles, starting with the construction and interpretation of a Production Possibility Frontier (PPF) for Newland, analyzing the impact of increased demand on production capabilities. It further examines market equilibrium by calculating total revenue at varying prices and determining demand elasticity. The assignment includes a detailed analysis of consumer and producer surplus, deadweight loss under government restrictions, and the effects of online movie rentals on the in-store movie rental industry, highlighting shifts in demand, price, and quantity, along with the concept of cross-price elasticity. The document provides graphical illustrations to support the analysis and concludes with relevant references.

Running head: INTRODUCTION TO ECONOMICS
Introduction To Economics
Name of the Student
Name of the University
Course ID

1INTRODUCTION TO ECONOMICS
Table of Contents
Question 1..................................................................................................................................2
Question 2..................................................................................................................................4
Question 3..................................................................................................................................9
References list..........................................................................................................................12

2INTRODUCTION TO ECONOMICS
Question 1
a)
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
0
1000
2000
3000
4000
5000
6000
Production Possibility Curve
Cars
Bicycles
Figure 1: Production Possibilities Frontier of Newland
b)
Production Possibility Frontier or PPF is the graphical presentation of all attainable
combination of maximum amounts of two goods or services those can be produce with full
employment of available resources.
Production Possibility Curve of an economy is constructed based on the following
assumptions
i)An economy can only produce different proportion of two goods. For simplicity one good is
assumed to be capital good while other is consumer good (Sloman and Jones, 2017)
ii) The given resources in the economy can be used for production of any of the two goods or
both good or can be freely moved between them.

3INTRODUCTION TO ECONOMICS
iii) Resources are fixed in the economy. But resources can be re-allocated from one industry
to other.
iv) The technology of production is given and fixed.
v) Resources are employed fully and efficient technically.
The main properties of PPF are as follow
i)PPF is concave or bowed outward from origin. The reason for concave shape of PPF is the
increasing opportunity cost.
ii) The slope of PPF is negative (Hill and Schiller, 2015) This is because given limited
resource to increase production of one good the economy need to sacrifice production of
other.
iii) Any point on the PPF is associated with full employment and efficient use of the
technology. Point lying inside the PPF shows inefficient production point.
c)
In Newland, there is a sudden increase in demand for both cars and bicycles. The output
combination of 4000 bicycles and 20000 cars represent point outside the PPF. In order to
attain such a point PPF of the economy needs to be shifted. This is possible if the economy
can find additional shared resource. For example, if capital or labor grows overtime then a
higher output for both the industry can be achieved (Cowen and Tabarrok, 2015) The second
possible way is access to an improved technology, Technological innovation can increase
production of both cars and bicycles and hence, new demand can be met. A third possible
way is more efficient use of existing resource by specialization of input.

4INTRODUCTION TO ECONOMICS
Question 2
a)
At price $400, the estimated total revenue is ($400 * 30) = $12000. As price drops to $350,
demand increases and revenue also increases to ($350*45) = $12250. If price further drops to
$300, then there is again a decline in total revenue to ($300 *40) = $12000.
b)
Price
Quantity
demanded
Total
Revenue
200 50 10000
250 45 11250
300 40 12000
350 35 12250
400 30 12000
At an average price of $300. Demand is relatively inelastic. From the total revenue test, it can
be seen that total revenue increase as price increase from $300 to $350 while total revenue
decrease when price decrease from $300 to $250. Both this indicate demand cannot adjust
much for a change in price and hence, demand is relatively inelastic (Maurice and Thomas,
2015)
c)
At the market equilibrium,

5INTRODUCTION TO ECONOMICS
Demnad=Supply
¿ , 100−5 P=5 P
¿ , 5 P+ 5 P=100
¿ , 10 P=100
¿ , P= 100
10
¿ , P=10
Equilibrium quantity sold in the market is
Q=5 P
¿ ( 5 ×10 )
¿ 50
d)
Using the demand curve and equilibrium price the consumer surplus is obtained as
Consumer Surplus ( CS )= 1
2 × ( 20−10 ) × 50
¿ 1
2 ×10 ×50
¿ 250
From the supply curve and equilibrium price, producer surplus is obtained as
Producer Surplus ( PS ) =1
2 ×10 ×50
¿ 250

6INTRODUCTION TO ECONOMICS
Total surplus=Consumer surplus+ Producer Surplus
¿ 250+250
¿ 500
e)
Consumer surplus, producer surplus and deadweight loss under government restricted
quantity of 25 and price of $15.
Figure 2: CS, PS and deadweight loss
Cosumer surplus= 1
2 × ( 20−15 ) ×25
¿ 1
2 ×5 ×25
¿ 62.5
Producer surplus= ( 15−5 ) ×25+ 1
2 ×5 × 25

7INTRODUCTION TO ECONOMICS
¿ 10 ×25+62.5
¿ 250+62.5
¿ 312.5
Deadweight loss=2 × ( 1
2 ×5 ×25 )
¿ 25 ×5
¿ 125
Consumer surplus, producer surplus and deadweight loss under government restricted
quantity of 25 and price of $5.
Figure 3: CS, PS and deadweight loss
Consumer surplus= ( 15−5 ) ×25+ 1
2 ×(20−15)×25
¿ 10 ×25+ 1
2 ×5 × 25

8INTRODUCTION TO ECONOMICS
¿ 250+62.5
¿ 312.5
Producer surplus= 1
2 ×5 × 25
¿ 62.5
Deadweight loss=2 × ( 1
2 ×5 ×25 )
¿ 25 ×5
¿ 125
f)
Figure 4: Market equilibrium

9INTRODUCTION TO ECONOMICS
Question 3
a)
Online video rentals and streaming are alternative to in-store movie rental. Introduction of
movie rental online shift some demand from in store movie industry to online movie rental.
There would be a lower demand of movie rental for in-store movie industry. This results in a
contraction of both price and output in the in-store movie industry.
Figure 5: Adjustment of equilibrium outcome of in-store movie industry
The figure above shows equilibrium adjustment in the in store movie industry. Demand of in-
store movie industry decline after introduction of online movie rentals and streaming (Jain
and Ohri, 2015) This is shown by the shift of the demand curve from DD to D’D’. Following
this, price lowers from P to P’ and quantity lowers from Q to Q’.
b)

10INTRODUCTION TO ECONOMICS
Optus’ online movie rentals face a higher elasticity of demand in relation to online movie
rentals in general. This is because, in the online movie rental market there are various other
competitors of Optus. Therefore, an increase in price by Optus’ induces people to shift their
demand towards movie rentals by other competitors. This makes the demand for Optus’
movie rental more elastic than the demand elasticity of the overall industry.
c)
The cross price elasticity for online movie rentals and in-store movie rentals is likely to be
positive. This is because the two goods are substitutes (Varian, 2014). An increase in the
price of in-store movie rental services reduces demand for in-store movie industry while
increase demand for online movie rentals and vice-versa.
Figure 5: Adjustment of equilibrium outcome for online movie rental
A change in the price of in-store movie rental therefore has implication for online
movie rentals. Suppose, there is a sudden increase in price of in-store movie rentals. This
reduces the demand for in-store movie rentals and increase demand for online movie rentals.

11INTRODUCTION TO ECONOMICS
The expansion of demand in the online movie rentals then increase price and equilibrium
quantity of online movie rentals.