Economic Principles Homework Solution: Market Equilibrium Analysis

This document presents a comprehensive solution to an Economic Principles assignment, addressing key concepts such as demand and supply, market equilibrium, and price elasticity. The assignment includes answers to questions analyzing the impact of supply shifts on prices, the effects of changes in demand and supply on equilibrium quantity and price, and the application of price elasticity of demand. Furthermore, the solution provides a detailed breakdown of profit maximization, including the calculation of total revenue, total cost, and profit/loss at different output levels, and concludes with a recommendation for pricing strategies. The document uses real-world examples and references to support its analysis, making it a valuable resource for students studying microeconomics.

Economic Principles 1
ECONOMIC PRINCIPLES
By (Name)
The Name of the Class (Course)
Professor (Tutor)
The Name of the School (University)
The City and State where it is located
The Date

Economic Principles 2
Economic Principles
Question 1
No, it just means the demand curve has shifted upwards increasing both price and demand
(supply has increased, demand has increased, and price has increased). Nevertheless, the demand
curve still assumes a downward sloping trend (O'Sullivan, Sheffrin & Perez 2012).
0 2000 4000 6000 8000 10000 12000 14000
$0
$20
$40
$60
$80
$100
$120
Beef Market
New Demand Curve
Supply Curve
Old Demand Curve
Quantity
Price
Question 2
Part a). There is increased demand for wine because poor harvest significantly reduced the
supply of wine in France. As such, there is a gap in the market creating unfulfilled demand
(O'Sullivan, Sheffrin & Perez 2012). This can be illustrated as follows

Economic Principles 3
0 2000 4000 6000 8000 10000 12000
$0
$20
$40
$60
$80
$100
$120
Supply is less Than Demand
Old Demand
Old Supply
Quantity
Price
Part b). The Australian market will reduce any supply surplus that is not sold in the domestic
market by selling it in the France market. With this increased demand for wine abroad the price
of wine in the domestic market will also increase as the supply of wine in the market reduces
(reducing demand) (O'Sullivan, Sheffrin & Perez 2012). Hence the supply curve will shift
upwards
-2000 0 2000 4000 6000 8000 10000 12000
$0
$20
$40
$60
$80
$100
$120
Supply will reduce increasing Price
and reducing demand
Old Demand
Old Supply
New Supply
Quantity
Price
Question 3

Economic Principles 4
Situation 1: The reduction in price will cause the demand for orange juice to increase; however,
the increase wages do not result in increased supply of orange juice. Therefore, the equilibrium
quantity will increase as well as the equilibrium price (Gibbs & Braeutigam 2010).
0
2000
4000
6000
8000
10000
12000
14000
$0
$20
$40
$60
$80
$100
$120
E1
E0
Equilibruim Price and Qantity
Increase
Old Demand
Old Supply
New Demand
Quantity
Price
Situation 2: The reduction in price will cause the demand for orange juice to increase; and, the
increased wages will result in increased supply of orange juice. Therefore, the equilibrium
quantity will not change but the equilibrium price will increase if the change in supply and
demand is similar (Gibbs & Braeutigam 2010).
-2000 0 2000 4000 6000 8000 100001200014000
$0
$20
$40
$60
$80
$100
$120
E1
E0
Equilibrium Change
Old Demand
Old Supply
New Supply
New Demand
Quantity
Price

Economic Principles 5
Question 4
Part a
They are assuming that price elasticity of demand is inelastic. Meaning an increment in price will
can a minute or no change quantity demanded. Therefore they expect to get high returns by
increasing the fare since the demand remains relatively the same (Mankiw 2008).
Part b
The assumption is present because taxi services are popular in Australia and people are fond of
using them. However, this assumption is wrong since the consumers have alternative
transportation means such as trains, buses, and carpooling that can substitute the used of taxis.
Therefore the price elasticity of demand for taxis is not inelastic in Australia (Mankiw 2008).
0 2000 4000 6000 8000 10000 12000
$0
$20
$40
$60
$80
$100
$120
Price Elasticity of Demand In
Australia
Elastic
Inelastic
Quantity
Price
Question 5

Economic Principles 6
Part a
Uni
ts
Pric
e
Total
Reven
ue
Average
Total
Cost
Total
Cost
Average
Variable
Cost
Average
Fixed
cost
Margi
nal
Cost
Marginal
Revenue
Prof
it
50 $4.5
0
$225.0
0
$5.00 $250.00 $4.00 $1.00 $3.00 $3.00 -
$25.
00
40 50 60 70 80 90 100
-$50.00
$0.00
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
Graphical Representation
Price
Total Revenue
Average Total Cost
Total Cost
Average Variable Cost
Average Fixed cost
Marginal Cost
Marginal Revenue
Profit
Units
Price
Profit= Total Revenue-Total Cost=$225-$250=-$25
Hence they recorded loss of $25

Economic Principles 7
Part b
Since MC=MR, this is the profit maximization level meaning the company cannot hope to make
better profits than this with the current pricing strategy (Mankiw 2008). Therefore, I would
recommend that the organization increase their selling price to $6 per units in order to offset per
unit cost of $5.

Economic Principles 8
References
Gibbs, M & Braeutigam, RR 2010, Microeconomics, 4th edn, John Wiley & Sons Inc., Hoboken.
Mankiw, GN 2008, Principles of Microeconomics, 5th edn, Cengage Learning, Mason.
O'Sullivan, A, Sheffrin, S & Perez, S 2012, 'Demand, Supply, and Market Equilibrium', in
Microeconomics, 7th edn, Prentice Hall, Upper Saddle River.