Economics Assignment: Analysis of Market Dynamics and Policies

This economics assignment analyzes market equilibrium, price controls, and trade policies. The first section examines the banana market, determining equilibrium price and quantity, and the effects of supply shifts. The second section explores price floors in the wheat market and tariffs on tyres, evaluating their impact on consumer and producer surplus, and the resulting deadweight loss. The assignment then evaluates the efficiency and fairness of these policies. The final section discusses the factors influencing bicycle demand, including cross-price and income elasticity, concluding with policy recommendations to encourage bicycle riding in Australia. The assignment utilizes figures and economic models to illustrate key concepts and support the analysis.

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Course ID

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Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................5
Answer 3....................................................................................................................................9
Introduction............................................................................................................................9
Discussion..............................................................................................................................9
Conclusion............................................................................................................................10
References................................................................................................................................11

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Answer 1
a)
Figure 1: Equilibrium in the banana market
In a market equilibrium outcome is obtained where demand and supply coincides. In
the banana market as described in the above figure demand and supply intersects at the point
e. Corresponds to the equilibrium banana’s price equals approximately $2.5 and equilibrium
quantity in the market approximately is 2250 boxes.
b)
Given the banana’s price was at $1.50 per box, this indicates a price lower than
equilibrium. At the lower price, demand for banana increases while that of supply of bananas
fall. As a consequence, available supply of banana falls short of the market demand causing a
shortage in the banana market (Pindyck and Rubinfeld 2015). Because of the resulted
shortage sellers of banana will rise price to reduce the demand side pressure. There will be a
continuous increase in banana’s price until it reaches the equilibrium.

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c)
Figure 2: Effect of a decrease in supply of bananas
When cyclone destroyed some of the banana farms in QLD, there is a fall in supply of
bananas which shifts the supply curve inward. The supply curve moves from SS to S1S1. The
bananas market attains equilibrium where the new supply of banana intersects the existing
demand. New equilibrium occurs at e1. Following decline in supply, equilibrium quantity
falls from 2250 to 2000 boxes and equilibrium price rises from $2.5 to $3.
d)
Figure 3: Effect of a decrease in both demand and supply of bananas

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Given the new scenario where demand for bananas fall by 500 at each price along
with the same reduction in quantity supplied the demand curve will shift by the same
magnitude as the supply. The new equilibrium is obtained from the intersection of new
supply and new demand (McKenzie and Lee 2016). Equilibrium is settled at e2. At this
equilibrium, price approximately equals $3.5 while equilibrium quantity remains same as
2250 boxes.

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Answer 2
a)
Figure 4: Price floor in the wheat market
Price floor is a price control measure defining a lower limit of price in the market with
the lower limit usually settles above the equilibrium (Baumol and Blinder 2015). As shown in
figure 4, suppose President Trump has imposes a binding price floor in the wheat market at
PF which exceeds the equilibrium price at PE. Corresponds to a higher price farmers are now
willing to supply more wheat while consumers demand lesser amount of wheat causing a
surplus in the wheat market.
b)
Figure 5: Price floor and economic surplus

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At the equilibrium, consumer surplus equals the triangular area of D1E1PE. The
surplus of producer at equilibrium is S1E1PE. Total economic surplus is the area D1E1S1. Since
the price floor increases price to consumers, their surplus lowers to the area D1CPF. Producer
surplus with the price floor equal the area PFCFS1. Because of the price floor total economic
surplus reduces by the amount of deadweight loss shown by the area CE1F.
c)
Figure 6: Consequences of tariff on tyres
In Figure 6, the world price of tyres before tariff was at P*. The imposed tariff
increases price of tyres to P1 in US. As the tariff increases price of tyres, demand of tyres for
US consumers decrease to Q22 from earlier demand of Q12. The higher price by increasing
profitability of tyres, increases quantity of domestically produced tyres to Q21 from earlier
produced quantity of Q22. Faced with high price US consumers suffer a loss in surplus given
equivalent to the area of b+d+e+g and hence, they are losers of the policy. Domestic
producers are the winners since they experience additional surplus given B. Government
gains as it can collect a tax revenue from import indicated by the area e (Amin and Fatima
2019). Society as whole loses because of the deadweight loss of d+g.

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d)
A policy is considered as efficient when it allocates resources to its fuller extent
maximizing social welfare. Evaluations of the two policies of price floor and import tariff
reveal that in both the cases welfare reduced by the amount of resulted deadweight loss.
Interruption in the efficient functioning of free market lead makes both the policies
economically inefficient. The policies are neither fair since one group in the society gains at
the cost of another. The fairness notion requires creation of equal opportunities to all
members (Othman, Papadimitriou and Rubinstein 2016). Both the policies though benefitted
producers group, the consumers group is at the disadvantageous position implying the
policies do not accomplish fairness notion.
e)
Neither of the policies satisfy principles of fairness and efficiency. As a consequence,
it is good for the economy to abandon the two policies and adapt some alternative policies to
attain the targeted objective. Alterative to price floor policy can subsidy or programs that
directly support income. In case of import tariff, the President should consider the possibility
of tariff retaliation and its adverse consequence on US.

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Answer 3
Introduction
In view of the possibility of growing tendency of Australian to ride bicycle, it is
predicted that proportion of population riding bicycle will be doubled in future. Therefore,
supporting bicycle riding will be beneficial for the society both in terms of addressing fitness
issues and that of congestion.
Discussion
Cross price elasticity of demand
Motor vehicles and bicycles are substitute means of transportation and therefore has a
positive cross price elasticity of demand. This suggest when demand for bicycle increases the
demand for motor vehicles fall (Litman 2017). This in turn helps to lower pollution and road
congestion. When people have a greater tendency to substitute their motor vehicles with
bicycles, this enhances their fitness.
Figure 7: Impact on motor vehicles market due to increased bicycle demand

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Income elasticity of demand
Income elasticity of demand for bicycle is generally negative since as income
increases more people tend to purchase motor vehicles instead of bicycle (Cheng et al. 2017).
Factors determining bicycle demand
A number of factors can influence bicycle demand. One demand determining factor
for bicycle is age. Riding bicycle is more common among younger people in comparison to
aged population. Another factor determining demand of bicycle is regularly travelled
distance. People who need to travel a longer distance regularly usually prefer motor vehicles
because of safety issue (Lee 2014). People travelling shorter distance in contrast more tend to
use bicycle. For any good or service, an important determinant of demand is income. Income
by determining affordability influences demand of a product or service. Demand of bicycle
tend to be higher among low income household compared to the same for high income
household because of differences in affordability.
Conclusion
Taking into consideration the benefits of riding bicycle for both transportation and
enhancing fitness people in Australia tend to ride bicycle more. It is therefore reasonable for
government to encourage riding of bicycle in the society.

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References
Amin, S.I. and Fatima, A., 2019. Impact Of Tariff On Income: Cross Country
Analysis. Journal of Independent Studies & Research: Management & Social Sciences &
Economics, 17(1).
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cheng, L., Chen, X., Lam, W.H., Yang, S. and Wang, P., 2017. Improving Travel Quality of
Low-Income Commuters in China: Demand-Side Perspective. Transportation Research
Record, 2605(1), pp.99-108.
Lee, C.F., 2014. An investigation of factors determining cycling experience and
frequency. Tourism Geographies, 16(5), pp.844-862.
Litman, T., 2017. Understanding transport demands and elasticities. Victoria Transport
Policy Institute.
McKenzie, R.B. and Lee, D.R., 2016. Microeconomics for MBAs: The economic way of
thinking for managers. Cambridge University Press.
Othman, A., Papadimitriou, C. and Rubinstein, A., 2016. The complexity of fairness through
equilibrium. ACM Transactions on Economics and Computation (TEAC), 4(4), p.20.
Pindyck, R.S. and Rubinfeld, D.L., 2015. Microeconomics. Boston: Pearson.