BEO1105 Assignment: Analyzing Economic Principles and Markets

This economics assignment solution addresses key concepts in microeconomics, including market analysis, supply and demand, and price elasticity. The assignment analyzes the impact of a poor grape harvest on the French wine market and its subsequent effects on the Australian wine market. It further examines how the addition of new features to Apple IPods affects demand and whether this contradicts the law of demand. The solution also explores the effects of simultaneous changes in demand and supply on equilibrium price and quantity, as well as the relationship between revenue, price changes, and demand elasticity. The final section evaluates the unintended consequences of government price control measures, specifically minimum support prices, using graphical illustrations to support the analysis. The assignment demonstrates an understanding of market dynamics and the application of economic principles to real-world scenarios.

Running head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
Course ID

1ECONOMIC PRINCIPLES
Table of Contents
Question 1..................................................................................................................................2
Question a...............................................................................................................................2
Question b..............................................................................................................................3
Question 2..................................................................................................................................4
Question 3..................................................................................................................................5
Question 4..................................................................................................................................8
Question 5................................................................................................................................10
References................................................................................................................................12

2ECONOMIC PRINCIPLES
Question 1
Question a
1.Grape is one of the main ingredients used for making wines. Harvest of grapes and
production of wines are complementary in nature.
2.Poor harvest of grapes hampers the supply of grapes to wine makers in France.
3.As grape supply reduces there is a decline in production of wines. The supply curve shifts
leftward due to the change in non-price determinant of price
4. Graphical illustration
Figure 1: Impact of poor harvest on French wine market
5. Because of a fall in supply of wines, the supply curve for French wines shift to the left to
S1S1.
6. Quantity demanded of French wines exceeds the quantity supplied. Lower amount of
French wines will be available.

3ECONOMIC PRINCIPLES
7. As supply contracts, given the demand there occurs a shortage of French wines in the
market (Waldman and Jensen 2016). Due to shortage of wines, market price increases while
available quantity decreases.
8. New equilibrium in the market is settled at E1. The equilibrium is settled at a higher price
and lower quantity demanded.
Question b
1.French wines and Australian wines are substitute in nature. One can be used in place of
other
2. The shortage of French wines increases price of wines and lowers the demand for French
wines. Because of higher price, consumers of French wines look for substitutes of French
wines.
3. This has a positive impact on demand for Australian wines. People now tend to consumer
more Australian wines. Increase in demand for Australian wines shifts the demand curve
outward (non-price determinant of demand cause a change in demand).
4. Graphical illustration
Figure 2: Impact on Australian wines in France

4ECONOMIC PRINCIPLES
5.An increase in price of French wines decreases demand for French wines and increases
demand for Australian dollar. The demand for Australian wines shifts the curve for
Australian wines rightward to D2D2.
6.Given the supply of Australian wines, increase in demand leads to an excess demand
condition in the market (Fine 2016).
7. With a higher demand, the new equilibrium is settled both at a higher price and higher
quantity.
Question 2
1.Apple Computer produces a new line of IPods with greater storage capacity and more
features.
2. Addition of new features to the existing model increases demand for IPods.
3. As people demand more IPods because of the added feature the demand curve shifts right
(because of a change in non-price determinant of demand)
4. With higher demand sales and price increases
5. Therefore, it does not represent a case of exception of law of demand
6. Graphical illustration
Figure 3: Market for Apple IPods

5ECONOMIC PRINCIPLES
7. Addition of new features to apple IPods increases demand for IPods. The demand curve for
IPods moves to the right to D1D1.
8. As quantity demanded increases quantity supplied there is an excess demand in the market.
This increases sales of IPods.
9. Given an increase in sales, both equilibrium price and equilibrium quantity increases.
Question 3
1.Variation in equilibrium price and quantity in the market depends on dynamics of changes
in demand and supply. There are situations where market demand or market supply changes
or both changes simultaneously. This leads to a change in existing equilibrium position along
with an associated change in equilibrium price and equilibrium price (Thompson 2016).
2. Given the scenario that both demand and supply of new apartment there are three possible
impacts on equilibrium outcome.
3. An increase in demand for new commercial apartments shifts the demand curve outward.
This tends to increase both equilibrium price and equilibrium quantity of new commercial
apartments.
4. An increase in supply of new commercial apartments shifts the supply curve rightward. As
supply expands, there is a tendency of equilibrium quantity to increase while equilibrium
price tends to decrease. Increase in demand and supply of new commercial apartments
therefore push the equilibrium price and quantity to opposite direction (Kreps 2019).
5.Price of new commercial apartments either increases or decreases or stays same depending
on magnitude of change in demand and supply. If demand increases by a greater proportion
than supply equilibrium price increase.

6ECONOMIC PRINCIPLES
6. In case where increases in supply exceeds the corresponding increase in demand, there
prevails an excess supply in the market causing a fall in equilibrium price. Price remains the
same in case supply and demand changes by equal magnitude. Equilibrium quantity however
increases in all the three cases.
7. Graphical illustration
Case I
Figure 3: Supply of apartments increases more than demand
Supply increases more than demand.
Condition of excess supply
As supply exceeds demand price falls and equilibrium number of apartment increases

7ECONOMIC PRINCIPLES
Case II
Figure 4: Demand for apartment increases more than supply
Demand increases more than supply.
Condition of excess demand.
As demand exceeds supply price falls and equilibrium number of apartment increases.
Case III
Figure 5: Demand and supply of houses increases by same proportion
Supply and demand increase by the same proportion.

8ECONOMIC PRINCIPLES
Equilibrium price of apartments remain the same.
Equilibrium number of apartment increases.
Question 4
Revenue of a firm depends on both price and volume of sales. Now changes in sales
volume and revenue varies with elasticity of demand. Elasticity of demand is an estimation
for proportionate change in demand due to a proportionate change in price. When demand
changes more than price demand is considered to be elastic. In this case revenue increases
when there is a decrease in price. As sales increases by a greater proportion than falls in price
revenue increases (Cowell 2018). In case demand changes less than price, demand is
considered as inelastic. Here, revenue increases with increase in price. As demand cannot be
adjusted much, firms benefit from an increase in price.
i)
Figure 5: Impact of an increase in supply with elastic demand curve

9ECONOMIC PRINCIPLES
The figure above illustrates impact of a given increase in supply on revenue of a firm
facing a relatively elastic demand curve. The flatter demand curve D1D1 shows a relatively
elastic demand. An increase in supply from S1S1 to S2S2 reduces price from P* to P1 and
increases quantity from Q* to Q1. As a result, revenue changes from OP*E1Q* to OP1E2Q1.
OP1E2Q1 is greater than OP*E1Q* as Q*Q1is greater than P*P1.
ii)
Figure 6: Impact of an increase in supply with inelastic demand curve
In the above figure, the steeper demand curve DD shows the relatively inelastic
demand (Baumol and Blinder 2015). With increase in supply from SS to S1S1, price falls from
P* to P1 and quantity increases from Q* to Q1. Revenue changes from OP*EQ* to OP1E1Q1.
OP*EQ* is less than OP1E1Q1 as Q*Q1 is less than P*P1.

10ECONOMIC PRINCIPLES
Question 5
1.Government often intervenes in the market by taking price control measure.
Implementation of minimum price policy is example of price floor policy.
2. Once the minimum support policy is implemented, products cannot be sold at the price
below the minimum price.
3.Graphical illustration
Figure 7: Unintended consequences of minimum support price and government policy
In the above figure demand and supply of alcohol are given by the respective demand
and supply lines of DD and SS respectively. Free market equilibrium occurs at E. The
associated equilibrium price is P* and equilibrium quantity of alcohol is Q*. In order to
minimize the risk of alcohol related illness now suppose the government sets price at P1. As
price increases demand for alcohol is likely to reduce to Q1 while supply of alcohol increases
to Q2. As supply of alcohol exceeds the associated demand there creates an excess supply in
the market.

11ECONOMIC PRINCIPLES
In order to reduce the unintended consequences of excess supply government should
stand to purchase the surplus. Otherwise it would not be possible to maintain the minimum
price at the announced level (Cowen and Tabarrok 2015). The surplus can lower the market
price below the equilibrium market price.