Analysis of Economic Principles: Trade, Market Equilibrium and Housing

This assignment delves into fundamental economic principles, beginning with an analysis of absolute advantage in international trade using the example of motorcycle and guitar production in Ireland and Scotland. It calculates opportunity costs to determine comparative advantage. The assignment then examines market equilibrium through a theatre company scenario, illustrating the interaction of supply and demand, and the effects of price changes and capacity expansion on equilibrium price and quantity. Finally, it investigates the Australian housing market, discussing the impact of changing consumer preferences and rising housing prices on demand and equilibrium, offering alternative explanations for observed market trends. Desklib provides this assignment and many other resources to aid students in their studies.

Running Head: ECONOMIC PRINCIPLE
Economic Principle
Name of the Student
Name of the University
Course ID

1ECONOMIC PRINCIPLE
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Answer 3..........................................................................................................................................3
Answer 4..........................................................................................................................................3
Answer 5..........................................................................................................................................4
Answer 6..........................................................................................................................................5
References........................................................................................................................................8

2ECONOMIC PRINCIPLE
Answer 1
Table 1: Number of labor hours required to produce a motorcycle and a guitar in Ireland
and Scotland
One Motorcycle One Guitar
Scotland 15 hours 5 hours
Ireland 9 hours 2 hours
From the above table it is seen that, Scotland can produce one motorcycle using 15 hours of
labor. Ireland however needs only 9 hours of labor for producing one motorcycle. It is therefore
cheaper for Ireland to produce one motorcycle as it needs less labor hours. Ireland thus enjoys an
absolute advantage in producing Motorcycle (Levchenko & Zhang, 2016). In case of Guitar,
Scotland is able to produce one Guitar using 5 hours of labor. Ireland on the other hand requires
2 hours of labor to produce one Guitar. Therefore, Ireland again has an absolute advantage in
production of Guitar.
Answer 2
Table 2: Opportunity cost for motorcycle and guitar in Ireland and Scotland
Opportunity Cost One Motorcycle One Guitar
Scotland 15/5 = 3 5/15 = 0.33
Ireland 9/2 = 4.5 2/9 = 0.22

3ECONOMIC PRINCIPLE
Opportunity cost is the cost of forgoing the next best alternative to produce one unit of a
particular good (Chacholiades, 2017). Ireland needs 9 hours of labor to produce one motorcycle
while it needs only 2 hours of labor for producing one guitar. Using 9 hours of labor Ireland
would have produced 4.5 units of guitar. The opportunity cost of production of motorcycle in
Ireland is 4.5 units of guitar. Scotland requires 15 labor hours for producing one motorcycle and
5 labor hours for producing one guitar. In order to produce one motorcycle Scotland thus needs
to sacrifice 3 units of guitar, which is the opportunity cost of motor cycle production in Scotland.
Answer 3
Figure 1: Demand, Supply and Equilibrium for the Theatre Company
Equilibrium price of the entry ticket is $16 and corresponding equilibrium quantity is
400. Equilibrium in a market occurs at the point where demand equals supply (Baumol &
Blinder, 2015). Corresponding to point E, demand curve of the Theatre company cuts the supply
curve. Hence, this indicates equilibrium point in the market.
Answer 4

4ECONOMIC PRINCIPLE
Figure 2: Market scenario at an initial price of $4
The initial price of $4 is well below the equilibrium price of entry tickets. Law of demand
suggests that given all other things constant demand is inversely proportional with price. At a
lower price of entry tickets consumers are able to buy more tickets. This raises the demand for
entry tickets at the price $4. The quantity demanded at price $4 equals 1000. In general, supply
of a good varies positively with price. However, in this case supply is independent of the price of
entry ticket. Given the capacity of the Theatre hall, the supply remains constant irrespective of
price. This is the case of perfectly inelastic supply curve (Stoneman, Bartoloni & Baussola,
2018). Supply of entry ticket remain fixed at 400. At $4, thus demand increase to 1000 because
of lower price while supply equals 400. As quantity demanded exceeds the quantity supplied,
there will be excess demand or shortage of entry tickets. Shortage in the market equals (1000 –
400) = 600.
Answer 5

5ECONOMIC PRINCIPLE
Figure 3: Market scenario under new capacity
Doubling the capacity of the company means doubling the supply of entry tickets. The
company is now able to supply 800 entry tickets. A new supply curve is now obtained at a higher
quantity. This is shown as S1S1. Demand curve however remain unchanged. A new equilibrium
is obtained at the intersection of new supply curve and old demand curve (Baumol & Blinder,
2015). The new equilibrium occurs at point E1. At the new equilibrium, price lowers to $8 from
earlier $16 and equilibrium quantity increase from 400 to 800.
Answer 6
An alternative to purchasing new house is to rent a house. Therefore, renting is a
substitute of buying a house. With change in preference for young Australian towards renting
house over buying a new one reduces the demand of new houses. This affects the equilibrium
price and quantity in the housing market (Wood & Ong, 2017). This is shown in the figure
below.

6ECONOMIC PRINCIPLE
Figure 4: Impact of a shift in preferences in the housing market
In the above figure DD represents the demand curve in the housing market and SS shows the
corresponding supply curve. An increase in preference of young Australian towards renting
reduce the demand for new houses in the same way as substitute good does (Baumol & Blinder,
2015). Accordingly, the demand curve in the housing market shifts inwards from DD to D1D1.
This shifts the equilibrium from E to E1. As a result, equilibrium price in the market decreases to
P1. Consequently, equilibrium number of houses decline from H* to H1.
Different explanations have been provided for reduced quantity demanded of house. One
explanation is that is preference of young Australian has now shifted towards rented houses.
Change in preference is reflected from inward shift in the demand curve. It is change in
preferences that causes a decline in housing in Australian housing market (Wood & Ong, 2017).
This argument is countered by the argument that it is actually higher prices of housing that are
causing a decline in quantity of housing. The median home price for First Home Buyers

7ECONOMIC PRINCIPLE
purchased between 2008 and 2014 rose to $387,000. The median price was almost $100,000
higher than the paid median price back to six years (businessinsider.com.au, 2017). Rise in house
price has a direct effect on housing demand which then causes a decline in equilibrium quantity
of housing.

8ECONOMIC PRINCIPLE
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Chacholiades, M. (2017). The pure theory of international trade. Routledge.
Levchenko, A. A., & Zhang, J. (2016). The evolution of comparative advantage: Measurement
and welfare implications. Journal of Monetary Economics, 78, 96-111.
Scutt, D. (2017). The RBA just scotched a theory about younger Australians choosing to not to
buy a home. Retrieved from https://www.businessinsider.com.au/the-rba-just-scotched-a-
popular-theory-about-younger-australians-choosing-to-not-to-buy-a-home-2017-9
Stoneman, P., Bartoloni, E., & Baussola, M. (2018). The Microeconomics of Product Innovation.
Oxford University Press.
Wood, G. A., & Ong, R. (2017). The Australian housing system: a quiet revolution?. Australian
Economic Review, 50(2), 197-204.