University Economics Assignment: Microeconomic Analysis and Policies

This economics assignment analyzes several microeconomic concepts. Firstly, it examines the local rice market as a perfectly competitive market, outlining its characteristics such as a large number of buyers and sellers, homogenous goods, free entry and exit, and perfect knowledge. Secondly, the assignment calculates and interprets the price elasticity of supply for sugar between 2008 and 2017, providing a table with data and a trend analysis. Finally, it discusses negative externalities using the tannery business as an example, illustrating the impact on society and using a figure to depict the market with negative externality. The assignment then proposes a demand-side policy, specifically the imposition of a tax on buyers, to address the externality and achieve a socially efficient output, with a figure to show the policy impact, followed by the changes in consumer and producer surplus, and government revenue.

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....................................................................................................................................................2
Answer 3....................................................................................................................................................4
Answer i.................................................................................................................................................4
Answer ii................................................................................................................................................5
Answer iii...............................................................................................................................................5
Answer iv...............................................................................................................................................6
References..................................................................................................................................................7

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Answer 1
Local rice market is an example of perfectly competitive market participating in daily life.
Several characteristics of rice market resemble the characteristic of perfectly competitive market.
Given below are the four main characteristics of rice market indicating features of perfectly
competitive market.
Large number of buyers and sellers
Perfectly competitive market is characterized by presence of large number of buyers and sellers.
There are various sellers in the rice market selling rice (Waldman & Jensen, 2016). As rice is one of the
necessities, numerous buyers participate in the market.
Nature of the good
In a competitive market, seller sell identical or homogenous good. Therefore, goods sold by
each seller are perfect substitutes to each other. Similar is the case of rice market. Rice sold in the
market are homogenous good like that of a perfectly competitive market.
Free entry and exit
Seller in the perfectly competitive market can freely enter or exit the industry. New firms enter
the market when there are supernormal profit. Firms exit the industry when existing firm suffers a loss.
In the rice market, there are no barriers for entry or exit of firms. There is neither regulatory nor any
other barriers that local sellers in the market face.
Perfect knowledge
In the perfectly competitive market, buyers and sellers have perfect knowledge regarding the
market. That means no seller or buyer is ignorant regarding prevailing price in the market. Similar is
the case of local rice market (Belleflamme & Peitz, 2015). All buyers and sellers have complete
knowledge about the market. Neither of them has any influence on market price. Sellers are price takers
in the market.
Answer 2
Price elasticity of supply is a measure to estimate relative responsiveness of quantity supplied
for a certain proportionate change in price. If supply changes by a greater proportion relative to price,
then supply is considered as relatively elastic. In contrast, if change in supply is larger than associated

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change in price, then supply is regarded as relatively inelastic (Mankiw, 2016). This section analyzes
supply elasticity of sugar for a period of ten years from 2008 to 2017. The supply elasticity is computed
using the following point elasticity method.
Elasticity of supply= Percentage change∈quantity supplied
Percentage change∈ price
¿
dQ
Q ×100
dP
P ×100
¿ dQ
dP × P
Q
Table 1: Price elasticity of supply of sugar
Year
Productio
n Price
Elasticit
y
2008 4474468 334
2009 4494325 509 0.01
2010 3419186 444 1.88
2011 3682548 518 0.46
2012 4247704 431 -0.91
2013 4363736 389 -0.28
2014 4548382 405 1.03
2015 4888555 383 -1.38
2016 4772390 512 -0.07
2017 4500000 417 0.31
(Source: agriculture.gov.au. 2019)

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
Elasticity
Elasticity
Year
Elasticity
Figure 1: Trend in price elasticity of supply of sugar
The price elasticity of sugar captures percentage change in quantity supplied of sugar following
a percentage change in price. The price elasticity of supply of sugar is mostly found to be less than 1.
This means proportionate change in supply is less than the proportionate change in price. That is
producer are not much interested to increase supply given an increase in price (Mochrie, 3015). This is
because demand of sugar is very much responsive to a price increase as various substitutes of sugar are
available Supply of sugar therefore not increases much for a given change in price.
The trend of elasticity of sugar shows that in 2009 price elasticity of sugar is only 0.01. In this
year despite significant change in price, production increases only negligibly. Since 2012, elasticity of
sugar is mostly negative. In recent years, there is increasing awareness regarding the use of sugar
because of its adverse effect of excessive sugar consumption on health (Colchero et al., 2015).. Taxes
and other measures are taken to reduce sugar consumption. This discourages sugar production making
supply elasticity negative with exception of only few years.
Answer 3
Answer i
Negative externality occurs when a consumption or production activity has a harmful effect on
third party, not accounted by direct parties of transaction. A business activity having considerably
harmful effect of environment is tannery business. The business generates both solid and liquid wastes.
During tanning process, many harmful chemicals such as Chromium oxide, formic acid, sodium
chloride, sulfuric acid and others are emitted. Solid wastes of the business include dusted curing salt,
dry trimmings and wet trimmings, buffing, packing, wet trimmings and other raw materials. Smells

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from the industry pollutes air (Tinni et al., 2014). The wastes when mixed with water causes water
pollution. As business does not consider the cost of pollution, these impose a negative externality on
society.

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Answer ii
Figure 2: Market with negative externality in tannery business
The business activity of tanneries are shown in the figure above. The market demand and
supply curve is shown as D1 and S1. In the presence of negative externality, marginal social cost
exceeds marginal private cost. Equilibrium in an unregulated market occurs at e. Free market price is at
P* and that of free market quantity is Q*. The socially efficient quantity is at Q1 where social marginal
cost and marginal social benefit intersects (Arrow, 2015). Surplus to consumers in the market equals
A+ B + C +D. Producer surplus is shown as the area E + F + G + H. The negative externality by
inefficient allocation of resources lead to a deadweight loss of amount I. Total surplus thus equal A+ B
+ C +D + E + F + G + H – I.
Answer iii
One policy on the demand side that can solve the problem of externality is imposition of tax on
buyers. Tax equivalent amount of external cost the causes an inward shift of demand curve to D2.
Consequently, buyers a higher price of P2 and sellers receive a lower price of P1. The imposed tax
lowers market quantity to Q1 (socially efficient output). Imposition of tax internalize the negative
externality and helps to achieve socially desirable output (Sexton, 2015). This is explained in the figure
below.

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Figure 2: Demand side policy to solve the problem of externality
Answer iv
After the policy consumer surplus lowers to area A and the producer surplus lowers to the area
H. Revenue to the government is B + C + E + F. Total surplus after the tax equivalent to A + B + C + E
+ F +H.

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References
agriculture.gov.au. (2019). ABARES Agricultural commodities and trade data. Retrieved from
http://www.agriculture.gov.au/abares/research-topics/agricultural-commodities/agricultural-
commodities-trade-data#2018
Arrow, K. (2015). Microeconomics and operations research: Their interactions and
differences. Information Systems Frontiers, 17(1), 3-9.
Belleflamme, P., & Peitz, M. (2015). Industrial organization: markets and strategies. Cambridge
University Press.
Colchero, M. A., Salgado, J. C., Unar-Munguía, M., Hernandez-Avila, M., & Rivera-Dommarco, J. A.
(2015). Price elasticity of the demand for sugar sweetened beverages and soft drinks in
Mexico. Economics & Human Biology, 19, 129-137.
Mankiw, N. G. (2016). Principle of Microeconomics. Cengage Learning.
Mochrie, R. (2015). Intermediate microeconomics. Macmillan International Higher Education.
Sexton, R. L. (2015). Exploring microeconomics. Nelson Education.
Tinni, S. H., Islam, M. A., Fatima, K., & Ali, M. A. (2014). Impact of tanneries waste disposal on
environment in some selected areas of Dhaka City Corporation. Journal of Environmental
Science and Natural Resources, 7(1), 149-156.
Waldman, D., & Jensen, E. (2016). Industrial organization: theory and practice. Routledge.