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what the PPF is. Cleary state all assumptions and properties of the PPF.  Newland usually has a demand of 3,000 bicycles and 18,000 cars. Suddenly Newland receives notice that the demand has increased to 4,000 bicycles and 20,000 cars. Discuss and explain at  least  three  possibilities  of  how  Newland  could  meet  that  demand.  (Hint:  State  any appropriate assumptions made


What are the market equilibrium price and quantity Why
(b) Suppose a new dip increases the quantity of potato chips that people want to buy by 30 million  bags per week at each price. How the demand and/or supply of chips change? Also, explain how  the price and quantity of chips change. Show the changes on a graph. 
(c) The quantity of potato chips that people want to buy increases by 30 million bags per week at each price. Now suppose, at the same time, a new breed of potato increases production of potato crops and the quantity of potato chips produced increases by 40 million bags a week at each price. Explain how the market equilibrium price and quantity of chips change. What are the new market equilibrium price and quantity Show the changes on a graph. 


Market analysts estimate that the price elasticity of demand for domestic beef is –1.30. How much would the price of domestic beef have fallen if the demand for domestic beef increases by 6.5 per cent However, this price fall decreases the quantity demanded for imported beef by 4 per cent.What  is  the  cross  price  elasticity  of  demand  for  imported  beef with  respect  to  the  price  of domestic beef Does the elasticity indicate that domestic beef and imported beef are substitutes or complements.

Equilibrium analysis

  1. The production posibility frontier (PPF)  is shown below with cars on X axis and bicycles on Y axis.
  2. A PPF is the locus of combinations of two goods that can be produced in an economy with available resources and given technology. So it assumes:
  • The level of available resources is constant. This level covers the physical units as well as the efficiency levels, which remain constant for every PPF drawn.
  • Technology remains constant.

NewLand can produce a maximum of  3000 cars or 5000 bicycles.

PROPERTIES:

  • Any point inside the PPC implies that resources are not fully utilized. This is also called productive inefficiency.
  • Any point outside the PPC is not possible, unless  technology, resources level , productivity level of resources change.
  • A point on the PPC implies productive efficiency as all resources are used.
  • PPC is concave to the origin, implying that the opportunity costs of making cars are increasing.
  1. We need to increase bicycles from 3000 to 4000 bicycles and cars from 18000 to 20000. From the data we see that we cannot remain o the PPC to do this. If we want 4000 bicycles then we can make only 10000 cars. We have to expand the PPC to reach our goal. this possible in the following ways:
  2. A rise in level of resources can shift the PPC outwards.
  3. An improvement in productivity levels of available resources can shift PPC out again.
  4. Trade is another way to expand the PPC, when domestic constraints do not permit the expansion.

Q1: PART II

  1. Equilibrium is where demand curve meets the supply curve. As shown equilibrium price= $65 and quantity= 145.
  2. The higher demand is shown as a rightward shift of the demand curve as shown.( from blue to green color)

The new equilibrium is where new demand equals supply . price =$80 and quantity= 160 million bags.

  1. Now we have an increase in supply as well shown as new Qs. The new equilibrium is found where new demand equals new supply.

The new equilibrium is at price =$ 60 and quantity= 180 million bags.

  1. Income elasticity of demand for concert tickets  = % change in demand/ % change in income .

So % change in income= ( 170-130)/ 130 = 30.76% or 30%

So income elasticity of demand for concert tickets =  +15/+30 = .5

This is a normal good as the sign is positive.

 income elasticity of demand for bus rides  = % change in demand/ % change in income

So income elasticity of demand for bus rides  =  -10/+30 =  -0.33

Bus rides are an inferior good as the sign of elasticity is negative.

  1. As per definition. Price elasticity of demand for sushi  with respect to sushi

= % change in demand for sushi / % change in price of sushi

= -1/+5= -0.2 demand is inelastic

Cross price elasticity of demand for soy sauce with respect to the price of sushi is equal to.

= % change in demand of soy source/ % change in price of sushi

= +2/+5 =0.4.

A positive cross elasticity implies they are substitutes. Sauce replaces/ substitutes for sushi as price of sushi rises.

  1. Elasticity of demand for domestic beef is defined as = % change in demand for beef/ % change in price =  -1.3

So % change in domestic price =% change in demand for beef/ price elasticity of demand

=  +6.5/-1.3 = - 5 or 5% fall in price.

Cross price elasticity of imported beef with respect to domestic beef

= % change in demand for imported beef/ % change in domestic price =  -4/-5 = 0.8

 A positive sign implies they are substitutes of each other. Consumers substitute imported beef for domestic beef when the price of domestic beef rises.  

Ina free market equilibrium is where demand equals supply -price = $250 per tonne and quantity = 1000 kilotonnes. When a price floor is applied we can show different regions to show the changes in consumer, producer surplus

BEFORE PRICE CONTROL

AFTER PRICE CONTROL

CHANGE

CONSUMER SURPLUS

A + B1 + E

A

-B1-E

PRODUCER SURPLUS

+D + B2 + C

B1 + B2 + C

B1-D

With price control at $300 per tonne we have an imbalance as demand < supply. This imbalance is called surplus = 1200-800 = 400 kilotonnes

Dead weight loss is shown in green. It is defined as the oss of consumer and producer welfare due to price control. the area of the triangle = ½ *400*(300-250) = 10000

For other values we use the following calculations using values shown in the diagram.

A= ½ *(400-300)*800* = 40000

B1= (300-250) *800 = 40000

B2= (250-200)*800= 40000

C= ½ *(200-100)*800 = 40000

E = ½ *(300-250)*(1000-800) = 5000

D= ½ *(250-200)*(1000-800) = 5000

A+B1+E= 40000+40000+5000 =850000

D+B2+C = =40000+40000+5000=85000

B1+B2+C = 40000+40000+40000= 120000

Change in consumer surplus = 40000-85000 = -45000

Change in producer surplus = 120000-85000 = 35000

Dead weight loss = -45000+35000 =-10000

Q3: PART II

  1. The free price or domestic price is Pdom. As shown quotas = Q1-D1. This is also equal to imports so that P import becomes the import price. Imports cause price to be lower, while quantity consumed rises. On the whole the society is better off as gain equals area D = (+B+D-B)

BEFORE Quota

AFTER Quota

CHANGE

Consumer Surplus

A

A+B+D

+B+D

Producer Surplus

B+C

C

-B

  1. now imports (in blue) > quotas (in red), which is shown in a new diagram. Comparing the two situations we can show that :
  • Price under quota is higher than with free trade imports. (Pquota > Pimport). This makes domestic producers better off as they can supply more at P quota than at P import.
  • Consumers are worse off as they pay a higher price as compared to case a .
  • The benefit to society is lowered. Earlier the benefit was C+E+F+G, which now shrinks to C only..

In the standard demand supply diagram all relevant information is labeled. Using notations we show the changes in consumer surplus and producer surplus in the table below. A plus sign implies rise, while a negative sign signifies loss or decrease.  

BEFORE TARIFF

AFTER TARIFF

CHANGE

CHANGE

Consumer Surplus

A+B+C+D+E+F

A+B

-(C+D+E+F)

 = -862.5

Producer Surplus

G

C+G

+C

= +287.5

GOVT REVENUE

NONE

E

+E

= +400

TOTAL SURPLUS

A+B+C+D+E+F+G

A+B+C+E+G

-(D+F)

 =-87.5-87.5= -175

Using mathematical concepts of areas we show the following:

AREA D (triangle)= .5*(5.6-4)*(250-125) = 87.5

AREA C = .5*(250-125) *1.6  +1.6 * 125  = 87.5 +200 =287.5

AREA E (rectangle)= (500-250) *1.6 = 400

AREA F (triangle) = .5*( 5.6-4) *(625-500) = 87.5

change in consumer surplus = loss of $862.5

change in producer surplus = gain of $287.5

Revenue from tariff = gain of $400

References

Study notes: Explaining Consumer surplus, available from:https://www.tutor2u.net/economics/reference/consumer-surplus [6 April 2017]     

https://www.freeeconhelp.com/2011/10/how-to-calculate-deadweight-loss-easy-4.html [6 April 2017]

Chen. C. 2007, Principles of Microeconomics Fall 2007, available from:https://ocw.mit.edu/courses/economics/14-01-principles-of-microeconomics-fall-2007/lecture-notes/14_01_lec17.pdf  [7 April 2017]

Pettingar. T. 2015  Effect of import quota,  available from” https://www.economicshelp.org/blog/glossary/effect-of-import-quotas/ [7 April 2017]

Import quotas available from https://economia.unipv.it/pagp/pagine_personali/msassi/readinglist/doc2.pdf   [10 April 2017]

 Import quotas , available from https://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=import+quotas  [ 9 April 2017]

Johnson. M., Economics Basics: Supply and Demand, available from  https://www.sophia.org/tutorials/economic-basics-supply-and-demand [9 April 2017]

Econport, Impacts of shifts in demand and supply 2006, available from https://www.econport.org/content/handbook/Equilibrium/Impact-.html  [9 April 2017]

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