Rachel Tan 635953
UNIVERSITY OF MELBOURNE
ECON10004 INTRODUCTORY MICROECONOMICS ASSIGNMENT ONE Tutor: Lewis Cohen Tutorial: Wednesday 12p.m. – 1p.m.
BY:
RACHEL TAN – 635953
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Question 1a)
As shown above, demand for online movie streaming has increased, i.e. demand curve shifts to the right (D O to D1). The demand curve should be more elastic as online movie streaming is a close substitute to rental and purchase of DVD movie discs. Due to strong demand for online movies, there is an increase in price (P O to P1) and quantity traded (Q O to Q 1).
Question 1b)
There is now a decrease in the demand for rental & purchase of DVD movie discs. This is reflected in a shift in the demand curve to the left (D O to D1). Quantity traded decreases (Q O to Q 1) and price falls (P O to P1). Consumers have found that online streaming is more convenient and affordable.
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Question 2a)
The implementation of a restriction in advertising would make the demand curve more elastic (shown in the change of shape from D O to D1). The general aim of advertising is to make the demand curve more inelastic. A restriction in advertising and the introduction of a per unit sales tax on sellers would lead to a price increase and a reduction in quantity supplied (Q O to Q 1). When the demand curve is more elastic relative to the supply curve, price paid by buyers rises slightly (P O to P B) and the price received by sellers falls substantially (P O to P S). This results in less supply therefore shifting the supply curve to the left (S
O
to S1).
Thus, sellers bear most of tax t ax burden. Quantity traded decreases from Q O to Q 1.
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Question 2b)
When the demand curve is more inelastic relative to the supply curve, the price received by sellers (P S) falls only slightly (P O to P S) and the price paid by buyers (P B) rises substantially (P O to PB). Thus, buyers bear most of the tax burden. There would be a smaller change in quantity traded (Q O to Q 1) even if the change is significant as demand is relatively inelastic.
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Question 3a)
By setting a minimum price to maintain price stability, equilibrium price will increase (Po to Pmin). At PMIN, quantity demanded by buyers will be less (Q o to Q D) while producers would want to supply more, creating a surplus between Q S and Q D. D. To maintain a minimum price and to drive up demand, the government will buy up the surplus of milk.
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Question 3b)
Without floor price
With floor price
Change
Consumer Surplus
A1+A2+C
A
-A1-A2
Producer Surplus
B+D
A2+B
-D+A2
Total Surplus
A1+A2+B+C+D
A1+A2+B
-C-D
The table above shows that’s w ith the introduction of a floor price, sellers who are
able to sell at P MIN will benefit. Consumers will be disadvantaged because the price has increased (P O PMIN) eventhough demand decreases at P MIN and also because consumer surplus has decreased (A1+A2+C A). Society is not better off because resources are not maximized to its full potential, as there is a deadweight loss (represented by area C+D) present due to government interference in a free market.
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Question 3c)
Milk is considered a ‘composite demand’ for che ese. The increase in demand for milk will result in a reduction in the supply of milk hence a decrease in cheese production. This is represented by a shift in the supply curve to the left (S O to S 1). This results in an increase in the price of cheese (P O to P1) and a reduction in quantity supplied (Q O to Q 1). 1). A new equilibrium is formed, from E O to E1.
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Question 4a)
Due to the onset of winter, demand will shift to the right from D O to D1, indicating an increase in quantity demanded, resulting in price increase (P O to P1). Another contributing factor to an increase in price could be due to hoarding by Chinese producers who expect supplies to be tight hence they are storing oil to boost profits during the winter season season where demand demand for fuel is stronger. stronger. At this higher price price – P1, producers would be more willing to sell, hence increasing the quantity supplied, 1. from Q O to Q 1.
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Question 4b)
Without price control, when demand increases, price increases. The introduction of a binding ceiling price at previous equilibrium price decreases the price of fuel (P 1 to PMAX), creating a shortage. This is the amount between Q S and Q D. D. At PMAX, producers will be given the incentive to produce less, reducing quantity supplied (Q 1 to Q S) while quantity demanded will increase (Q 1 to Q D).
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Question 4c)
Without Price
With Price Ceiling
Changes
Ceiling Consumer Surplus
A+D
A+B
-D+B
Producer Surplus
B+C+E
C
-B-E
Total Surplus
A+B+C+D+E
A+B+C
-D-E
As shown in the table and graph above, in terms of welfare, consumers will benefit from the price ceiling while producers find themselves worse off as they are under pressure to raise output at a time when rising costs are forcing them to produce at a loss. The Chinese society will not be better off since price controls result in a deadweight loss (Area D+E) and the free market is at a disequilibrium. Also total surplus is reduced (A+B+C+D+E A+B+C).
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Question 5a)
Prices for dairy products will remain the same at World price (P W) after the elimination of subsidies. However, the level of imports will increase from Q 1Q 2 to Q 3Q 2. 2. This is because local producers are unable to produce sufficient dairy products without government subsidies to meet consumer demands at the world price. This is represented by a shift in the supply curve to the left.
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Question 5b)
With world trade
With world trade
Changes
With subsidy
Without subsidy
Consumer surplus
A+B+C+D+E+F
A+B+C+D+E+F
-
Producer surplus
G+H+I
G
-H-I
Total surplus
A+B+C+D+E+F+G+H+I A+B+C+D+E+F+G+H+I A+B+C+D+E+F+G
-H-I
As shown in the table and graph above, after the elimination of the subsidy, there is no extra benefit or loss to consumers as price for dairy products remains at P W. However producers will be worse off as producer surplus will decrease. The European society will not be better off with the elimination of the subsidy as total surplus has reduced resulting in deadweight loss represented by the area H+I.
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