ECONOMIC«««« Essay Example

Question (A)

The graph of the market for possums fur relates differently but unique with regard to the environment. Generally, a given shift in the supply curve and or demand changes the positioning of the equilibrium. Figure 1 below illustrates the relationship between the environmental friendliness of the fur and status on the market equilibrium. Basing our argument on price and quantity, there will be general increase in the demand for the product due to reasons that have been enumerated (e.g. its environmental friendliness, demand in other countries including China). On the other hand, the market is likely to experience a scenario where the quantity exchanged in the market increase significantly. Subsequently, this will trigger an increase in the price of the product in the market. Explaining figure 1 below, the demand is increasing and on the same note, the product triggers a case where quantity that is likely to be exchanged in the market is increasing from point marked Q1 to Q2. Similarly, the figure is indicating a market price moving (on upward trend) from point marked P1 to P2.

Figure 1: Price and Quantity Graph

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Question (B)

It has to be noted that the reaction of individual firm towards the increase in market will be determined by the fact that the firm will be operating in already a perfectly competitive industry. As this is the case, the interpretation of operating in such environment means that with the increase in demand, there will be a shift in the industry demand curve from D1 to D2 as shown in the figure 2 below. The firm involved will be forced to alter its levels of production by increasing the quantity of possums’ related products from what has been marked in the figure below as Q1 to Q2. Technically, this shifts the trend upward with regard to marginal revenue curves as well as average revenue curves for the individual firm (Gorry and Gilbert 2015). The individual firm, as a result of this, will realize increased levels of profits and this comes due to the fact that the average revenue curve is lying above what can be seen as average cost curve according to the figure 2 below. The boxes between 0 to Q2 and P1 and P2 represent the profits. The figures 2 and 3 below represent a case for the industry and for the individual firm respectively.

Figure 3: A case for the individual industry

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Figure 3: A case for the individual firm

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The case for the fur presents a situation where there will be no barrier for other firms to enter the market. This in turn will increase the anticipated supply from S1 to S2 (see figure 2). The trend will continue till the firms in entry start to make zero economic profits (it has to be noted however that in as much as they will be making zero economic profits they will still remain in the market since a normal rate of return with regard to their investments will be included as part of the opportunity cost of their production) but at long run there will be no other firms that will have incentives that enables it to enter into the industry and those in will be moved to zero economic profits (Clawson and Knetsch 2013).

Question (A)

Sugar drinks are linked with a range of health related complications including obesity, poor nutrition, tooth erosion and decay, bone related problems that could lead to osteoporosis and cardiovascular diseases. Beginning with obesity, the sugar drinks are linked to obesity because people who tend to include sugar related drinks in their diet tend to gain weight (Grimes et al. 2013). On poor nutrition sugar drinks have empty calories with little to now nutrient value. As a matter of fact, they replace healthier foods thus subjecting the body to infections. Grimes et al. (2013) have further indicated that sugar drinks are acidic that cause dental erosion. Conclusively, sugar drinks contain caffeine. On the other hand, caffeine causes complementary but health issues as they are the causative agents of kidney stones in adults.

Question (B)

To begin with, there argument from external costs where if tax was to be introduced then it will impose high external costs on people. This means that there will be a situation in Australia where people’s cost of sugar consumption being greater than the private cost of sugar. The figure 4 below (assuming that the tax introduced will be external costs) indicates the effects of the sugar when the tax will be introduced. Initially, there was free market as marked by P1 and Q1. However, when the tax is introduced the efficient level socially becomes at point marked Q2. At Q2 there is social marginal benefit (SMB) equaling social marginal cost (SMC) (SMB=SMC). In such a situation there will be need to impose a tax on the product so that it raises the raises the price whereas there is reduction of the quantity to a point marked Q2 (Xie 2015).

Figure 4:

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References

Clawson, M. and Knetsch, J.L., 2013. Economics of outdoor recreation (Vol. 3). Routledge

Gorry, D. and Gilbert, J., 2015. Numerical simulations of competition in quantities. International Review of Economics Education, 18, pp.49-61.

Grimes, C.A., Riddell, L.J., Campbell, K.J. and Nowson, C.A., 2013. Dietary salt intake, sugar-sweetened beverage consumption, and obesity risk. Pediatrics, 131(1), pp.14-21.

Xie, J., 2015. Testing Advertising-Induced Rotation of Demand Curves in the EU Salmon Market. Aquaculture Economics & Management, 19(2), pp.175-191.