Economics Essay Example

Economics 10

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Question 1

The supply curve slope upwards since the law of supply states that the higher the price the larger the quantity supplied. Supply is the amount of products available to the customers in the market. Gillespie (2007) shows changes in supply are where the suppliers of a particular good or service change in production. These changes are caused by various factors such as improved technology, efficient production or changes in the number of competitors. Changes in supply lead to a shift in the supply curve therefore causing imbalance in the market. If the change in supply increase the supply curve moves to the right and vice versa.

The main determinant of quality supplied is price. A change in quantity supplied is the change in behaviour of sellers due to the changes in price therefore the relationship between price and quantity is unchanged. The difference between changes in supply and changes in quantity supplied is that changes in price is caused by other factors in the market apart from price while the changes in quantity supplied is only caused by the price in the market.

2. Using a diagram of a competitive free market for a good or service, explain the difference between price and value? Show how these concepts explain the paradox of value.

A competitive free market is one that is not regulated by any parties other than the players in the market. In this market, property rights are voluntarily exchanged. Price is shown as the quantity that the purchasers are ready and capable to purchase in the market. It is the quantity of payment in exchange for goods and services.

Value as stated in the competitive free market is the degree of worth, desirability ir the utility of a particular good.

3. Discuss the price and income elasticity of demand for agricultural products in an advanced industrial country like Australia.

Income elasticity of demand measures the responsiveness of demand of goods to the changes in the income of people when the price in the market is constant. A negative income elasticity of demand is linked to inferior goods which show that if peoples’ income is increased, then there would be a reduction in the demand of these goods and may lead to demand of a more luxurious substitutes. When the income elasticity of demand in positive, the good is said to be normal goods where an increase in income lead to rise in demand and if the income elasticity is exactly one, it is a necessity good whereas if it is more than one then the good is a luxury. Where the income elasticity of demand is zero, then the increase in income is not linked to changes in demand of goods and there are said to be sticky goods. In an advanced country such as Australia most people earn a high income and therefore are likely to consume more luxurious goods.
price elasticity of demand is said to be elastic when the value of price elasticity is greater than one or where the changes of price have a large relative effect on the quantity of goods demanded in the market and inelastic where the effects are relatively small.Frank (2008) describes that Price elasticity of demand illustrates the receptiveness of the amount of goods and services ordered due to adjust in cost all determinants of demand being constant such as income.

Course Code:

. How much will the subsidy cost the government in each case and which method of encouragement is most effective? Pc, and the price ultimately paid by the consumers of the vaccine, PpQ. 4. Show two ways the government might go about doing this. In each case show the price received by the producers of the vaccine,

The government influences the uptake of vaccines through launching it in the private market of the industrialized countries. This is by giving low quantities and high prices. The vaccine is then integrated into the public health policies of the industrialized markets. The supplies to the public market are at lower price than sales in a private market which shows that the government gives subsidies which are equal to;

(Pp-Pc)= Subsidy cost to the government.

5. What is the difference between diminishing marginal returns and diseconomies of scale? Include diagrams in your answer.

The law of diminishing marginal returns states that as the number of employees increases, the marginal product of an additional workforce will be less than the marginal product of a previous employee. An example is where a factory employs workers who produce the factory’s products. Keeping all factors of production constant, at one point an additional labourer produce less output than the previous worker. This shows that for every additional worker the return continues reducing and finally diminishes. Diminishing returns also involves the decline in the marginal output of the process of production. This decrease is relative to the amount of increase of one factor of production all other factors being constant.

Diseconomies of scale involve the forces that cause producers such as large organizations of government to increase on the cost of producing goods and services. This occurs especially where a large form is involved in that the cost of one unit increases at occurs for various reasons but the main one is as a result of managing a large part of workforce. The other reason causing diseconomies of scale include poor work communication. As businesses expand it is also important to improve the communication system since it becomes difficult to pass information along the chain of command. Well forms of communication are used in such cases for example written communication such as newsletters, memos or emails. These are in effective since there is delayed or no feedback.

Lack of employee motivation also causes diseconomies of scale for example in environments where workers feel isolated. Managers should try to build a day to day contact and encourage good team environment and a sense of belonging. This motivates the workforce and improves output and quality of production.

Question 6.

A perfect competition market is one where there are no participants to have the market power and to set the prices of homogenous products. The firms operating in this market are takers of price and have a comparatively small share in market. The Buyers are also aware of the price charged by every firm in the market and there is freedom of entry and exit.

Course Code: 1

The perfect competition makes normal profits in the long run as shown in the diagram above. The price in the market is also set by the industry’s supply and demand and therefore there is an elastic demand curve.

A monopoly market exists where a specific individual has sufficient control over a particular product in the market. Robert (2005) describes that this market is therefore not characterized by economic competition and there are also no viable substitute’s goods. In this market there is a single seller and therefore more market power. The firm is also an industry and a monopolist can change his price and product quality at any given time. In a high elastic market, more quantities are sold at a less price and in a less elastic market; less quantities are sold at a higher price.

Course Code: 2

A monopolistic is a price taker since there are no competition and therefore seek to maximize profits at MR=MC. The output is Qm and price at Pm.

Course Code: 3

The green part shows supernormal profits in a monopoly where (AR-AC) Q and the pink part shows combined loss of producer and consumer surplus which is the dead welfare loss. The monopoly is inefficient since price is greater than MC. P>MC unlike in perfect competition where price is lower to benefit the consumers.

7. What are Public Goods? Why won’t these goods be provided by private firms? How might the government overcome this type of market failure?

According to Ray (2008) a public good is one where the consumption by one individual does not reduce the availability by others willing to use the same good or service. It is hence said to be non rival. Public goods are provided by the government and not private firms because they are too sensitive to be left in the hands of private investors. Examples include public roads, national defence, and air.

8. More people decide to take up apprenticeships to become carpenters because of the high wages being paid to carpenters in the labour market. Show how this action will change the market for carpenters over time as more qualified workers enter this market.

The action of taking up carpentry as a result of high wages may change the market over time since the carpentry industry will be more flooded and therefore increase in competition. This will be advantageous to the consumers as the increased competition may reduce the prices of goods produced and the quality will improve however the increased competition will not benefit the carpenters and may earn normal profits.


Frank, R. (2008). Microeconomics and Behavior (7th ed.). McGraw-Hill.

Gillespie, A. (2007). Foundations of Economics. Oxford University Press.

Ray, Powell. (2008). Private goods, public goods and externalities. AS Economics. Philip Allan. 352.

Robert, L. (2005). On labour demand and equilibria of the firm, Manchester School, 612-619.