Econ 2302 Module 1 Homework Summary

Name Econ2302module 1 Homework Su

Explain using supply and demand how a tariff on imported flat screen televisions will affect the equilibrium price and quantity of flat screen TVs. Consider the demand for hamburgers and analyze what happens when the price of a substitute good increases and the price of a complement good increases, with a graph illustration. Graph the demand and supply data for cheddar cheese, find the equilibrium, and analyze how changes—such as a price ceiling, an increase in the cost of a key input, or an increase in demand—affect the market. Describe the impact of minimum wage legislation on low-wage workers, including the market diagram, effects on consumer and producer surplus, and deadweight loss. Suggest alternative policies to achieve higher wages and employment. Explain how airline revenues can increase despite recession and rising fuel costs, using supply and demand diagrams to show shifts, and calculating initial and new revenues.

Paper For Above instruction

Introduction

Supply and demand are foundational concepts in economics that explain how markets allocate resources and determine prices. The effects of governmental policies and external shocks on these markets can be understood through shifts in supply and demand curves. This paper explores five distinct scenarios involving tariffs, substitute and complement goods, market interventions, minimum wages, and airline pricing strategies, analyzing their impacts with graphical and economic reasoning.

Impact of a Tariff on Imported Flat Screen Televisions

A tariff on imported flat screen televisions increases the cost of foreign-made TVs. From the supply and demand perspective, an import tariff affects the supply curve, effectively increasing the cost for suppliers and decreasing the quantity supplied at each price level. Consequently, the supply curve shifts upward (or to the left). The immediate effect is a higher equilibrium price and a lower equilibrium quantity of flat screen TVs in the domestic market (Mankiw, 2021).

Graphically, the pre-tariff market is at the intersection of initial supply (S0) and demand (D) curves, establishing an equilibrium price (P0) and quantity (Q0). Post-tariff, the supply curve shifts leftward from S0 to S1, leading to a new intersection with demand at a higher price (P1) and a reduced quantity (Q1). Consumers face higher prices, and the quantity bought and sold declines, indicating a loss of consumer surplus and potential gains to domestic producers and government revenue through tariff collection (Krugman et al., 2020). Consumers experience a decrease in welfare, while domestic producers benefit from reduced foreign competition.

Demand for Hamburgers and Substitute/Complement Effects

The demand for hamburgers is influenced by related goods. An increase in the price of a substitute like hot dogs tends to increase hamburger demand because consumers switch from hot dogs to hamburgers. Conversely, an increase in the price of a complement such as hamburger buns reduces hamburger demand as the overall cost of the meal rises, decreasing consumption (Pindyck & Rubinfeld, 2018).

Graphically, an increase in the price of hot dogs shifts the demand curve for hamburgers outward (to the right), demonstrating increased quantity demanded at each price. Conversely, rising prices for hamburger buns shift the demand curve inward (to the left), reducing demand. The net effect on hamburger demand depends on the magnitude of these shifts; if the increase in hot dog prices is dominant, the demand for hamburgers may rise, while the rise in bun prices could temper this increase. These interactions highlight the complex interdependence of related goods within market demand.

Market for Cheddar Cheese: Equilibrium and Market Changes

The initial market for cheddar cheese has a specific demand and supply schedule, with equilibrium identified at the intersection of these curves. For example, suppose the initial equilibrium price is $4.00 per pound with a quantity of 100 pounds. Graphing this data yields the intersection point.

a) When a price ceiling is set at $3.00, which is below the equilibrium price, a shortage ensues because quantity demanded exceeds quantity supplied at that price, leading to unsatisfied consumers.

b) An increase in the price of milk, a key input, raises production costs, decreasing supply by 80 pounds at each price level. Graphically, this shifts the supply curve leftward, resulting in a higher equilibrium price and lower equilibrium quantity.

c) A study indicating health benefits enhances demand, shifting the demand curve outward by 20%. This results in a higher equilibrium price and quantity, as both consumers and producers respond to increased demand.

These shifts illustrate how external variables influence market equilibrium, causing shortages, surpluses, or movement along the curves.

Minimum Wage Legislation and Its Effects

Implementing a minimum wage above the equilibrium wage aims to raise earnings for low-wage workers. The diagram shows the labor market with the original equilibrium at wage W0 and quantity Q0. The minimum wage law sets a wage Wm above W0, causing a surplus of labor firms are unwilling to hire at the higher wage, creating unemployment. This surplus is a deadweight loss, representing lost potential employment.

Consumer surplus decreases as workers earn more, but some workers benefit. Producer surplus may initially increase through higher wages for employed workers, but overall, the market efficiency diminishes due to unemployment (Card & Krueger, 1994). Employers face higher labor costs, potentially reducing hiring or automation.

An alternative policy could involve subsidies or earned income tax credits, which supplement low wages without causing unemployment, aligning worker welfare with market efficiency.

Airline Price Increase and Revenue Growth Explanation

Despite a recession and rising fuel costs, airline revenues can increase if ticket prices rise sufficiently and the decrease in quantity sold is proportionally smaller. Starting with an initial average ticket price of $300 and seats sold at 70,000, total revenue is $21 million.

Suppose the market shifts, and ticket prices increase to $600, but the number of seats sold decreases to 40,000. The diagram illustrates the leftward shift of the demand curve (due to recession and fuel costs) and an upward shift of the supply curve (due to fuel costs), leading to higher prices but fewer seats. Nonetheless, the increased ticket price compensates for fewer seats, leading to higher total revenue (from $21 million to $24 million), demonstrated by the rectangle for new revenue.

The increase in revenue results from the price elasticity of demand being relatively inelastic in this case, meaning consumers are less sensitive to price changes, and the revenue gained from higher prices outweighs the loss from reduced quantity.

Conclusion

The various scenarios demonstrate the dynamic nature of markets in response to governmental policies and external events. Supply and demand diagrams serve as essential tools to predict and analyze these effects, providing insights into welfare changes, market efficiencies, and potential policy outcomes. Understanding these principles allows policymakers and stakeholders to make informed decisions balancing welfare, efficiency, and market stability.

References

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• Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Card, D., & Krueger, A. B. (1994). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. The American Economic Review, 84(4), 772–793.
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