Economy Principles Questions: Explain With Use Of

6 Economy Principles Questionsquestion 1explain With The Use Of Deman

QUESTION 1: Explain, with the use of demand and supply diagrams, the effect of the following events on the market for solar panels: (a) The price of solar panels has fallen to below the market equilibrium price. (b) The price of electricity for an average household has increased by 50 percent. (c) New technology has increased the productivity of solar panel producers. NOTE: IN EACH OF YOUR ANSWER EXPLAIN THE MARKET EQUILIBRIUM ADJUSTMENT PROCESS.

QUESTION 2: Ceteris paribus, at the same time when demand for yoga services has increased, the government has introduced strict regulations on yoga providers, resulting in a decrease in the number of yoga providers. Using demand and supply analysis, what will be the impact on price and quantity in the market for yoga services? (HINT: THERE ARE 2 SCENARIOS WORKING AT THE SAME TIME)

QUESTION 3: The outbreak of Bird Flu in 1997 resulted in the Hong Kong government ordering the culling of more than 1.5 million chickens. The culling of chickens was simultaneously accompanied by consumers reducing their demand for live chickens due to the bird flu. Using demand and supply analysis, what was the impact on price and quantity in the market for live chickens? (HINT: THERE ARE 2 SCENARIOS WORKING AT THE SAME TIME)

QUESTION 4: Assume the price of a good increases from $6 to $8, leading to a fall in quantity demanded from 50 to 40 units. Calculate the price elasticity of demand for the good at this price range and explain how total revenue will be impacted by the increase in price?

QUESTION 5: Assume, in an industry where there are no barriers to entry and firms are making an economic loss in the short run. a) What options are available to firms in the short run to minimize their losses? b) Using demand and supply analysis together with the cost curves, explain why the actions to minimize loss lead to firms’ making normal profit in the long run?

QUESTION 6: In a market structure where firms are mutually interdependent, price competition is not common. Explain, using the game theory matrix, with relevant assumptions, how firms make decisions when they behave collusively and non-collusively. In the absence of price competition, how do firms maintain or increase their market share?

Paper For Above instruction

The principles of demand and supply form the foundation of microeconomic analysis, revealing how markets allocate resources and respond to changes. This essay explores six key questions demonstrating the application of demand and supply diagrams in understanding market dynamics, the effects of external events, and strategic decision-making among firms.

1. Effects of Events on the Market for Solar Panels

The market for solar panels is influenced by various factors that shift demand and supply curves, affecting equilibrium price and quantity. When the price of solar panels dips below the market equilibrium, the immediate consequence is a surplus: at the current price, consumers demand more units than producers supply. As a result, producers may lower prices further or offer discounts to clear excess stock, prompting a price rise back towards equilibrium. Conversely, when electricity prices rise by 50%, the demand for solar panels increases because they become a more cost-effective alternative to traditional power sources. This increases demand, shifting the demand curve rightward, resulting in a higher equilibrium price and quantity. Lastly, technological improvements that enhance productivity reduce production costs, shifting the supply curve rightward, leading to lower prices and higher quantities as the market adjusts towards new equilibrium points. In each scenario, the market equilibrium adjustment process involves shifts in demand or supply prompting prices and quantities to adjust until a new equilibrium is attained, balancing the quantity demanded with the quantity supplied.

2. Impact of Increased Demand and Regulatory Constraints on Yoga Services

If demand for yoga services increases, perhaps due to health trends, the demand curve shifts outward. In isolation, this would cause an increase in both price and quantity. However, if simultaneously the government introduces regulations restricting yoga providers, this reduces supply by decreasing the number of providers, shifting the supply curve inward. Two scenarios emerge: if demand increases significantly and supply decreases, the price will definitely rise, but the effect on quantity is ambiguous—it could increase or decrease depending on the magnitude of shifts. The equilibrium outcome indicates that prices are likely to increase with variable effects on quantity depending on the relative sizes of demand increase and supply decrease. This dual effect results in a complex adjustment process, where the market finds a new equilibrium reflecting higher prices with uncertain quantity changes.

3. Impact of Bird Flu on the Chicken Market

The outbreak of Bird Flu in 1997 caused an immediate reduction in supply, as government culling reduced the number of chickens available, shifting the supply curve leftward. Concurrently, consumer behavior changed; scared consumers demanded fewer live chickens, reducing demand and shifting the demand curve leftward. These simultaneous shifts—decrease in supply and demand—mean that the equilibrium price could either increase or decrease depending on the relative magnitude of their shifts. Typically, if the supply decrease is more substantial than the demand reduction, prices will rise. Conversely, a larger demand drop may offset supply reduction, leading to a price decrease. The total effect on quantity is generally a decrease, as both supply and demand reduce overall market volume, but the exact price movement depends on the strength of each shift. This illustrates how external shocks and behavioral responses jointly influence markets.

4. Price Elasticity of Demand and Total Revenue Impact

Calculating price elasticity involves the percentage change in quantity demanded relative to price change. The formula is: Elasticity = (% change in quantity demanded) / (% change in price). Here, price rises from $6 to $8, a 33.33% increase, and quantity demanded falls from 50 to 40 units, a 20% decrease. Elasticity = (−20%) / (33.33%) ≈ −0.6. Since the absolute value is less than 1, demand is inelastic in this price range. As price increases, total revenue (TR) = price × quantity, increases because the percentage increase in price outweighs the percentage decrease in quantity demand. Therefore, the firm’s total revenue rises with the price increase, reflecting inelastic demand.

5. Firms’ Strategies to Minimize Losses and Reach Normal Profit

In industries with free entry and firms incurring losses, firms can reduce output and costs in the short run to minimize losses, such as decreasing production, laying off workers, or scaling back operations. These actions help reduce expenses and prevent losses from escalating. Over the long run, market forces drive the entry or exit of firms: if firms in the industry make losses, some will exit, decreasing supply and raising prices until remaining firms earn normal profits—covering all opportunity costs. The demand and supply framework shows that as firms exit, supply decreases, leading to higher equilibrium prices, restoring profit levels to normal. This dynamic illustrates how short-term actions mitigate losses and market adjustments ensure sustainability in the industry.

6. Collusive and Non-Collusive Behavior in Interdependent Markets

In markets with mutual interdependence, firms tend to behave strategically rather than purely competitively. Under collusion, firms cooperate to set prices or output levels, often through explicit or tacit agreements, to maximize joint profits. The game theory matrix for collusive behavior indicates that both firms prefer to cooperate and maintain higher prices, avoiding destructive price wars. When firms act non-collusively, they compete aggressively, reducing prices and market share, as shown in the non-cooperative equilibrium in the game matrix. To maintain or increase market share without price competition, firms engage in non-price strategies such as product differentiation, advertising, customer loyalty programs, and innovation. These tactics allow firms to sustain profits and market dominance, even without explicit collusion, fostering strategic stability through non-price competition mechanisms.

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