- Internal Code :
- Subject Code : ECO100
- University : Kings Own Institute
- Subject Name : Economics
Introduction to Economics - Question 1
- The equation for demand and supply functions are given as:
QD= 100 - 5P
QS= 5P
The market equilibrium price and quantity of widget corn can be determined by equating the demand and supply functions-
100 - 5P = 5P
10P = 100
P = 10
Q = 5*10 = 50
The market equilibrium price is $10 and the equilibrium quantity is 50 units.
- Consumer surplus can be calculated as the area of triangle below the demand curve and above the equilibrium price. Therefore, consumer surplus is given as:
CS= 0.5 * (50 * 10)
CS = 250
Producer surplus can be calculated as the area of triangle above the supply curve and below the equilibrium price. Therefore, producer surplus is given as:
PS = 0.5 * (50 * 10)
PS = 250
Total economic surplus is defined as the sum of consumer surplus and producer surplus.
TES= CS + PS
TES = 250 + 250
TES = 500
- (i) The government has imposed price control. This price regulation policy is known as price ceiling. Price ceiling is the maximum price or limit set by the government that should be charged by the sellers for the widget corn. This is basically to protect the consumers from paying high amount for the widget corn.
(ii) If this price ceiling is imposed by the government, the quantity supplied is reduced as the price falls to $5. The quantity supplied will be:
QS = 5P = 5 * 5 = 25 units
The quantity demanded would increase as the price falls from $10 to $5. The quantity demanded will be:
QD = 100 - 5P = 100 – 5*5 = 75 units
Thus, there is a shortage as the quantity demanded is 75 units which is more than the quantity supplied which is 25 units. There is a shortage of 50 units.
(iii) As the price falls to $5, there is an increase in the consumer surplus as they are getting widget corn at low price than before. While, with a fall in the prices the producer surplus would decrease.
The price at which the quantity supplied is 25 units is :
QS = 100 - 5P
25 = 100 - 5P
5P = 75
P = 15
The consumer surplus and producer surplus after price ceiling would be:
CS = 0.5 * (5 * 25) + (25 * 10) = 62.5 + 250 = 312.5
PS = 0.5 * (25 * 5) = 62.5
The total economic surplus is given as:
TES= CS + PS = 312.5 + 62.5 = 375
The consumer surplus has increased from 250 to 312.5 after price ceiling while the producer surplus has decreased from 250 to 62.5. The total economic surplus has also decreased from 500 to 375.
(iv) The deadweight loss can be calculated by imposing price ceiling in the widget corn market. The deadweight loss is the loss to the economy and is calculated by the area of triangle:
DWL = 0.5 (10 * 25) = 125
The government should abandon this policy as it is inefficient. There is deadweight loss to the economy. Also, the total economic surplus has been reduced from 500 to 375.
- Demand and Supply of Widget Corm Market after imposing price ceiling:
Introduction to Economics - Question 2
- Production Possibility Frontier shows the combination of two goods, toilet rolls and sanitizers in our case, that can be produced with the given resources and technology. As the resources are scarce and limited, if production of one good, say, toilet rolls are increased, the production of sanitizers would fall given the fixed resources. Therefore, the above production possibility curve is a downward sloping curve.
The important assumptions of PPF are:
- The resources are used for the production of the goods.
- The resources are limited and do not change.
- Technology and production techniques also remain same.
- Resources are used in a technically efficient way.
The properties of PPF are:
- The PPF slopes downward from left to right.
- The PPF is concave to the origin because the opportunity cost tends to increase as production of one good increases and the other good decreases.
- When the demand of toilet rolls and sanitizers were 18000 and 3000 respectively then the economy was producing on the production possibility curve. However, when the demand is increased for both the goods, the economy can only increase the production if both the goods in the following ways:
- Resources or inputs of production are increased.
- There is advancement in technology.
- Labour force is increased or training is given to increase the production.
The above ways can lead the production possibility curve to shift towards the right. This would increase the production of both the goods, that is, toilet rolls and sanitizers.
Introduction to Economics - Question 3
- With the trend of on line video rentals and steaming, the demand for in store movie industry has decreased. Thus, the demand curve of in store movie industry would shift to the left. Now, given the old price P1, the quantity supplied is more than the quantity demanded. This would create a downward pressure in the prices. Thus, the equilibrium price would fall to P2 and the equilibrium quantity would also decrease from Q1 to Q2. The assumption behind this is that the supply curve is not affected and the demand side is only affected. The below figure shows the demand and supply of in store movie industry:
- Price elasticity of demand is defined as the percentage change in the quantity demanded due to percentage change in the price of own good. As the budget allocated towards the entertainment sector by people is very less, therefore, both the demand of Netflix and online rental movies are price inelastic. However, the price elasticity of demand of Netflix would be greater than online rental movies. This is because there are various substitutes of Netflix like Hotstar, Amazon Prime which makes the demand elastic.
- The cross elasticity of demand can be defined as the percentage change in the demand of a good due to a percentage change in the price of other good. If the price of in store movie rentals rises, this would shift the consumers attraction from in store movie rentals to online streaming like Netflix. Thus, the demand of Netflix would rise. This shows that the cross elasticity of demand is positive for online movie rentals and in store movie rentals.
Demand and Supply of Online Movie Rentals
The diagram shows that as the price of in store movie rentals rises, the demand curve of online movies rentals would shift rightwards from D to D1. This leads to increase in the equilibrium price from P1 to P2 as well as equilibrium quantity from Q1 to Q2 of online movie rentals.
- The government can regulate or control prices. Either it can set a maximum price known as price ceiling or can set a minimum price for a product known as price floor. There are pros and cons of this price regulation.
If the government regulates the price of Netflix by imposing price ceiling on the market, this would impact both in a positive and negative way.
Some of the pros of price ceiling:
- It would protect the consumers from paying excess amount for online streaming.
- This is essential as it could lead to monopoly power in the market. The one streaming company could charge as much as possible if there is no price regulation.
- The suppliers cannot exploit the consumers if there is price regulation. This is generally used for essential goods like food and rents.
Some of the cons of price ceiling are:
- The quantity supplied is reduced as the price falls. There is no incentive for the supplier to produce more at lower prices.
- This creates shortage in the market.
- There are chances of black marketing as the quantity supplied is reduced and the quantity demanded is more than quantity supplied.
The price ceiling should not be imposed by the government in the online streaming market.
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