Economic Principles Essay

Words: 970
Pages: 4

Question 1 Using supply-and-demand diagrams, show and explain the effect of the following events on the market for woollen jumpers. An outbreak of ‘foot-and-mouth’ disease hits farms in Australia.
Supply curve shifts left
Whenever there is an outbreak of ‘foot-and-mouth’ disease in Australian farms, the result is an increase to the input prices for producing woollen jumpers. As a consequence, the supply of woollen jumpers shifts to the left on the graph, as shown below. The new equilibrium price is higher and the new equilibrium quantity of jumpers is lower.

The price of leather jackets falls
Demand curve shifts left
When the price of leather jackets falls, more people buy them, which in turn reduces the demand for
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This leads to a higher equilibrium price and quantity as we move up along the supply curve, and the equilibrium changes from E1 to E2. The following statements are wrong: “Consumers, seeing that the price of garlic has gone up, reduce their demand for garlic. This causes the demand for garlic to decrease and the price of garlic to fall.” This statement is incorrect as they imply that the rise in the equilibrium price causes the demand for garlic to decrease—a leftward shift of the demand curve. A rise in the equilibrium price via a movement along the supply curve does not cause the demand curve to shift leftward.

Question 3 Many small boats are made of fibreglass, which is derived from petroleum. Suppose the price of crude oil rises.
Illustrate and explain what happens to the cost curves of an individual boat building firm and to the market supply curve?
The rise in the price of crude oil increases production costs for individual firms and therefore shifts the industry supply curve up, as shown in the diagram below. The firm's initial marginal-cost curve is MC1 and its average-total-cost curve is ATC1. In the initial equilibrium, the industry supply curve, S1, intersects the demand curve at price P1, which is equal to the minimum average total cost of the typical firm. Thus, the typical firm earns no economic profit.

Explain what happens to the:
Profits of