1: Economic Foundations And Market Forces
Describe about the MicroEconomic Solutions.
a) As we see from the data given in the table, Scotland takes less time in producing a motorcycle as well as a guitar than Ireland, i.e., 9 hours to produce 1 motorcycle where Ireland needs 10 hours to do the same. Hence, Scotland is the country that has an absolute advantage in production of motorcycle.
(b) The time taken by Scotland in production of a guitar is 2 hours compared to 2.5 hours taken by Ireland. Since it takes less time, the country that has an absolute advantage in producing guitars is Scotland.
(c) Ireland takes 2.5 hours to produce a guitar and 10 hours to produce a motorcycle. Therefore, the 10 hours needed for Ireland to produce one motorcycle, it can produce:
{(1/2.5)*10}= 4 guitars, in the same time. Hence the opportunity cost of Ireland in the production of one motorcycle is 4 guitars.
(d) The time taken by Scotland to produce a motorcycle is 9 hours whereas to produce a guitar takes 2 hours. In the 9 hours it produces a motorcycle, it can produce:
{(1/2)*9}= 4.5 guitars. Hence the opportunity cost of Scotland in production of one motorcycle is 4 guitars and a half.
(e) Ireland takes 2.5 hours to produce a guitar and 10 hours to produce a motorcycle. Hence in those 2.5 hours, it can produce:
{(1/10)*2.5} = 0.25 part of a motorcycle. Opportunity cost of Ireland in producing a guitar is 0.25 motorcycle or can be said (1/4)th part of a motorcycle.
(f) Scotland produces a guitar in 2 hours and a motorcycle in 9 hours. Hence in those 2 hours, it can produce:
{(1/9)*2} = 0.22 part of a motorcycle. Opportunity cost of Scotland in producing a guitar is 0.22 motorcycles.
(g) As we see from the above calculations, for producing a motorcycle Ireland’s opportunity cost is 4 guitars whereas for Scotland opportunity cost is 4.5 guitars. Therefore, Ireland has a comparative advantage in producing motorcycles and so it will specialize in producing the same.
(h) Scotland faces an opportunity cost of 0.22 part of a motorcycle in producing a guitar whereas Ireland faces a higher opportunity cost of 0.25 part of a motorcycle. Therefore, Scotland has a comparative advantage in producing guitars and shall specialize to produce the same. (Boundless.com)
The optimal production as well as allocation of resources given the existing limited factors of production is known as efficiency. Equity is about how the various resources are distributed throughout the society (Mankiw, 2007).
2: Elasticity
Equity efficiency trade off is seen when any kind of activity in the market increases in efficiency but lacks equity. Equity efficiency trade off is artificially introduced in a market when one is concerned with the distribution of resources to be more equal but would limiting productive efficiency (Mankiw, 2007).
The trade off can be explained with the help of a tax system for instance the Communal charge or poll tax system. Such a system of tax helps in not distorting economic behavior in other words not reducing the incentives to work, hence reflecting efficiency. But a millionaire paying the same amount of tax as a poor person pays is socially unfair and hence trading off equity (Pettinger, 2010).
(a)
Fig 1
(b) The price at the demand supply equilibrium for entry ticket is $12 and the quantity is 600.
(c) If now we consider the price to be $20, then the supply of quantity at the price would be 600 but the quantity demanded would be only 200. Hence, there would be a situation of excess supply of 400 tickets.
(a) If people decide to have more children, then due to additional family members they would need a 4WD car for the family, hence demand for 4WD cars in such a case increases, which shifts the demand curve rightward.
(b) Fuel being a complementary good for cars, when price of fuel increases by 40%, demand for 4WD cars decreases, as with higher fuel prices people cannot afford to use fuel and hence do not buy cars too.
(c) Due to new technological development in producing 4WD cars, the efficiency in producing cars increases, and hence this results in the increase in 4WD car supply in the market.
(d) Station wagons being a substitute for 4WD cars, demand for 4WD cars will decrease as the price of station wagons decrease.
A production possibility frontier is a concave line showing all possible combinations of two goods given resources and technology is constant (Varian, 2010).
The points on the frontier (A and B in Fig 2) represent the combinations of the two goods that can be efficiently produced utilizing the constant resources and technology. The points inside the frontier(C in Fig 2) show that the production point is not efficient as it does not completely utilize the available resources whereas the points outside the frontier (point Din Fig 2) are those points which are not attainable due to unavailability of the required amount of resources (Samuelson et al., 2010).
The concave shape of the PPF shows the opportunity cost involved in reallocating resources from one good to another. As we increase the output to be produced of one good then the resources needed to produce the other good falls which shows the opportunity cost attached in increasing units of one good simultaneously losing units of the other (law of diminishing returns) which makes the line concave. If the goods were substitutes then the line would have been a straight line (Sen, 2007).
Fig 2
The cross-price elasticity of demand shows how the quantity demanded of one good change with price change of another good, ceteris paribus (Lipsey et al, 2011).
Cross price elasticity= %Change in quantity demanded of good 1/%Change in price of good 2
Income elasticity measures how with a change in income of an individual, quantity demanded of one good changes. Income elasticity is calculated as :
Income elasticity= % Change in demand of a good/ % Change in Income
A positive value of cross-price elasticity signifies that the goods are substitutes because as price of one good changes the quantity demanded of the other also changes in the same direction (Investopedia). For example if with 10% rise in price of one commodity the quantity demand for the other commodity rises by 20%, then they are substitutes with a positive value of cross price elasticity of 20%/10%= 2. A negative value of cross price elasticity implies that the goods are complement goods in nature as when price of one good change the demand for the other good changes in the opposite direction like with 10% rise in price of one good the demand of the other good falls by 20%, then the cross price elasticity would be -20%/10%= -2.
A positive value for income elasticity, imply that the good considered is a normal good since the demand for the good increases with increase in income whereas a negative value means that it is an inferior good as the demand for the good decreases with increase in income. For example if the income of a person increases by 30% and his demand for a good increases by 15%, then the income elasticity would be 15%/30%= ½=0.5, which is that of a normal good. Examples of normal goods are automobiles, books, necessities, etc. If with rise in income by 30%, the demand would have decreased by 15%, then the income elasticity would have been
-15%/30%= -1/2, which is negative implying the good is inferior. Examples of inferior goods would be transportation as with rise in income people would shift from bus rides to better means of transportation, or tinned meat which is a cheap substitute of fresh meat.
(a) For a high blood pressure suffering patient blood pressure medicines would be a necessity and so with change in prices, the demand would not change so much and would have low elasticity or can be said more inelastic in nature. But Clairol hair coloring product is not a necessity and shall have high elasticity of demand.
(b)A new Ford Fusion would be more of a luxury good with high demand elasticity compared to the tank of petrol needed for the car already purchased which would be more inelastic in nature.
(c) A Seiko watch is sufficiently expensive and more of a luxury good with high elasticity of demand compared to general watches whose demand would not change with change in price as much as an expensive watch of Seiko’s would, implying general watched have lower demand elasticity.
For low skilled workers the elasticity of demand is -0.75. The price or the wage is changed by government from P1=$7.25 per hour to P2=$7.75 per hour.
The price elasticity of demand mid pint formula is:
Ed= [(Q2 –Q1)/{(Q2+Q1)/2}] / [(P2-P1)/{(P2+P1)/2}]
Here we know Ed= -0.75, P1=7.25 and P2=7.75
We rearrange the formula to get the change in employment which here is represented as (Q2-Q1)/ {(Q1+Q2)/2}.
Therefore we have:
(Q2-Q1)/{(Q1+Q2)/2} = Ed * [(P2-P1)/{(P2+P1)/2}]
= -0.75*[(7.75-7.25)/ {(7.75+7.25)/2}]
= -0.75*[0.5/7.5]
= – 0.75*0.0666
= – 0.049
~= -4.9%
Hence from this we know that there had been a fall in employment by -4.9%.
From the data we get P1 = $35, P2 = $25, with Q1= 40, Q2 =50.
The price elasticity of demand mid-point formula is:
Ed= [(Q2 –Q1)/{(Q2+Q1)/2}] / [(P2-P1)/{(P2+P1)/2}]
= [(50-40)/ {(50+40)/2} / [(25-35)/{(25+35)/2}]
= (10/45) / (-10/30)
= (0.222/-0.333)
= -0.666
Therefore: Ed= -0.666.
Since here the demand elasticity is less than 1, the quantity demanded is relatively inelastic with change in price. The value shows that with 10% decrease in price, the quantity demanded would increase by 6%, hence the quantity demanded does not rise too significantly. In this case, the producer may not be able to increase his total revenue by decreasing his price a lot but if he decreases his price a little then his quantity will rise though not significantly, hence increasing his revenue. As we see in the data previously at price $35 the producer’s revenue is 35*40=$1400. After decreasing price his revenue decreases to: $25*50=$1250, because of inelastic demand (Tuck, 2010).
(a) The supply of child care places is elastic as with increase in wages, the supply of child care staff would increase as low earnings are considered as a hurdle for the staff to opt for costs of higher studies.
(b) Higher prices are required to raise the number of childcare places because, low earnings do not let child care workers opt for higher studies which have high costs. Hence, with a change in price, more qualified child care workers would be available as they would pursue for higher certifications with higher earnings implying the elasticity of child care supply.
(c) The use of apprentices, shall attract more child care workers who would work for fixed periods at low wages learning from a skilled person and may help child care workers gain skills till a point but beyond that the constraint of low wages would prevent the workers from attaining higher certifications, hence not solving the problem of the child care shortage and not being able to affect on the supply of qualified child care workers.
References:
Mankiw, G 2007, Economics: principles and applications, Cengage learning, New Delhi
Varian, H, 2010, Intermediate economics, East west press, New Delhi
Samuelson, P& Nordhaus, W 2010, Economics, Tata McGraw Hill, New Delhi
Sen, A 2007, Microeconomics, Oxford, New Delhi
Lipsey, R & Chrystal, A 2011, Economics, Oxford, New Delhi
Investopedia, Price elasticity of Demand, viewed 20 Aug 2016, https://www.investopedia.com/terms/p/priceelasticity.asp
Pettinger, T, 2010, Efficiency vs Equity, viewed 20 Aug 2016, https://www.economicshelp.org/blog/2473/economics/efficiency-vs-equity/
Boundless.com, Absolute advantage versus Comparative advantage, viewed 20 Aug 2016, https://www.boundless.com/economics/textbooks/boundless-economics-textbook/international-trade-31/introduction-to-international-trade-124/absolute-advantage-versus-comparative-advantage-493-12589/
Tuck, J, 2010, The relationship between price elasticity and total revenue, viewed 20Aug 2016, https://smallbusiness.chron.com/relationship-between-price-elasticity-total-revenue-24544.html
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