Supply and Demand Questions and Answers

Topics: Supply and demand, Microeconomics, Economics Pages: 5 (854 words) Published: June 1, 2014

During the 1990s, technological advance reduced the cost of computer chips. Explain, with the use supply and demand diagrams, how the following markets are affected in terms of prices and quantities. (a) Computers

As technology advanced a reduction in production costs and more efficient production occurred allowing an increase of production and supply. More businesses seeing the potential opportunity entered the market which in turn increased the supply curve further both resulting in a shift to the right in the supply curve.

(b) Computer software
Computer software is a complementary good to a computer and we see an Inverse relationship with the demand curve as computer prices come down for example computer software prices increase. Thus we see with an increase in quantity supplied and increase in price also occurs.

(c) Typewriters
There is an independent relationship between the computer and typewriters. Typewriters soon become obsolete as computers increase in demand and typewriters decrease in demand with the new changes of technology.

Question 2
After an economics lecture one day, your friend suggests that taxing food would be a good way to raise revenue because the demand for food is quite inelastic. (a) In what sense is taxing food is a ‘good’ way to raise revenue? Food being inelastic meaning people will always have the need to buy food consumables. Governments would benefit greatly by taxing food as it would be a fast way to raise money. Inelastic: Suppliers are unable to react quickly to a change in price. Firms also find it harder to implement change in production within certain time parameters.

(b) In what sense is it not a ‘good’ way to raise revenue? Usually any increase in tax on sellers will typically result in an increase in the market price where both buyer and seller share the tax burden. Further taxes on food would place a considerable burden on low income families this in turn would have various impacts on their ability to both spend and save which in turn could have a negative impact on the economy. Elastic: Suppliers can react to change in price. Firms can also find capacity to increase production with ease they may have sufficient in stock to cater current demands therefore there is no time delayed or change in price required.

Question 3
Most studies of firms’ long run costs have found that average costs decline as firms produce increasingly larger output levels (economies of scale), such as for automobile firms. However, trucking (haulage) firms appear not to experience falling average costs associated with large-scale operations. Why might this be the case? Explain The long run average cost curve shown below shows a typical large firm’s economy of scale in the red where a decrease in cost per unit is illustrated as the output increases. Between Q1 and Q2 the firm runs a constant return to scale. Beyond Q2 the firm experience diseconomies where the firm then begins to grow too large and increase in costs occur. Q1Q2

As the firm gets larger the costs of infrastructure, technology and the problems associated with the business becomes ever more daunting. Large trucking or haulage firms may not appear to be showing a falling average cost due to the firm’s size and total costs. The larger the firm the greater the cost associated with the cost of operation which sounds perfectly logical. However by doubling the scale of production for example by 100%, this could equate to an increase in output of 200%, yes over all costs would increase however the firm is now able to gain a greater discount on the product allowing the firm to actually produce at a lower cost per unit thus seeing economies of scale. “A single firm can supply the entire market demand at a lower cost than two or more similar firms.” Layton A, 2012

Each time a competitor enters the market the cost...


References: 1) Layton. A., Robinson. T., and Tucker. I.B. (2012) Economics for Today. Fourth Asia Pacific Edition, Cengage Learning.
2) 101 Things Everyone Should Know about Economics: A Down and Dirty Guide to Everything from Securities and Derivatives to Interest Rates and Hedge Funds - And What They Mean for You (1-4405-0350-8, 978-1-4405-0350-4), Sander, Peter.
Adams Media Corporation, 2009
3) Riley G, 2012, Revision on Scale Economies and MES, viewed 6th Sep 2012, http://tutor2u.net/blog/index.php/economics/comments/unit-3-micro-revision-on-scale-economies-and-mes
4) Riley G, 2012, AS Markets & Market Systems viewed 6th Sep 2012, http://tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of-supply.html
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