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Running head: PRINCIPLES OF ECONOMICS

Unit Code: ECO504

Unit Title: Principles of Economics

Assessment Title: Assessment Task 3

Type of Assessment:Written

Name of the Student:

Name of the University:

Author’s Note:

PRINCIPLES OF ECONOMICS

Table of ContentsA 1...................................................................................................................................................4

Part 1a)....................................................................................................................................... 4

Part 1b)....................................................................................................................................... 5

Part 1c)....................................................................................................................................... 5

A 2...................................................................................................................................................6

Part 2a)....................................................................................................................................... 6

Part 2b)....................................................................................................................................... 7

Part 2c)....................................................................................................................................... 8

A 3...................................................................................................................................................9

Part 3a)....................................................................................................................................... 9

Part 3b).....................................................................................................................................10

Part 3c)..................................................................................................................................... 11

A 4.................................................................................................................................................11

Part 4a).....................................................................................................................................11

Part 4b).....................................................................................................................................12

A 5.................................................................................................................................................12

Part 5a).....................................................................................................................................12

Part 5b).....................................................................................................................................13

Part 5c)..................................................................................................................................... 14

A 6.................................................................................................................................................14

Part 6a).....................................................................................................................................14

Part 6b).....................................................................................................................................14

Part 6c)..................................................................................................................................... 15

Part 6d).....................................................................................................................................16


A 7.................................................................................................................................................19

References.................................................................................................................................. 21


A 1

Part 1a)Change in quantity supplied is expressed when with change in price leads to increase

or decrease in the supply of a product. It is a movement along a supply curve that is

expressed using different points on the supply curve. Increase in quantity supply (due to

rise in price) is termed as “extension of supply’ and decrease in quantity supplied (due

to fall in price) is termed as “contraction of supply” (Mankiw 2014). It can be shown in

figure 1a (i). Whereas, change in supply is when the entire supply shifts either upwards

or downwards because of changes in factors other than price (Hammock & Mixon 2016).

As per the figure 1a (ii), when the supply curve changes to right, there is increase in

quantity (Q* to Q2) and when the supply curve changes to left, there is decrease in

quantity (Q* to Q1) because of other factors like technology, tastes and preferences, etc.

Extension

Q* Q2Q1

SS

SS”

SS’

P1

P2

P*

SS

Price

Quantitysupplied

Price

Quantitysupplied

ContractionIncreaseDecrease

Figure 1a (i): Change in QuantitySupplied

Figure 1a (ii): Chang in Supply

Q* Q2Q1

P*

Figure 1a) Change in Quantity Supplied and Change in Supply

Source: (Mankiw 2014)


Part 1b)If there is an outbreak of hostilities in Middle East, then the supply would be hindered.

As a result, the supply curve will move towards left in Middle East. As a result, Australia

would not be able to cope with a major oil supply disruption and would ultimately lead to

market failure (Kelly 2018). On the contrary, in Australia, price for petrol will increase to

meet the decreased supply. The same has been depicted through figure 1b (i), this will

even show, once the price has increased, the demand for passenger cars will small

engines will increase but less than the equilibrium demand as the consumption of fuel

would be low as shown in figure 1b (ii)

Q*Q1

P*

P1

Petrol

Price

DD

SS

SS1

Figure 1b (i): Effect on market for petrol

Q*Q1

P*

P1

Passenger carswith smallengines

Price

DD

Figure 1b (ii): Effect on Passenger cars withsmall engines

SS1

SSP2

Q2

Figure 1b) Outbreak of hostilities in Middle East and its effect

Source: (Baumol & Blinder 2015)

Part 1c)As per Carrington (2016), electric cars are assumed to be 35% of new car sales in 2040,

such that every fourth car will be an electric car. With growing demand of electric cars


and assumption, the demand for battery powered bicycles will decrease (will shift to left)

as electric and battery are substitutes such that decease in prices for battery bicycles

will increase the demand for electric cars.

A 2

Part 2a)Unit sales subsidy is a negative tax where seller’s price exceeds the consumer’s price

such that it is in the overall interest of the tax. However, economically it can be termed

as a wedge such the consumer’s pay less and the buyer’s receives more and this is

possible when government bears the expenses (Atkinson & Stiglitz 2015). It can be

given as:

DD

SS

P*

Q*

P (Seller)

P (Buyer)

Price

Quantity

SUBSIDY

Figure 2a: Unit Sales Subsidy

Figure 2a) Unit Sales Subsidy

Source: (Atkinson & Stiglitz 2015)


Part 2b)The subsidies affect the consumer based on the price elasticity of demand depending

how much they have to pay when the demand is elastic or inelastic (Atkinson & Stiglitz

2015). Wheat’s demand is inelastic in nature depicting that no matter how much the

price fall; the consumption of wheat will not have a drastic change in demand (Kaushal

& Muchomb 2015, pp.25-42). This is shown in figure 2b) (i). In comparison, if we

compare to a luxury product like diamond and gold (precious metals); the consumption

will drastically increases even if the prices have not fallen to that level depicted in figure

2b (ii).

DD

SS

P1

Q*

P2

Demand

Price

Subsidy

P*Pricefall

Consumption does notincrease drastically

Wheat

Figure 2b) (i) Inelastic Demand: Wheat



DD

SS

P1

Q*

P2

Demand

Price

Subsidy

P*Pricesdoes notfall a lot

Consumption increasesdrastically

Precious metals

Figure 2b) (ii) Elastic Demand: Precious Metals (Diamond, Gold)


Part 2c)Milk or all brands of milk are inelastic where there are no substitutes. Also, a product

like milk is insensitive to change in price, as a result, consumer will continue to but it

even if the price goes higher/ lower. The results would be that price elasticity of demand

will be greater than price elasticity of subsidy where incidence on producers will be

more than the consumers. The same has been depicted in figure 2c.


DD – Steep demand curve

SS

$3.9

Q*

$3.2

$6.4

Price ofmilk/ gal

Subsidy

$5.3Pricefall

All Brands of Milk

Incidence of subsidyon Producers

Incidence of subsidyon Consumers

Figure 2c) Inelastic Demand: All Brands of Milk


A 3

Part 3a)Perfect competition is not based on the theoretical base of abnormal profits. The

abnormal profits are not allowed based on the assumptions on the functioning of

perfectly competitive markets. The abnormal profits in industrial organization theory

were given by Bain highlighting the structural characteristic which makes it distinct

(Muiño & Núñez‐Nicke 2016, pp.298-328). Also, as devised specific firm-internal

characteristics are the considered to be main determinants for achieving abnormal

profits in perfectly competitive markets’. Moreover, if a firm is endowed with rare and

specific resources like in “resource based view” can result to be more competitive and

to generate profits further. Other determinants “knowledge based view or market based

view” can be considered other factors. However, these profits are solely on the


dynamics of long run equilibrium value of the abnormal profits (Hirsch 2013, pp.741-

759).

Part 3b)Average total costs are the total cost by number of units produced.

ATC = Total Cost/ Output but

ATC = AVC (Average Variable Cost) + AFC (Average Fixed Cost)

The interaction of AVC and AFC make up to ATC; when the production increases, AFC

goes on falling. Also, in the initial stages of production AVC even falls (Pindyck &

Rubinfeld 2015). This can be shown by point A in the figure 3b.

ATC

AFC

Q*

AVC

Cost

Output

“A

Figure 3b) Average Total Cost


The AFC is at its minimum a point A because the firm is making full use of its production

capacity. This depicts that the “law of variable proportions” is applied such that when

fixed and variable factors are combined; the fixed factor is used more efficiently which


leads to fall in ATC in short run (Jacoby & Brooman 2017, pp. 65-95). The diagram

above depicts that the fixed factors are extensively used.

Part 3c)Qualifies accountants are the ones who handle finances of a given product with

minimizing the costs and maximizing the profits. In short, run, when we analyse that

whether the accountants need to wash their car or not. They should evaluate that

initially; there will be fixed costs like maintenance, insurance and others (Posner 2014).

The variable costs would be labour and materials required during the car wash.

However, when ATC and AVC are at their low, the costs would be high, but it would be

higher if they go to service centre to get their car washed. As a result, initially, the

quality accountants should wash their cars on their own.

A 4

Part 4a)The price elasticity of demand for alcohol and tobacco in Australia is either inelastic or

elastic. Although, there have been a continuous debate whether these are substitutes or

are complements to each other but as per Subbarman (2017, pp.1399-1414), alcohol

and tobacco are both substitutes and complements in Australia. The results from

Australian National Drug Strategy shows that these two are not related rather are

substitutes because both and in NDSH are illicit drugs, if one’s price increases, so is the

demand of other increases but not equivalent to the first one (Substitutes for price). On

the contrary, if one’s price increases, the demand of other decreases (Complements for

usage). On the other hand, Wen, Hockenberry & Cummings (2014) had to say that

alcohol and tobacco are weak complements and Kelly & Rasaul (2014, pp.89-114)

mentioned it to be strong substitutes. However, demand for alcohol and tobacco has

increasingly become inelastic in the 21st century but the country like Australia has this

as an unidentified factor. The higher levels of per capita consumption relates to inelastic

demand which have the “own-price elasticity” of demand (Wong, Selvanathan &

Selvanathan 2017, pp.799-823).


Part 4b)Level of competition differs with each market. When analyzed from the perspective of

real markets then agriculture market faces a perfectly horizontal demand curves for

homogeneous proud in the industry with free entry and exit of firms. This market can be

termed as perfectly competitive market (Baumol & Blinder 2015). Nevertheless, other

markets are even highly competitive but they face high inelastic demand curves and

relatively not that easy to enter and exit the market. Moreover, in case of monopoly or

oligopoly, it implicitly or explicitly gets together in the setting prices and this does not

rule out competitive behavior (Pindyck & Rubinfeld 2015). To depict each market’s

competitive nature, figure 4b) is shown below from perfect competition to pure

monopoly.

Figure 4b) Competitive behaviours in each market

Source: (Pindyck & Rubinfeld 2015)

A 5

Part 5a)Total Revenue is the sum of all sales and marginal revenue is the addition to the total

revenue by making changes one unit per change in the output. Algebraically, MR and

TR can be given as:

TR = Price X Quantity; MR = Δ��Δ�

MR for a ‘n’ unitsMRn = TRn – TRn-1


As per the figure given in figure 5a), TR and MR relationship is described. In figure 5a)A;

When TR rises to a point K (sales takes place at the give price and quantity)from 0

(where nothing is sold), it is maximum and further any selling of quantity would lead to

fall in total revenue (Baumol & Blinder 2015). Secondly, in figure 5a)B; when the sales

tends to diminish with each additional quantity, MR starts falling, but when TR becomes

maximum, MR is zero that means no additional unit can further direct to rise in revenue.

Later, as TR starts falling, MR starts becoming negative (Mankiw 2014).

Figure 5a) TR and MR curve

Source: (Pindyck & Rubinfeld 2015)

Mathematically, it can be derived as:

TR = p*q (taking derivative on both sides)

d��d�

= p * q dpdq= MR (MR is slope of TR)

Part 5b)MR curve is the change in amount for each and every additional unit to the total

revenue. The MR curve slopes downwards because law of diminishing marginal returns

applies (Pindyck & Rubinfeld 2015). This further state that as the quantity increases, the

revenue derived for every additional unit will fall for the monopolist output.


Part 5c)Marginal revenue curve is horizontal in the perfectly competitive market as MR is the

demand curve and coincides with Average Revenue (Mankiw 2014). This is because a

perfectly competitive market is price taker and is parallel to x-axis for any amount of

quantity.

A 6

Part 6a)Successful application of artificial intelligence (AI) will help autonomous cars to gain

momentum in the industry of mainstream vehicles. Artificial Intelligence can bring long

standing change in several aspects of manufacturing process in automobile industry.

However, in order to implement such changes manufacturers first need to understand

the underlying values and focuses on developing their analytical knowledge (Kaplan

2016). Successful implementation of AI might require some supplementary equipment.

Hence, in the short run there will be not much effect on autonomous car supply (Dong et

al. 2015, pp. 2301-2346). As adaption of new technology is subject to sufficient time the

short run supply remains almost same.

Part 6b)The advent of AI technology encourages people to demand more autonomous cars.

The artificial intelligence enables manufacturers to some additional features to the

existing model of autonomous cars. The new technology might enhance greater security

to the existing autonomous car models (Dong et al. 2015, pp. 2301-2346). The new

features attract greater attention from the buyers. All these factors together contribute to

an increase in demand for autonomous cars in the short run.


Figure 6b) Effect of AI on short run demand

Source: (Korinek & Stiglitz 2017)

Part 6c)Price in the market is determined from the interplay of supply and demand. In the short

run, the demand for autonomous cars increases as the added features attract more

people to purchase autonomous cars. The supply in however cannot be altered as

technological transformation needed sufficient time (Niewiadomski & Anderson 2017, pp.

29-49). The increased demand in combination with limited supply results in an increase

in price. The following figure depicts the impact on price of autonomous cars in the short

run.


Figure 6c) Effect of AI on short run price

Source: (Kaplan 2016)

Part 6d)The situation however changes in the long run. In the long run the manufacturing

process can completely adapt the new technology. This will result in an increase in

supply of autonomous cars. There are two opposing forces acting of price. The

increased demand pushes price up while increased supply creates a downward

pressure on price. The ultimate effect on price depends on magnitude of the acting

forces. Price moves in direction of the dominant force (Korinek & Stiglitz 2017).

Accordingly, there are three possible cases

Case I


Figure 6d) (i) Change in supply exceed change in demand


Case II


Figure 6d) (ii) Change in demand exceeds that of supply


Case III


Figure 6d) (iii) Change in demand is same as the change in supply


A 7The four Australian Banks that account for being dominant in the banking sector are

Westpac, Commonwealth, NAB and ANZ which is strength for the Australian economy.

Also, the banks have not only reduced their dependence of wholesale funding but have

also attracting domestic deposits (Weernink, 2016). According to Jericho (2018), they

hold 75-80% of the market in housing and home loans. The productivity Commission

discusses that after the global financial crisis accounted for financial stability which was

meant to reduce competition but there was no slip in the net interest margins for these

four banks further stating that the crisis did not affect these banks. Also, with growing

competition, there hold in the market is increasing and has been acknowledging the

Australian deposits, as a result, the cash rate and the interest rate is whooping high for

the home and housing loans by these banks.


The banks growing hold could be used for reduce competition but in return it is making

banks more profitable due to expense of the taxpayer. The strength of these banks is

never ending as based o market capitalisation, it accounts within 25 top globally safe

banks and the banks future growth and innovation will bring new changes in financial

services that will be consumed, delivered as well as structured for financial stability

(Fintech.treasury.gov.au, 2018).


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Press.

Baumol, W.J. & Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage

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Carrington, D. 2018. Electric cars 'will be cheaper than conventional vehicles by 2022'.

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than-conventional-vehicles-by-2022 [Accessed 28 Apr. 2018].

Dong, J.F., Sabastian, S.E., Lim, T.M. & Li, Y.P., 2015. Autonomous in-door vehicles.

In Handbook of Manufacturing Engineering and Technology (pp. 2301-2346). Springer

London.

Fintech.treasury.gov.au. 2018. The strength of Australia’s financial sector. [online]

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Hirsch, S. 2013. Abnormal profits and profit persistence: evidence from the European

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