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a. Demand Equation:
P = 200 – 0.4Qd
P = 20 + 0.5Qs
In order to find equilibrium point:
200 – 0.4Q=20 + 0.5Q
In order to find the equilibrium price:
P= 200 – 0.4(200)
So, equilibrium price is equivalent to 120 and equilibrium quantity is equivalent to 200 of apricots.
To determine where the demand curve will cut the Y axis, Qd = 0
P = 200 – 0.4Qd
P=200 - 0.4 (0)
To determine where the demand curve will cut the X axis, P = 0
0 = 200 – 0.4Qd
0.4 Qd = 200
To determine where the supply curve will cut the Y axis, Qs= 0
P = 20 + 0.5Qs
P = 20 + 0.5(0)
P = 20
To determine where the supply curve will cut the X axis, P=0
P = 20 + 0.5Qs
0=20 + 0.5Qs
Consumer Surplus: The part above the equilibrium price level and below the demand curve is consumer surplus.
Consumer Surplus: ½ * Qd* ∆P
Consumer Surplus: ½ * 120 * 80
Consumer Surplus: 4800
Producer Surplus: Producer Surplus is below the equilibrium price line and above the supply curve. ½ * 200 * (120-20)
= ½ * 200 * 80
Point price elasticity of Demand
P = 200 – 0.4Qd
0.4Qd = 200- P
Derivation with respect to P
Ed = 120/200 * -1
Ed = 0.6* -1
Ed = -0.6
Price Elasticity of Demand = % change in quantity demanded/%change in price
-0.6=% change in quantity demanded/10
-0.6*10 = % change in quantity demanded
-6% = % change in quantity demanded
Therefore, it can be evaluated through the above computation that the quantity demanded will change by 6%.
ii) Total Revenue will decrease as with the increase in the price by 10% the quantity demanded of apricots will reduce which will eventually reduce the overall total revenue.
ii) Production Possibility Frontier is concave because of the law of marginal opportunity cost. The resources available with the economy is limited and therefore in order to produce more of Clothing the production of Rice will have to be reduced and for increasing the production of Rice the production of Clothing will have to be reduced.
iii) Assumptions underlying Production Possibility Frontier:
Only two goods (here Clothing and Rice) are produced in the economy (here China).
The same resources are required to produce both the goods and the resources can be easily shifted among the production of both the goods.
The supplies of factors are fixed and can be easily transferred between the productions of the two goods.
The production techniques are constant and given in the economy.
The resources available in the economy are technically efficient as well as full employed.
iv) Productive efficiency means when the economy is able to produce right amount of goods with the available resources in the economy. According to the concept of productive efficiency, the production of one good cannot be increased without decreasing the quantity produced of other good. Allocative efficiency states the economy is able to produce a combination of two goods that is most desirable by the society.
With the up gradation in the technology there will be an outward shift in the production possibility frontier. The up gradation in the technology helps the economy is producing more capital and consumption goods with the same level of available resources with the economy. Therefore, the outward shift in the PPF is due to the increased growth in the economy with the adoption of high level of technology in the production processes (Fei & Lin, 2016). The upgraded level of technology helps in reducing the cost of production of rice and increasing the rice yield thereby increasing economic growth of China.
The Expresso market is a monopolistic market structure because there are many sellers and buyers in the market including cafes and restaurants. The sellers in the monopolistic market structure are price takers as the price levels are determined based upon the existing demand level in the market.
b) The reason behind the explosion in the number of coffee chains in Australia is the appreciation received by the local farms of coffee beans in Australia. The appreciation received by locally produced coffee beans lead to the revival of Australian coffee farms and which has lead to Absolute advantage for the Australian economy to produce coffee and increase the supply of coffee in the economy (BeanScene, n.d.). Therefore, the economic model of Absolute Advantage explains the explosion in the number of coffee chains in Australia over the past 10 years.
c) Due to the presence of large suppliers in the market, it will become important for the suppliers to differentiate themselves from the other competitors in the market in order to make economic profit in the long run. Therefore, the firms that will be able to develop competitive advantage will be able to produce economic profits. The organizations that will be able to survive in short run will be able to make profits in the long run (Bertoletti & Etro, 2016).
d) In the short run the coffee chains due to increased competition in the market the average total cost of the product to the seller is greater than the market price which will lead to loss of the seller in the short run. Thus, the inefficient ones will have to leave the market. However, if government decides to give subsidy then the sellers may be able to survive the short run thus making difficult to make economic profit in the long run.
Bertoletti, P., & Etro, F. (2016). Monopolistic competition when income matters. The Economic Journal, 127(603), 1217-1243.
BeanScene. (n.d.). Available at https://www.beanscenemag.com.au/home-grown-the-revival-of-australian-coffee-farms/
Fei, R., & Lin, B. (2016). Energy efficiency and production technology heterogeneity in China's agricultural sector: A meta-frontier approach. Technological Forecasting and Social Change, 109, 25-34.
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