ECF1100 Individual Assignment 1

[Type the document subtitle]

Due 16th August Semester 2, 2010

Question 1
(part a) Opportunity Cost 1 tonne of Food Brad Angelina 1 tonne of Dishes

(part b) Given that Brads opportunity cost when producing 1 tonne of dishes is 1 tonne lower than Angelias, he has the comparative advantage in producing dishes. Alternately, Angelinas opportunity cost when producing 1 tonne of food is a tonne less than Brads so she hold the comparative advantage in producing food. (part c) The following table outlines what each would produce in autarky: Brad 80 20 Angelina 300 50 Total 380 70

Food (tonnes) Dishes (tonnes) (part d)

Minimum terms of trade would therefore be: Brad: Angelina: tonne of dishes for 1 tonne of food 1 tonne of food for 1 tonne of dishes

(part e) Given that the proposed trade between Brad and Angelina under specialisation has the ratio of 1 tonne of food for 2/3 a tonne of dishes, the following is the amount each person receives from trade:

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Brad Receives

Angelina Receives

Under specialisation Brad would produce 100 tonnes of dishes and Angelina would produce 400 tonnes of food, as these are the areas in which has comparative advantage. Therefore the amount of food and dishes each has after trade is as follows:

Food (tonnes) Dishes (tonnes)

Brad 90 (received) 40 (retained)

Angelina 310 (retained) 60 (received)

Total 400 100

Therefore they gain from the trade: Brad Trade 90 40 Angelina Trade 310 60 Total Trade 400 100

Autarky Food (tonnes) Dishes (tonnes) 80 20

Gain 10 20

Autarky 300 50

Gain 10 10

Autarky 380 70

Gain 20 30

Question 2
(part a) According to the law in demand, as price reduces quantity demanded will increase. The increase in sales (by 72126 newspapers) of the times as a result of the price drop (45p to 30p) supports this inverse relationship of demand. However, a closer analysis of the figures indicates that despite the reduction in price by a third, sales experienced only a 19.1% increase. Given it is assumed that the supply function is perfectly elastic, this means that the demand function must be relatively inelastic for the price drop to have resulted in a smaller relative increase in quantity demanded.

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Impact on the Times Price Supply1

Elasticity between A & B ( ( ( ( Supply2 ) ) ) )

45p 35p

A B

Demand 376,836 448,962 Quantity

Calculations (above) state that the elasticity between points A and B (A representing before the price drop and B representing after the price drop) on the graph is 0.000097. Due to the elasticity between points A and B being less than one, this confirms the proposal that the demand function for the Times newspapers is relatively inelastic.

The law of supply states that as price increases, producers willingness to supply increases (a direct relationship between price and quantity). As the price cut by The Times reduced the Guardian, Independent and Daily Telegraph sales, this follows the law of supply because the lowering of the price of a substitute (The Times) causes the demand curve of rival newspapers to shift to the left as some consumers were attracted to the cheaper alternative. In explaining why the Financial Times experienced an increase in sales, its necessary to consider compliment goods.

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(part b) It is possible from the information given to determine which newspapers are compliments and substitutes to each other. Using the percentage change in sales figures to determine the cross price elasticity, it can be assumed that those solutions that are negative are complements whilst those that are positive are substitutes. See table below for working:

Cross-Price Elasticity

Guardian

Daily Telegraph

Independent

Financial Times

The Times Substitutes Substitutes Substitutes Complements

(part c) From the given data it is known that the price drop by the Times resulted in a loss of profits of 3488760p. This could be one possible explanation as to why other newspapers did not follow the Times lead; they predicted that despite the slight fall in daily sales that came from the Times price change, reducing their price would not increase their profits. For example: o If the Guardian wished to regain the 4.39% loss in sales o It could lower its price to 30p from 45p o With the reduced readership at the original price of 45p the newspaper would make 18,076,725p profit o If it did regain the 4.39% of readers, at the lowered price its profits would only be 12,604,620p

The Times on the other hand may not have made their price cut in their interest in profits, which would explain why they continued with the price cut despite a drop in profits. It is possible that the Times wished to increase its readership, and so the price cut was a way to attract new customers Page 5 of 7
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from other newspapers. Another possibility is that the Times wanted to appeal to a different demographic of people, who would be more likely to purchase a newspaper at the lowered price.

Question 3
For the equilibrium price of any good or service to increase, either of the following two shifts could occur: Shift in Supply Curve Price Supply2 Price Supply Shift in Demand Curve

Supply1 E2 E1 Demand Quantity Increase in price Reduction in quantity supplied E1 E2

Demand2

Demand1 Quantity

Increase in price Increase in quantity supplied

Therefore, in relation to the significant increase in the price of lobsters from 1950s to 2005, its possible to explain how the equilibrium price changed by observing factors which could have caused the shifts pictured in the graphs above.

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For the supply curve to shift to the left (as displayed on the graph shift in the supply curve) there are could have been a combination of potential causes: An increase in the difficulty of fishing lobsters possibly due to environmental factors (greater scarcity) lead to a reduction in the willingness to supply Number of suppliers reducing between the 1950s to 2005 resulting in less overall supply relative to original demand Increased costs of inputs such as boating equipment and labour

A movement in the demand curve to the right (as shown on the graph shift in the demand curve), which pushes the equilibrium price higher, could be a result of one or many factors: Changing tastes, that is consumers desire lobster more, could have driven the price up An increase in alternate seafood, which caused demand to shift onto lobsters An overall increase in income levels, so the population purchased greater numbers of lobsters

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