BEO1105 Economic Principles

BEO1105 Economic Principles

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BEO1105 Economic Principles

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BEO1105 Economic Principles

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Course Code: BEO1105
University: Victoria University

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Country: Australia

Questions:
a. Explain the concept of opportunity cost and reflect an occasion in recent weeks where the concept of opportunity cost applied to you.
 
b. Explain, with the use of demand and supply diagrams, the effect of the following events on the market for solar panels:i. The price of solar panels has fallen to below the market equilibrium price.ii. The price of electricity for an average household has increased by 50 percent

Answer:
The opportunity cost is an economic concept representing the cost of choosing the one alternative over another, thereby sacrificing the benefits which could have been achieved by availing the next best alternative (Png 2013). In this context, in the last week I had to choose between a monthly subscription of my favourite magazines and a fancy dine-out at a fine-diner. I chose to buy the monthly subscription of the magazines, for which I had to let go off the pleasure of having a fancy dinner.  
Due to the decrease in the level of price, demand increases and the supply falls, thereby creating an excess demand in the market for solar panels (Frank and Cartwright 2013).  
With the increase in the price of electricity, the demand for solar panels will increase as the same is a substitute of the former. Supply remaining the same, both the quantity and the price both increase in the solar panel market (Hall and Lieberman 2012).  
The law of demand can be seen to be applicable in the case of demand for apple by Grannie Mae. A good harvest of apple increased the supply of apple, which in turn decreased the price of the same, thereby increasing the demand for apple 
The law of demand states that with fall in price of a commodity the demand for the same increases. This can be seen to be happening in this case, as due to a fall in the price of apples due to a good harvest, Grannie Mae buys more of apples (Rios, McConnell and Brue 2013). 
In this situation, an instance of a change in demand due to a change in preference can be seen to be in the case of the demand for walking frame by Grannie Mae. Grannie Mae, initially wanted to buy a walking stick but changed her preference to buy the latest walking frame, which all her friends use.  
In economics, the normal goods are those whose demand increase with the increase in the income. On the other hand, inferior goods are those whose demand decrease with the increase in income of an individual (Rios, McConnell and Brue 2013). As can be seen from the concerned paragraph, Grannie Mae’s demand for visiting her sister in Queensland is a normal good as she is going to do so when her pension will increase in the next month. 
In Melbourne and Sydney both the demand and supply of new apartments have been increasing. However, magnitude of supply increase is higher than the magnitude of demand increase for new apartments 
As the above figure shows, with the supply increasing more than the increase in demand, in spite of the increase in the number of housing demanded, the price can be seen to be falling in Melbourne and Sydney (Rader 2014). 
With the demand for yoga service increasing and the supply of service providers decreasing, there can be three possible outcomes: 
When the demand increases more than proportionately to the decrease in the supply of the yoga service providers, the price as well as the volume of service availed both increases.   
When the demand increase is less than that of the supply decrease, then the price increases and the volume of service availed falls.
When the demand increase is proportionate to the fall in supply, then the hike in price but the volume of service availed remains the same.  
My pricing policy would have been based on the extent of price elasticity of demand among the consumers for the product which I sell. If the demand had been highly elastic, then I would have increased the price of my product more (say from $5 to $10 per unit) to earn more revenue, as a high price increases would not have decreased the demand for the product substantially (Varian 2014). However, if the demand for my product would have been highly price elastic, then I would have decreased my price a little (say from $5 to $4 per unit), as this would have increased the demand for my product substantially, thereby helping me to earn more revenue. 
If the Western Australian government sets a minimum price of alcohol, then the same will only be effective if the price is set above the equilibrium level:  
The minimum price above the equilibrium level will decrease the demand and create an excess supply in the alcohol market (Cowell 2018). However, if the minimum price is below the equilibrium then the effect will be opposite: 
In this case the demand will increase, an excess demand will be created and the quantity of alcohol consumed will also increase. 
Entry and exit are free in competitive markets like that of perfectly competitive markets. In the short run, if a firm experiences economic loss, then the situation is as follows: 
To decrease the short run loss, the firm can decrease its production or can increase their price level to such a point where the minimum point of the average cost curve touches the price level.  
In the short run, if there occurs economic loss, then firms will exit the market, which in turn will decrease the supply, increasing the price, thereby bringing the equilibrium to a situation of normal profit. Again, when there is super normal profit in the short run, more firms will enter, increasing the supply and decreasing the price, thereby again bringing the market to a situation of normal profit in the long run (Coase 2012). Thus, in the long run, the firms operating in the competitive structure of the market, cannot earn more than normal profit. 
References 
Coase, R.H., 2012. The firm, the market, and the law. University of Chicago press.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Frank, R. and Cartwright, E., 2013. Microeconomics and behaviour. McGraw Hill.
Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.
Png, I., 2013. Managerial economics. Routledge.
Rader, T., 2014. Theory of microeconomics. Academic Press.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

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