Microeconomics Principles. Problems - and Policies

Question: Discuss about the Microeconomics for Principles. Problems, and Policies. Answer: Introduction: The market force in a purely competitive market determines Price and quantity. In a competitive market a seller is price taker. Market supply is the aggregate output produced by all the firms (Baumol and Blinder 2015). As per law of demand, quantity demanded of normal good increases when price increases, ceteris paribus. Here, the assumption is other things such as income of the consumer, price of the other related goods and preference of the consumers remain the same. It has been assumed that the beef market is perfectly competitive. This assumption indicates that there is large number of sellers of beef and consumers have perfect information regarding product and quality (Parkin and Bade n.d). As per case study, multiple substitutes of beef exist in the market. Initial equilibrium is achieved in the market at the point E. S1 and D are initial demand and the supply curves in the beef market. At this point, total market demand for beef and total supply meets each other to clear the market. One of the main reasons for the rising price of beef in the market is decrease in supply of beef. Production of beef has decreased in West Australia as the number of cattle going to the local abattoirs has decreased. Moreover, number of processed claves has also decreased. Therefore, quantity supply of red meat has decreased. As the supply of cattle has reduced, supply of beef has reduced in the market. The market supply curve of beef has shifted to the left. At each price supply of beef has reduced compared to initial level. Change in price and supply of substitute goods have been ignored in this analysis as ceteris paribus assumption is held. Movement of price is along the demand curve. At P1 prices, demand is more than supply of supply of beef and hence, excess demand is created in the market. Firms are unable to supply beef by the amount of excess demand due to low production. Therefore, prices start to increase to clear the market assuming ceteris paribus. As price starts to rise above P1, some consumers, who do not want to buy same quantity at a higher price, are excluded from the market. Consequently quantity demand starts to decreases. The gap between demand and supply starts to decrease to absorb excess demand from the market. Price rises until the new equilibrium is reached at the point where new supply curve cuts the demand curve in the market. It has assumed that market demand has not changed. E2 is the new equilibrium, where new beef price is restored at P2 and the quantity demanded reduced to Q2. Elasticity of demand is determined by the change in the quantity demanded in response to the price of the product. Elasticity may be price elastic, inelastic and unitary elastic. Demand is elastic when the quantity demanded changes more than proportionately compared to change in price of the product, ceteris paribus. Thimmapuram and Kim (2013) mentioned that price elasticity of demand is negative as per law of demand. Law of demand states a negative relationship between price and quantity and the hence, the price elasticity of demand is negative. Weyl and Fabinger (2013) stated that price elasticity of demand is of two types such as own price elasticity and cross price elasticity. Own price elasticity reflects the change of quantity demanded due to change in own price of the concerned product. On the other hand, cross price elasticity refers to the change in quantity demanded due to change in price of a related good such as either substitute or complementary. Price elasticity of demand for beef is price elastic as it abides by the law of demand. One reason for elastic demand is availability of alternative in the market at a lower price. As the price of the beef increases by a small unit, quantity demanded of beef in west Australia increases more than proportionately. Same instance happens when price of beef falls. ep 1. When, price of beef rises, consumer surplus reduces. Ability of the consumer to purchase same quantity at a given price decreases. Therefore, consumer expenditure on beef decreases. When price increases other things remaining same, purchasing price of the consumer falls. The people with low income reduce consumption of beef and find other alternatives in the market. As the price elasticity of beef is greater than one, hence, small in price has greater impact on consumer expenditure (McConnell, Brue and Flynn 2014). Furthermore, as there is other alternative meet such as Spaghetti bolognaise and T-bone steaks, chicken in the market with falling price, consumers can easily move for those products. Hence, from the above discussion in can be inferred that consumer expenditure on beef market is reduced. The markets that are related to the beef market are chicken, Spaghetti bolognaise and T-bone steaks in West Australia. These are the substitute product of beef. As cited by Hall and Lieberman (2012), when price of good rises, demand for substitute good rises as demand for the concerned product falls. When the effect of price change on substitute goods are concerned, it is assumed that other things such as price for the product, income of the consumers and their preferences remain the same (Rios, McConnell and Brue 2013). Demand curve shifts to the left or right as the when price of substitute good changes. The following figure shows the effect of price change of beef on the market of other types of meet in West Australia. As price of beef increases, demand for other type of meet with low price increases. Hence, demand increases in the related market. However, in short run, there is no increase in supply. Therefore, excess demand is created at price P2. Price of other types of meet rises in the market in order to manage demand. Consumer surplus in this related market is reduced as well. As a consequence, price rises until the new demand curve cuts the existing supply curve. The new equilibrium price is P2, which is greater than previous one and the equilibrium quantity is Q2, which is greater than previous. Quantity sold in the market rises as demand has risen. References Baumol, W.J. and Blinder, A.S., 2015.Microeconomics: Principles and policy. Cengage Learning. Hall, R.E. and Lieberman, M., 2012.Microeconomics: Principles and applications. Cengage Learning. McConnell, C.R., Brue, S.L. and Flynn, S.M., 2014. Microeconomics: Principles.Problems, and Policies,16. Parkin, M., and Bade, R., (n.d) Microeconomics: Australia in the Global environment. First Edition. Rios, M.C., McConnell, C.R. and Brue, S.L., 2013.Economics: Principles, problems, and policies. McGraw-Hill. Thimmapuram, P.R. and Kim, J., 2013. Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model.IEEE Transactions on Smart Grid,4(1), pp.390-397. Weyl, E.G. and Fabinger, M., 2013. Pass-through as an economic tool: Principles of incidence under imperfect competition.Journal of Political Economy,121(3), pp.528-583.