Economics; question and answer


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Question 1

War unrest in Middle East has negatively impacted on the price and quantity of oil in the market. The expectation of war from Syria and Iraq to spread to Middle East countries cause fear of possible shortages of supply as people may possibly do without oil. As a result people will buy more to store in preparation for future shortages. As the demand increases, price of oil goes up as people anticipate war unrest in the near future. When eventually the war sets in oil production is disrupted but people do not demand more since they had enough to cushion the scarcity (Kemp, 2013). In the graph illustration below, assuming the market was initially at the equilibrium. Since scarcity is expected in future people will by more (high demand) to spare for future. As the demand increase from 150 units to 350 units, the price also increases accordingly from $0.25 to $ 0.35.

Graphical illustration


Question 2

Car and petro are complimentary good that are consumed together. Taxation on one of the complimentary products greatly influences the price of the other good. The increase in price of one good causes a corresponding decrease in the price of the other good and vice versa. For instance, taxing petrol increase its price, leading to high demand for high fuel efficient cars. Increase in demand for high fuel efficient cars results to increased price and vice versa. On the other hand increase in price for petrol leads to decrease in demand for low fuel efficient cars thus leading to their low price (Dwivedi, 2012). Many thus will buy high fuel efficient cars.

Graphical illustration.

Question 3

The fact that suppliers cannot sell live chicken directly to consumers coupled with the fear of mass death due to anticipated chicken flu results to high supply in the market. When supply increases beyond demand the price falls down. In addition since the health official are the only buyers a monopolistic competition comes into play since the price for chicken is not control by the market forces of demand and supply (Taylor,  &  Weerapana, 2012). The equilibrium the will shift to the right.


Graphical illustration


Question 4

Price elasticity of demand is the measure of responsive of the quantity demanded of a product to price change with other factors held ( Dwivedi, 2012).

Price Elasticity of Demand (PEoD) = percentage change in quantity demanded (%ΔQ) ÷                                                                                  percentage change in price (%ΔP)

%ΔQ = 35 -50 / 50 ×100

= -30%

%ΔP = 8 -6 / 6 ×100

= 33.33%

Therefore, PEoD = -30 %/ 33.33%

= -0.900

As economists we are not interested with the negative sign of our price elasticity of demand and therefore we take the absolute value. Therefore, the price elasticity of demand when price increases from $6 to $ 8 is 0.9.


For the above case the demand for the good is price inelastic. This means that the demand for the product does not respond highly ton price changes. As evident in the computation, an increase of price by 33.3 % of the price results to a corresponding decrease of quantity demanded by 30%. The demand thus is not very sensitive to price changes.

Question 5(a)

Externality is an effect or a cost of the consumer behavior that may not be borne by the consumer but by the society. This mean s that the effects are caused by the consumer but the society bears the consequences.

Tobacco smoking is among the activities that cause externalities. For instance narcotic in tobacco is believed to cause lung cancer to smokers. However the external cost of providing medical care to smokers is borne by non-smokers, by smokers and the government. Additionally environmental pollution due to smoking is borne by the family members of the smoker’s friends and even non-smokers strangers. Moreover, smoking has environmental externalities that involve deforestation to create room for tobacco growing.  Agrochemical used in tobacco production also adds to environmental pollution and degradation. Cigarette wastes are common in all cities, sidewalks and around homes. Although majority of these wastes are biodegradable, the filter and plastic wrappers and remain in the environment for long and the consequences of such pollution are felt by the larger society.

Question 5(b)

The Australian government in its attempt to control and minimize the external costs resulting from tobacco imposes high tax on tobacco. High taxation on tobacco increases the cost and as a result the demand for tobacco decreases. The tax imposed is transferred by producers to the consumers (smokers). When this happens, the demand curve will shift from right to left as indicated in the graph.

Question 6

When entry barriers are eliminated in the market huge number of firms enters the industry resulting to excessive supply of commodities. In a market where entry barriers are limited the price of commodities is determined by the market forces since no firm has control over the market. Excessive supply that is created results to low prices of goods and services offered. In response the price the price goes down due to competition from other firm. As a result, the profit that firms were making initially decreases due.

Graphical illustration

Question 7

Oligopolistic market structures is a type of market where by small number of larger firms control the market jointly. The firms trade in almost similar goods.

Oligopolistic firms do not engage in price competetion (Vives, 2001). Basing our argument on the game theory; where the actions one firm depend on those of other firms, it is evident that when for instance one firm lowers its price compared to other firms, customers will be attracted by the lower prices resulting to other firms making economical loss in their operation. In response to this the other will lower their price slighted below the initial firm eventually attracting the customers. The other firms in the market will make loss and eventually respond by making their prices much lower compared to other firms. This process continues until the firms sell at economically a low price that is illustrated by kinked curves (Vives, 2001).There to remain competitive and make profit do not engage in price competition.


Alternatives to price completion

Oligopolistic firms compete by using alternative modes such as advertisement, product differentiation and barrier to entry in the market. Oligopolistic firms undertake a vigorous advertisement of their products both in national and international levels. Advertisement is made to make potential customers aware of the existence of the product in the market and the good qualities associated with such good and services (Taylor & Weerapana, 2012). Advertisement is carried out through mass media and product promotion.

In addition oligopolistic firms constantly differentiate their products in terms of quality and always struggle to come up with new products design that outshine those of competitors. In the recent era, product differentiation has been enhanced by ever-growing technology and innovation. Since oligopolistic firms compete in almost similar goods and services coming up with new products with good qualities gives a firm advantage over its market rivals. For instance, phones manufacturing firms have constantly developed phone with new applications to remain competitive.

Furthermore, the firms create market entry barriers to new firms, a strategy that ensures that the existing share of market. The common market barriers include the patent rights, important government franchises and the existing economies of scale. These are the barriers that ensure the market is not flooded by many firms, which in the end may reduce the existing firms’ share of the market control.


Dwivedi, D. N. (2012). Microeconomics. New Delhi, India: Pearson Education/Dorling             Kindersley.

Kemp, G. (2013). War with Iran: Political, military, and economic consequences. Lanham,         Maryland: Rowman & Littlefield Publishers

Taylor, J. B., & Weerapana, A. (2012). Principles of microeconomics. Mason, OH: South-          Western Cengage Learning

Vives, X. (2001). Oligopoly pricing: Old ideas and new tools. Cambridge, Mass. [u.a.: MIT       Press

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