Economics : Surplus Changes After Assessment Answer

Answer:

Production Possibility Curve tends to capture the fictional representation of all possible patterns of production for any particular combination of two goods that can be manufactured by altering the allocation of resources to the production of the goods. From the underlying concept of PPC, the underlying concepts of scarcity and choice may be derived and explained as demonstrated from the below shown graph (Nicholson & Snyder, 2011).
In the above graph, point a denotes goods scarcity. This is indicated from the fact that point a lies in the PPC exterior. This implies that the current resources available and their utilisation efficiency is not sufficient to suffice production of goods (i.e. X and Y) indicated by the point. Therefore, scarcity is present although it is possible that this may not be present in the future as the PPC curve may enhance to cover the point a also (Mankiw, 2014).

The points b and c adequately reflect on the underlying choice possessed since the available resources could be used in either the manner indicated by b or c thus resulting in differential production of X and Y goods. Choice may be captured by the various points that lie on the PPC as each present an alternative manner for resource usage. Decision needs to be made to choose one amongst these choices which best presents the national interests (Krugman & Wells, 2013).

The economic system choice is dependent on below mentioned factors (Dombusch, Fischer & Startz, 2012).

  • Historical Evolution: The economic system prevalent in the country is driven by the ideals and political philosophy of the prominent leaders involved in independence or modern nation building along with the prevailing circumstances at that time. This is evident from socialism which is essentially a past legacy.

  • Market forces penetration– Mature and markets with deep penetration are required for capitalism to function. The availability of the same is typically limited to only the developed nations and therefore capitalism tends to be more common in developed economies,

  • Responsibility of state – The state based on the underlying development status and national priorities tends to decide which system would be more suitable particularly keeping amount of state intervention in mind.

The differences between the economies of China and Australia are illustrated below (Russet, 2015).

  • In terms of size, China’s economy is very larger in size compared to Australia.

  • The economic system prevalent in both countries is different. While China has a socialist system in place, Australia is an example of capitalist economy.

  • The sectoral distribution to the GDP is different in both nations. China is manufacturing driven while Australia is services driven.

  • The development status of the both economies is different due to per capita income variations. Australia is a developed economy as it has a high per capita income while China with a lower value of per capita income is developing nation.

2. (i) In line with the information given, it is apparent that on account of technological breakthrough, there has been a decrease in the manufacturing cost of the solar powered vehicles. Due to a decrease in the costs, the supply curve would experience a rightward shift captured in the graph below (Pindyck & Rubinfeld, 2001).

The shift in the supply curve would lead to the equilibrium price of these vehicles decreasing coupled with increase in equilibrium quantity.

(ii) Both electric vehicles and solar powered vehicles offer clean alternatives to conventional vehicles and hence would be considered substitutes. As is evident from the above, there has been an increase in equilibrium quantity of solar powered vehicles. Due to increase in quantity consumed for solar vehicles, the electric vehicles demand will be lowered as reflected in the graph shown below (Mankiw, 2012).

As indicated in the graph, there would a reduction is equilibrium quantity and equilibrium price with regards to electric vehicles.

The government has proposed to fix a minimum price for solar powered vehicles at a price lesser than equilibrium price with the intention of spurring demand of such vehicles. However, this plan may backfire by causing a demand supply mismatch. This is quite possible since at a lower price, the manufacturers may not be able to meet their expense or keep their desired profit margins. As a result, there would a decrease in number of suppliers which may decrease the supply and lead to a situation where the government’s purpose is defeated. Thus, an alternative measure to achieve the promotion of solar powered vehicles is to provide subsidies to the producers for under-recoveries due to lower selling price in the market (Krugman & Wells, 2013). The subsidies level should be fixed keeping in mind that the manufacturers should have a decent profit margin

3. Producer surplus tends to capture the gap between the price expectations of the producer for a given product and the price actually obtained. Consumer surplus tends to capture the gap between the maximum price that customers would pay for a given product and the price actually paid (Pindyck & Rubinfeld, 2001). As per the question, the government has levied tax on radios, the impact of which is reflected below.

Due to imposition of tax (T), there would be an increase in the total cost of the radios which would cause a shift to the left in the supply curve as captured above. The demand curve is static and thus the new equilibrium position is reflected by the point E1. At this new equilibrium point, the equilibrium price has witnessed an increase while the equilibrium quantity has decreased (Mankiw, 2012).

It is apparent that the tax burden imposed by the government hurts the buyers and sellers interest. The lowering of buyers interest is apparent from the decrease in consumer surplus as consumers have to pay more for radios and therefore there has been a drop in consumption  (Galectic, 2015).  The exact impact would demand on the underlying demand elasticity of the radio which essentially would determine how the taxation burden would be borne by buyers and sellers. Further, the producer surplus is decreased as producers have to bear a part in the taxation burden and hence per unit sales proceeds which they are able to get would reduce coupled with decrease in sales volume (Krugman & Wells, 2013).

Further, it has also been illustrated in the above graph that the sum total of producer and consumer surplus decrease in not matched by the increase in government revenues. Infact, the increase in government revenues is lesser than the producer and consumer surplus decrease.  The remaining component is the deadweight loss (shaded area) and is indicative of the inefficiencies as a result of taxation (Nicholson & Snyder, 2011).

4. It is known that the price of the ticket has decreased by 10% due to the discount offered by the company.

Percentage change in demand (Using Mid-point Approach) for Group A = 1.55)*2/(1.65+1.55)] * 100 = 6.25%

Percentage change in demand (Using Mid-point Approach) for Group B = [(1.70-1.50)*2/(1.70+1.50)] * 100 = 12.5%

Demand elasticity (Group A) = 6.25/-10 = -0.625

Demand elasticity (Group B) = 12.5/-10 = -1.25

For group A, the absolute elasticity magnitude is less than 1 which points towards inelastic demand from this segment. Hence, due to 10% discount, the revenue would decrease as the % increase in ticket sales does not make up for the % decrease in ticket price.

For group B, the absolute elasticity magnitude is more than 1 which points towards elastic demand from this segment. Hence, due to 10% discount, the revenue would increase as the % increase in ticket sales overcompensates for the % decrease in ticket price (Krugman & Wells, 2013).

(iii) The company should give discount only to group B while no such discount should be extended to group A as is apparent from the above discussion. This would enable the company to maximise the revenue.

(iv) With another cinema being opened in the city, it is apparent that demand elasticity for consumers would be impacted. Since the presence of another cinema would offer more alternatives to potential customers, hence the demand elasticity would be hiked. The exact magnitude of increase would depend on how close the substitute can become to the current company in terms of viewer experience and quality. This would erode the capacity of the original company to charge higher price for tickets especially on peak days and time (Pindyck & Rubinfeld, 2001).

5. The following table captures the completed cost schedule that is required.


Total Product

Total Fixed Cost (TFC)

Total Variable Cost (TVC)

Total Cost (TC)

Marginal Cost (MC)

Average fixed cost

Average variable cost

Average total cost

 

$

   

(AFC)

(AVC)

(ATC)

$

 

$

$

$

$

$

0

50

0

50

-

-

0

-

1

50

20

70

20

50.00

20.00

70.00

2

50

35

85

15

25.00

17.50

42.50

3

50

45

95

10

16.67

15.00

31.67

4

50

50

100

5

12.50

12.50

25.00

5

50

60

110

10

10.00

12.00

22.00

6

50

80

130

20

8.33

13.33

21.67

7

50

115

165

35

7.14

16.43

23.57

8

50

165

215

50

6.25

20.63

26.88

9

50

225

275

60

5.56

25.00

30.56

The requisite condition for profit maximisation is as follows (Mankiw, 2014).

MR (Marginal Revenue) = MC (Marginal Cost)

For the given question, the selling price of the product is fixed at $ 35 and therefore marginal revenue is $ 35. Hence, from the cost schedule, it may be derived that at output of 7 units, the marginal cost is also $ 35. Any bid to increase the production further would lower the total profits.]

The graphical representation of the variables is as demonstrated below.

References

Dombusch, R, Fischer, S & Startz, R 2012.Macroeconomics, 10th eds., McGraw Hill Publications, New York

Galectic, F 2015, ‘Consumer and Producer Surplus Changes after Taxation’, Economy and Business Journal, Vol. 9 No. 1, pp. 322-328

Krugman, P & Wells, G 2013, Microeconomics, 3rd eds.,  Worth Publishers, London

Mankiw, G 2014, Microeconomics, 6th eds., Worth Publishers, London

Nicholson, W & Snyder, C 2011, Fundamentals of Microeconomics, 11th eds., Cengage Learning, New York

Pindyck, R & Rubinfeld, D 2001, Microeconomics, 5th eds., Prentice-Hall Publications, London

Russet, P 2015, Copy of Australia vs China: The similarities and differences of their economies, Prezi Website, Available online from https://prezi.com/nqps6knwa7ic/copy-of-australia-vs-china-the-similarities-and-differences-of-their-economies/ (Accessed on August 16, 2016)

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