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BEO1105 Economic Principles

QUESTION 1

a. Explain the concept of opportunity cost and reflect an occasion in recent weeks where the concept of opportunity cost applied to you. 2 Marks

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 1.5* 2 = 3 Marks

QUESTION 2

Grannie Mae woke up feeling very excited because her favourite Granny Smith apples have decreased in price due to a very good harvest. Due to her limited food budget she usually bought 1 kilo of apples per week. This time she is going to go to her favourite fruit store and buy three kilos at the lower price. On her way back home she passed a shop selling the latest walking frame and they had the one which all her friends are using. Granny Mae, who was thinking of buying a regular walking stick, decided instead to buy the walking frame. When purchasing the frame, the store attendant told her that the frames are very popular and they have sold quite a few of them this month. Two weeks passed and granny Mae was very happy with the walking frame and is now thinking of going to visit her sister in Queensland. She rang her sister and told her that she will visit her next month because the government is increasing her pension.

a. Identify the concept of the law of demand, from the paragraph in the article. Use graph(s) to support your answer. 2 Marks

b. Identify the concept of a change in demand, from the paragraph in the article that relates to a change in preference. Use graph(s) to support your answer. 2 Marks

c. Identify the concept of a normal or inferior good, from the paragraph in the article. 1 Marks

QUESTION 3

The latest decline in apartment prices in the capital cities of Melbourne and Sydney are due to several factors. One main factor driving apartment prices down in Melbourne is the increase in new apartments into the market is much greater than the increase in the demand for new apartments. Explain, with demand and supply diagrams, the impact on price and quantity for new apartments. 2 Marks

QUESTION 4

Ceteris paribus, at the same time when the demand for yoga service has increased the government has also introduced strict regulations that has resulted in a fall in the number of yoga service providers. Using demand and supply graphs illustrate and explain the impact on the equilibrium price and quantity in the market for yoga service? (HINT: There is more than one possible outcome). 4 Marks

QUESTION 5

a. If you owned a business, how will you apply your understanding of price elasticity of demand in your pricing policy? Use a numerical example in your answer. 2 Marks

b. The Western Australian government is thinking of setting a minimum price on alcohol in order to minimise the risk of alcohol related illness. Graphically represent and explain the possible impact of the government decision on the market for alcohol. 3 marks

QUESTION 6

Assume, in an industry where there are no barriers to entry and firms are making an economic loss in the short run.

a. What options are available to firms in the short run to minimise their losses? 2 Marks

b. Using demand and supply analysis together with the cost curves, explain why firms’ will only make normal profit in the long run?

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