ECON6000 Economic Principles and Decision Making Report Sample

ECON6000 Economic Principles and Decision Making

Assessment Task

Your topic will be an ongoing issue in the Australian economy. The topic will be given to you by the end of Week 2 at the latest. You are required to identify, discuss and analyse the core microeconomic contents and write a report covering all the relevant concepts discussed in class. You will only focus on microeconomic environment to address the issue.

The maximum length of your report is 2500 words. Your report should have sound academic references (minimum 6 references); your references cannot be from blogs. The purpose of this assignment is to test:

• your understanding of the basic and core Microeconomic concepts besides,
• your ability to analyse and apply the core concepts to the current issues affecting the  Australian economy from a Microeconomic perspective
• your ability to use relevant theories and diagrams to support your answer

The assessment task should include the following key elements:

- You are required to analyse an ongoing contemporary economic issue usingthe microeconomic concepts covered in class. You will need to support your explanation using appropriate diagrams to display your clear understanding.

Please refer to the Instructions for details on how to complete this task.

Solution

Introduction 

The present assessment aims to demonstrate basic concepts of demand in microeconomics and apply them by considering information gathered for seven different products from the nearest supermarket. As per the MBA Assignment Expert, As per the microeconomic definition, demand depicts a consumer’s desire for purchasing goods and services and willingness to pay a specific price for them (Stošić & Rabrenović, 2015). Usually, demand for a product or service declines with the increase in price. This fact is captured as the law of demand claiming a negative relationship between quantity demanded and price. The principle says that consumer demand for a product or service increases with the decline in price and declines with the increase in price (Microeconomic theory; basic principles and extensions, 10th ed., 2007). This assessment will proceed by choosing seven products belonging to different categories and analysing their demand. Furthermore, it will categorise them under the categories of necessities, luxuries, or Giffen goods and assess their elasticities. Moreover, it will use the elasticity of demand to see the impact of the price change on revenues for each product along with the identification of beneficiaries. Lastly, it will use the Cross-price elasticity formula for the identification of the chosen goods as a complement or substitute with detailed calculations. 

Demand Analysis of 7 Products 

For accomplishing this report 7 products have been chosen including potato, tea, rice, sugar, red wine, trendy t-shirt, and coffee and the data on their quantity demanded and prices are taken from the nearest supermarket in Australia. The prices of these products may differ based on the cost differences of different supermarkets in the country. The demand schedule for each product can be found in the appendix section of this report.  

High-demand products are those which are desired by a large number of consumers and it merely realized or measured by the sales of the products. Demand for a product is usually dependent on various factors and not just the number of people actively searching for it. Moreover, it depends on the willingness to pay as well as the availability of the product (Editors of Salem Press., 2014). 

The demand for rice and potato remains usually high all time as they belong to the staple food of Australians and also, they constitute the necessities for them. It is found that these products generally remain price insensitive because demand for necessities generally does not change with the changes in price (Stošić & Rabrenović, 2015). The effect of an increase in population is high on these products meaning that a high population triggers high demand for these items. 

The demand for red wine and trendy t-shirts remains usually low because they are not necessities but luxuries. These products are usually highly price sensitive as price changes abruptly change their demand. 

The demand for tea, sugar, and coffee remains roughly stable and constant as they are not necessities. Further, they are not highly expensive. Thus, they can be categorised under normal goods, which respond to changes in prices as per the law of demand. Their demand usually depends on consumer habits and brand preferences (Solomon & Golo Nataša. 2015). 

For example, likely changes in demand for Coffee are demonstrated below in which the effects of a rise in the population, a rise in income, or, an improvement of quality are shown. 

Figure 1: Increase in demand 

The above diagram demonstrates an increase in demand due to a rise in population. When the population of a region rises, then they require more of the product i.e., coffee in the present context. At a particular price demand for coffee will increase. Similarly, demand will move rightward with the increase in income, as income provides the capability to purchase more of a good. It is also true in the case of improvement in coffee quality (Meyer, 2016). 
On the other hand, the factors that hurt the demand for a normal commodity like sugar, tea, or coffee include a decline in the population, economic recession (low income), and degradation in quality.  

Categorisation of 7 products into necessities, luxuries, or Giffen’s goods and an indication of their elasticities 

1. Among the selected goods, the good that fits the category of Giffen goods is Potato. Giffen goods are those goods that have a highly negative income effect meaning that with a decline in income, their consumption rises (Choudhary, 2021). It is also defined as a non-luxury and low-income product, the demand for which rises with the increase in price. It violates the law of demand stating an inverse relationship between price and quantity demanded. It has an upward-sloping demand curve as illustrated in the figure below. 

Figure 2: Demand curve for Potato (or Giffen Good)

To check the elasticity of the above demand curve, the formula for price elasticity is needed. The formula for price elasticity is as follows. 

By putting changes in values of price and quantity of potato in the above formula, elasticity can be found. 

E potato = |{(3 – 2)/2} ÷ {(1.35 – 1.3)/1.3}| = 13 > 1

The demand curve for potatoes is highly elastic. 

2. Among the chosen goods, rice falls in the category of necessities. By looking at the demand curve, its type cannot be easily determined. Therefore, its elasticity is considered. 

Figure 3: Demand for rice 

Necessity goods are usually inelastic. Now putting the values of price change and quantity change in the above-mentioned formula for rice. 

E rice = |{(4.2 – 4.4)/4.4} ÷ {(2.4 – 2.1)/2.1}| = 0.31 < 1

The demand curve for rice is inelastic because its value is less than 1. 

3. Among the selected goods tea is not a luxury product because its price remains affordable to customers. It is a good example of normal good. The demand curve of tea is provided as follows. 

Figure 4: Demand for tea

The demand for tea is usually downward falling. The elasticity can be found by putting price and quantity changes in the above-mentioned formula. 
E tea = |{(250 – 200)/200} ÷ {(3.1 – 3.2)/3.2}| = 8 > 1

The demand curve for tea is also found as elastic due to its value greater than 1. 

4. Sugar is among the normal goods. The demand curve for sugar is illustrated as follows with the computation of its elasticity. 

Figure 5: Demand for sugar 

E sugar = |{(4 – 3)/3} ÷ {(1.55 – 1.7)/1.7}| = 3.77> 1

The demand curve for sugar is elastic due to its value greater than 1. However, in relative terms, it is more inelastic than tea. 

5. Red wine is categorised under luxury items. Such items are usually defined in terms of the income effect. They are such goods, the demand for which increases more than the proportionality of the rise in income (Webster, 2015). They are also highly sensitive to price and usually highly price elastic. The demand curve and price elasticity of red wine are illustrated as follows. 

Figure 6: Demand for wine 

The demand curve for wine is found flat due to its elastic nature. Now putting the values of price change and quantity change in the formula for elasticity. 

E red wine = |{(4 – 3)/3} ÷ {(6.811 – 7.92)/7.92}| = 2.38 > 1

The demand curve for red wine is found elastic because of its value greater than 1. It follows the feature of a luxury product due to its high price tag. However, in the present context, the value of elasticity for other products is higher than wine meaning that they are more luxurious than red wine such as tea, sugar, and potato, which is not true (Munoz & Bivona, 2016). 

6. Trendy T-shirt is not a necessity and not a Giffen good. Due to its high price, it can be categorised under luxury goods. The demand curve and its elasticity are illustrated as follows. 

Figure 7: Demand for trendy t-shirt 

The above demand curve for the trendy t-shirt is found flat depicting the elastic nature of the demand. Now putting the value of its price changes and quantity changes in the elasticity formula to determine whether it is elastic or inelastic in nature. 

E trendy t-shirt = |{(4 – 3)/3} ÷ {(12.98 – 14.112)/14.112}| = 4.15 > 1

The demand curve for the trendy t-shirt is found elastic in nature due to its value greater than 1. It follows the features of a luxury item and it is more luxurious than red wine. 

7. Coffee is also an example of a typical normal good responsive significantly to price changes. The demand curve and its elasticity are illustrated as follows. 

Figure 8: Demand for coffee

The above figure is showing a normal downward falling demand curve. Let us the values of price and quantity changes in the formula of elasticity to determine its elasticity. 

E Coffee = |{(200 – 150)/150} ÷ {(4.63 – 4.77)/4.77}| = 11.36 > 1

The demand curve for coffee is found highly elastic in nature due to its value greater than 1. It follows the features of a luxury item and it is more luxurious than red wine and a trendy t-shirt. However, in reality, it is not a luxurious product but rather a normal good. 

Assessing The Impact of Price Change Based on Demand Elasticity 

To see the impact of price change on revenues, often the concept of price elasticity is used. The principle in this context says that for an inelastic demand curve, total revenues move in the direction of price change meaning that with an increase in price, revenues also increase (Munoz & Bivona, 2016). For a unit elastic demand curve, a rise and fall in the price will keep the revenues unchanged. For the elastic demand curve, total revenue move in the opposite direction of price change meaning that an increase in the price will decrease the revenues of the firm. It is summarised in the table below. 

Table 1: Relationship between demand elasticity and revenues

A diagrammatic representation of the above principle is depicted as follows.  

Figure 9: Illustration of Revenue and demand elasticity 

The above diagram is divided into two panels. In the left panel, the inelastic demand curve is presented. It shows how revenues changes with the increase in price from P3 to P1 and from P1 to P2 through the increase in the rectangular area. Similarly, in the right panel, the increase in revenues is illustrated by the rectangular area (Munoz & Bivona, 2016). Here, with the decline in price from P2 to P1 and from P1 to P3 the rectangular area, which is revenue increases. 

Potato 

In the present case, potato is a Giffen good, which violates the law of demand. Although it is elastic in nature because its value is greater than 1, it will not follow the above-mentioned principle (Munoz & Bivona, 2016). Thus, it can be said that a rise in the price will also increase its revenues. It is an exception to the above principle. 

Tea 

From the demand data for tea, it is found that its demand is elastic meaning that a decrease in the price will increase its total revenues. 

Rice 

Rice is found as a necessity good because its elasticity is found as 0.31 less than 1. As per the principle, revenues will move in the direction of price. An increase in the price of rice will benefit the firm by increasing its revenues. 

Sugar 

Sugar’s demand curve is elastic and it will follow the principle. Here, a decline in the price will benefit the firm by increasing its revenues. 

Red Wine 

Red wine was categorised as a luxury product and its demand is also found elastic meaning that by decreasing the price level, the firms of red wine will gain by making larger revenues (Munoz & Bivona, 2016). 

Trendy T-shirt 

The demand for a trendy t-shirt is elastic and it is found as more luxurious than red wine. In this case, a decline in the price will help the producers to make larger revenues. On the other hand, with a rise in price, revenues will decline. 

Coffee

The demand for coffee is found elastic and relatively more elastic than that for red wine and trendy t-shirts. By following the principle, a rise in the price of coffee will hurt the revenues and a decline in the coffee prices will improve its revenues. 

Categorisation of Products Into Complement or Substitute Based on Cross-price Elasticity 

In the selected goods, conventionally, tea and coffee are treated as substitute goods and sugar is treated as the complement to these two goods (Munoz & Bivona, 2016). Now let us take their cross-price elasticity to verify the above-stated facts. 

The formula for cross-price elasticity is as follows. 

 
The cross-price elasticity of tea with respect to coffee is as follows. 

Therefore, coffee and sugar are complementary goods as the value is found negative. 
Other selected goods are independent of each other because their price rise and fall do not affect the quantity demanded of those goods. More specifically, the change in the quantity demand of other goods will turn out zero with respect to the change in the prices of other selected goods. Hence, the resultant cross-price elasticity will be zero meaning that they are unrelated to each other. Further, their unit of measurement is also different from each other. Therefore, an appropriate value of cross-price elasticity cannot be obtained from the formula. 

Conclusion 

In conclusion, it can be said that economic principles help in determining effective decisions. With microeconomic principles, the behaviour of consumers and the behaviour of producers can be justified. It is found that the law of demand and understanding the factor affecting consumer demand essentially help in making the decision regarding what to produce and how much to produce. The understanding of price elasticity illustrates for which good, the price should be increased, decreased, or kept constant to make positive profits. 

References 

Choudhary, B. P. (2021). Managerial economics. University Science Press, an imprint of Laxmi Publications Pvt. Retrieved October 15, 2022, from https://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=3103341.

Editors of Salem Press. (2014). The principles of macroeconomics and microeconomics (Ser. Business reference guide). Salem Press. Retrieved October 15, 2022, from INSERT-MISSING-URL.

Kapoor, S. (2015). Managerial economics. Laxmi Publications. Retrieved October 15, 2022, from https://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1223962.

Meyer, D. J. (Ed.). (2016). The economics of health. W.E. Upjohn Institute for Employment Research. Retrieved October 15, 2022, from INSERT-MISSING-URL.
Microeconomic theory; basic principles and extensions, 10th ed. (2007). Scitech Book News, 31(4).

Munoz, J. M., & Bivona, D. H. (2016). Managerial forensics (First, Ser. Corporate governance collection). Business Expert Press. Retrieved October 15, 2022, from INSERT-MISSING-URL.

Solomon, S., & Golo Nataša. (2015). Microeconomic structure determines macroeconomic dynamics: aoki defeats the representative agent. Journal of Economic Interaction and Coordination, 10(1), 5–30. https://doi.org/10.1007/s11403-014-0135-3

Stosic, S., & Rabrenovic, M. (2015). Microeconomic principles in the health sector: the demand for health services in the republic of serbia. Megatrend Revija, 12(3), 29–48. https://doi.org/10.5937/MegRev1503029S

Webster, T. J. (2015). Managerial economics : tools for analyzing business strategy. Lexington Books. Retrieved October 15, 2022, from INSERT-MISSING-URL.