James Davis – 0061093823 ECO1000 Assignment 1
b. A competitive firm maximises profits by setting output at the point where price equals marginal cost. In this instance the market price is $16 so therefore the closest marginal cost point with respect to output is 3 units and a marginal cost of $15. To confirm this the above table has been modified to show the profits at each level of output and reveals profit is maximised at $8 when output is 3 and marginal cost is $15. The firm will produce 3 units to maximise profits.
a. Firstly there is no mention of a change in the quantity of bottled water available therefore the supply curve remains unchanged. Secondly due to the removal of substitutes the quantity of bottled water demanded increases creating an entirely new demand curve. Supply curves are upward sloping which means an increase in quantity supplied results in an increase in price. As the demand curve shifts to the right it creates a move in price up the supply curve creating a new equilibrium price. Essentially the supply curve stays the same and the demand curve shifts right raising the equilibrium price. The price of bottled water increases. (Example below from E0 to E1 as demand curve shifts from D0 to D1)
b. An “anti-price gouging” law is effectively a price ceiling set by the government in law to protect consumers from excessive prices. At equilibrium price where supply equals demand there is equal consumer and producer surplus as shown in graph A by price P*. In setting a price ceiling the price is artificially set below the equilibrium price as shown in graph B by price P1. This creates an imbalance of surplus in favour of consumers as shown in graph B where the shaded blue area is larger then the green area. This also has the effect of increasing demand to the point of Q2 on the demand curve in graph B. In contrast for the supply curve when price is at P1 the quantity that producers are willing to supply is at Q1. What we find is the quantity demanded at the price that is set is higher then the quantity willing to be supplied at that price. This results in a situation where demand exceeds supply or what is more commonly referred to as a shortage and is shown as the difference between Q1 and Q2 in graph B. In this scenario what we find is reduced efficiency because the total of consumer and producer surplus is less then what it would have been at equilibrium price and this is referred to as a dead weight loss and is shown by the area shaded yellow in graph B. The consumers who do manage to purchase a share of the goods available have the benefit of paying a reduced price over what would normally be paid at the market equilibrium price. The consumers who miss out due to the shortage in quantity available are harmed as they do not obtain the product they would normally be able to purchase at market equilibrium. The firms supplying the products are also harmed as they are not able to sell as much of a product...