Economics Semester 1

Topics: Supply and demand, Economic equilibrium, Marginal cost Pages: 3 (955 words) Published: May 18, 2014
Question 1 (8 marks)
 
Using supply-and-demand diagrams, show and explain the effect of the following events on the market for woollen jumpers.    
An outbreak of ‘foot-and-mouth’ disease hits farms in Australia.  (2 marks) Supply curve shifts left
Whenever there is an outbreak of ‘foot-and-mouth’ disease in Australian farms, the result is an increase to the input prices for producing woollen jumpers. As a consequence, the supply of woollen jumpers shifts to the left on the graph, as shown below. The new equilibrium price is higher and the new equilibrium quantity of jumpers is lower. 

The price of leather jackets falls (2 marks)
Demand curve shifts left
When the price of leather jackets falls, more people buy them, which in turn reduces the demand for jumpers. The result, shown on the graph below, is a decline in both the equilibrium price and quantity of woollen jumpers.

Kylie Minogue, an Australian born international pop star, appears in a woollen jumper in her latest video.  (2 marks) Demand curve shifts right
As so many people have the desire to look like Kylie, the effect Kylie Minogue would have on the demand for woollen jumpers, by wearing one in her video, would be very positive. The demand for jumpers would rise. As shown below, the result is an increase in both the equilibrium price and quantity of jumpers.

 
New knitting machines are invented (2 Marks)
Supply curve shifts right
The invention of new knitting machine would have the effect of increasing the supply of woollen jumpers. As shown below, the result would be a reduction in the equilibrium price and an increase in the equilibrium quantity of jumpers.

 
Question 2 (6 marks)
Find the flaws in the in reasoning in the following statements, paying particular attention to the distinction between shifts of and movements along the demand and supply curves.  Draw a diagram to illustrate what actually happens. “A technological revolution that lowers the cost of producing a good...
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