Business Economics

Business Economics Assignment



Business Economics Assignment

Question 1: Demand and Supply Illustrations

A) UK economy in 2009 was performing very badly. Household incomes were either being frozen or cut, and the FTSE 100 share index was falling. The effect of these forces was a fall in the price of housing.

Supply

P1

Price of Housing P2

D1

D2

Demand & Supply of Rented Units

As the above diagram suggests, the fall in consumer income of UK dropped its demand whilst its supply remain constant in the short run (Sullivan & Sheffrin, 2007). Therefore, the market price for housed decreased due to excess of supply over demand (Hubbard & Brien, 2006).

b) A sharp fall in the price of heating oil leads to a change in demand for insulation material, which over time results in the price of insulation material changing.

Qty Demand for Insulation Material

Price of Insulation Material

Supply of Insulation Material

10000

20

10000

20000

50

10000

c) Household incomes fall, shifting the demand for petrol, whilst crude oil prices fall, shifting the supply of petrol. At the new equilibrium position, the quantity of the petrol sold is more than before the demand & supply changes occurred. (8 marks)

Household

Income

d) Rent Control Legislation

Before the legislation, private rent owners were obliged to follow the price dictations of the UK government. However, the market forces of demand and supply led to price increase because more rent demand occurred than the supply increased (Sullivan & Sheffrin, 2007). In the above diagram, the move from D1 to D2 has been greater than the move from one point of supply to another point. Therefore, the rents have increased a little due to higher-than-supply demand. This is shown in the graph below:

Supply

Rents in $

D2

D1

Demand & Supply of Rented Units

In the above scenario, the equilibrium rent levels have been gradually shifted upwards. The demand kept on increasing due to addition of rent consumers across UK. At the same time there was some increase in supply.

Question 2: Scenario for Textile Prices, Demand and Supply

The law of demand implies that an increase in the price of a product hits demand negatively. However, that is only practicable when other things remain equal. The law of demand is based on a set of assumptions spelled out as 'cetris peribus'. For the law of demand to remain true in force, a set of factors need to remain constant. These include consumer's income, price of substitutes, number of consumers and their demographics, usage trends, etc. In other words, the law of demand can be fairly operative if seen under a limited umbrella of assumptions. Textile prices have increased over time, but so has the number of local and foreign competitors, their product prices, consumer behavior, demographics and income. The following diagram illustrates the phenomenon:

S1

S2

Price of Textiles

D2

D1

E1 E2

Demand & Supply

As seen, the demand, supply as well as the price of the textile has shifted. The supply and demand curve shift as the market achieves a new equilibrium over the time. In the diagram above, E1 shows the equilibrium for time 1 and E2 shows equilibrium ...