McMaster University

Centre for Continuing Education

Economics Theory and Practice
570-418
Assignment #1
Jeffrey OLeary

Name:__Rebecca Silver______
Student #:_____1231834____

Assignment #1
Part One
1) No, Jonathan is not correct with his assumption that the total cost of his first
year of college is $12,000. The financial output is correct, however, he is not
factoring the cost of his forfeited income, which is an opportunity cost. Since
he would no longer be earning $20,000 per year, and he has not indicated
any income during school, his opportunity cost of the first year is $32,000.
2) The firm responded to the survey by creating a surplus market with more
vehicles boasting more safety features. By adding more units to the market,
they are decreasing the price people are willing to pay for the vehicles, and
increasing the price of their vehicles so drastically drives down the demand.
The combined effect of these changes result in a loss for the firm, as the
former greater increases the effect of the latter.
3) This claim is not valid, from either countrys perspective. If a country
produces goods more efficiently it is in their best interest to sell excess goods
for financial gain, as a booster to the economy from foreign consumers.
Considering that the USA has limited scarce resources it would be beneficial
to import raw materials from Canada and export back the finished goods;
preserving their scarce resources so they will not be dependent upon Canada
to produce goods and services, while also reaping the economic benefit of
selling their goods to Canadian consumers. Another factor to consider would
be the cost of transportation: if it costs less to import raw materials than to
transport raw materials across the country then the imported products are a
better choice.
By boosting the Canadian economy in this way America is also helping their
own citizens who travel in Canada for various reasons (to escape hot
weather, to visit the arctic, to hunt, etc.) by creating a market for American
currency, which assists the travel industry for both countries.
4) A government might choose to place restrictions on specific goods being
imported such as tariffs or quotas for several reasons, including improving
terms of trade, promoting diversification, and controlling market pricing.
These restrictions can act to prevent an excess being imported to the market
and driving down the prices of goods, or by stabilizing prices as import
products might be more expensive than domestic goods and would lead to a
higher demand of domestic products, which causes a greater amount of
domestic raw materials being used (or a higher amount of import for raw
materials occurring.) This effectively protects internal resources and keeps
the country safe from becoming reliant upon another country for valuable
scarce resources. If a country consumes all their scarce resources internally it
will drive up costs of products in the long-run, so they must import goods to
reduce the amount of scarce resources consumed for production.

Another reason might be labour shortages; even if they have sufficient

resources to produce goods there might be shortage of skilled services in
this case tariffs would protect the domestic market from being overcome by
international firms.
5) An important question to ask in response to this question is: can the country
use the limited resources available to make all goods and services more
efficiently, or must they pick and choose how to best use their resources to
maximize output? If a country can produce all goods and services more
efficiently, that does not necessarily mean they are able to produce all goods
and services simultaneously; where the first country is unable to create
sufficient supply the other country may be able to augment the supply, thus
creating a profitable trade agreement. If the country is able to produce all
goods more efficiently but lacks the resources there would be a profitable
trade venture by importing the raw materials from another country who is
unable to utilize them in domestic production, and export the finished goods
back as per the agreement.
The countries should strive to get the best value in all situations, for example,
when the American dollar (USD) is high it is cheaper to purchase products
made in Canada as it might cost less than it would be to produce the goods in
America. When the cost of transportation is factored in, as mentioned in
question 3, it might be less expensive to import raw materials or goods than
to ship them from across the country to wherever they are in demand.

6)
7) Equilibrium is determined by the intersection of the supply and demand
curves.

8)
9)
10)

11)

Wh
en the market price is set above equilibrium there will be an excess supply
available, as people will buy less at the higher price.
12)
13)

14)
15)
When set below equilibrium, the market price will cause an excess
demand because consumers will buy more at the lower prices.
16)
17)

18)
Market equilibrium is determined by the point at which supply and
demand intersect, as depicted above with E0. When input costs increase, the
firm makes less money producing the same level of output at any given price,
as the new input costs are cutting into profits. As a result, the firm is less
inclined to continue production at the current market price, thus causing a
supply shift to the right (depicted as S1), establishing a new equilibrium price
(depicted as E1.)
19)
20)
When economists say there was a surplus of a good or service they do
not mean that good becomes any less scarce than it was previously, since
scarcity is defined by a limited number of resources and the choices
concerning how they are best utilized considering the unlimited wants that
exist. What they are referring to is the demand of the good; when there is a
surplus of something there are more units available on the market than the
market demands, and this will likely cause a reduction in the price of the
good. Surpluses can occur for several reasons, such as a decreased demand
caused by a drop in price for a substitute good, a decrease in price for a
complement good, or an increase in supply triggered by a price increase as a
result from a recent shortage, just to name a few.
21)

22)

23)
With the normal supply and demand curves the increase in gas price
should have caused a decrease to demand, but that is not the case. There are
several possible reasons this occurred, including the fact that individuals are
unable to alter their gas consumption in a significant way in the short run.
When gas prices suddenly increase individuals are left with few options but to
continue purchasing gas. They might plan fewer road trips, or begin
carpooling, but only in the long term can they actually adjust the amount of
gas purchased by a considerable amount. Over years people can relocated
closer to work, find alternative modes of transportation, or if the cost of gas
overcomes income earned some might give up working altogether, and cause
a decrease in the demand. Another possibility is the ever increasing
population. More vehicles are made and sold every day, and as more people
begin driving the increase of autos to the market drive up the demand,
regardless of price. A third possible reason why gas demand increases
despite price increasing as well, is that many pieces of equipment used in
different industries require gasoline and similar fuels for operation. In the
construction industry they have cranes, lifts, dump trucks, excavators, etc.,
which all require gasoline in order to do their job. As more and more
production occurs and more equipment is created, the more gas they
ultimately use. Very few industries have fuel efficient means of production,
and this is one more increase to the gas demand. All of these possibilities
have the similar effect upon the demand curve pushing it to the right as the
demand grows yet supply remains the same. This creates a new equilibrium
price, and as we have seen over the years, people adjust to the higher prices.
24)
25)

26)
27)
28)
29)
30)
31)
The label necessities can be misleading when in reference to low
price elasticity, because some goods/services have a consistent consumption
rate through the population, largely due to preferences and habit. For
example, the price of education does not affect the number of people who
pursue a higher education. If the price of education decreases, existing
students cannot consume more of it at the lower price, nor are they likely to
consume less if the price increases. Education might have a low elasticity of
demand, but it is not a necessity for everyone in the population. Another
example is internet and cable services. If the price increases some people
might cancel their subscriptions, but many more will consume at the same
rate, making little to no decrease in their consumption. Should the price
decrease, some individuals might sign up for new subscriptions, but a
majority of users will not alter their consumption as a result of the new price
since they cannot consume more of the service than they already do. Since
cable/internet services and education are considered luxuries by some parts
of the population, and many people continue to live without either, it is
misleading to be considered a necessity only based upon the fact it has a low
elasticity of demand.
32)
33)
If price is perfectly inelastic at 0, and becomes unit elastic at 1, then it
stands to reason that the closer to 1 the elasticity is then the closer the
percentage change in price will affect the percentage change in quantity. In
other words, if the price elasticity of Premier Pizza Palaces pizzas is 0.8, 20
per cent from 1, the 20 per cent decrease in price is much greater than the
increase in quantity. For example:
34)
Consider the cost of pizza to be $10 each. If normally 20 pizzas are
sold, PPP earns a $200 revenue. When they hold a 20 per cent off sale the
price drops to $8, if they sell 20 per cent more pizzas (24 pizzas) they are
only earning $192 in revenue, and would therefore need to actually sell 25
percent more pizzas just to break even with normal sales. If the variable cost
is increasing with each pizza, the sale might be a very bad idea as they will
not make enough revenue for the sale to be worthwhile.
35)
12)
With a price elasticity of 0.61 we know that their demand is relatively
inelastic, and a change in price causes less of a change in demand. The result
of this on profits is that while their cost of holding the expo remains the same
regardless of the number of visitors, raising ticket prices will have an even
smaller effect upon the ticket sales, thus casing overall revenue to increase.
The organizers believe they have made the right pricing decision because by
marginally increasing the prices they can attract relatively the same amount
of people and make a larger profit, or they can decrease ticket prices and

slightly increase the number of visitors, all without altering the cost of the
event.
36)
37)
38)
39)
40)
41)
42)
43)
13)
In real life ceilings are above the floor, but when it comes to price
floors and ceilings, the ceiling is below the floor. Price ceilings are put in place
to keep prices down, or limit production, and price floors are imposed to
guarantee a better price on goods than the market would naturally yield. At
the price of 0.4 per liter we can see a price ceiling in effect, as it is below the
equilibrium; at point E firms are only willing to supply 80L of gasoline at 0.4,
but demand (F) is at 140L, which creates and excess demand (shortage) of
60L. Price floors above equilibrium create a minimum allowable price above
market, such as minimum wage. At 0.55 we see demand at point A, and
supply at point B, which creates an excess supply (surplus) of 100L because
individuals only wish to purchase 40L at that price but firms are supplying
140L.
44)
45)
If price floors were below equilibrium, like real floors, they would be
ineffective since the market would continue to trade at the equilibrium price,
and vice versa with price ceilings were they above equilibrium. The entire
purpose of ceilings is to lower the price from equilibrium, and floors are in
place to raise the prices. In other words, a price floor is creating a new
minimum for the market to trade at and ceilings create a new maximum.
Since one cannot physically be lower than the floor or higher than the ceiling,
these titles are quite accurate in their describing their effect on pricing.
46)
14)
When discussing scarcity, rationing means more than controlling how
much is consumed. Once a resource is used it cannot be used toward
something else. Rationing is the exercise of using opportunity cost to
evaluate how each resource could be used to its fullest potential.
47)
15)
When the minimum wage is set above the equilibrium there is a
decrease to demand and an increase to supply of labour. The excess quantity
of labour means an increase in the unemployed workforce, which mostly
affects the individuals who are seeking work, as employers are willing to hire
fewer employees at the minimum wage.