Week 2 – Market Demand Scenarios
Task:
Explain and illustrate the impact on market demand for sugar in the following three scenarios:
1. The price of artificial sweetener increases
- Effect: Artificial sweeteners are a substitute for sugar. When the price of artificial sweeteners goes up, consumers will switch to sugar.
- Result: The demand for sugar increases, shown by a rightward shift of the demand curve.
2. News reports claim sugar contributes to obesity
- Effect: Consumer perception of sugar becomes negative due to health concerns.
- Result: The demand for sugar decreases, shifting the demand curve to the left.
3. The price of sugar increases
- Effect: This is a movement along the demand curve, not a shift.
- Result: There is a decrease in quantity demanded due to the higher price, but the demand curve itself does not move.
Learning Outcome:
- Understand the distinction between a change in demand and a change in quantity demanded.
- Analyze non-price and price factors that influence demand.
Week 3 – Price Elasticity of Demand (PED)
Task:
- PED Calculation for Kellogg’s Cereal
- Given: A 10% price increase leads to a 25% drop in quantity demanded.
- Formula: PED = % Change in Quantity Demanded / % Change in Price
PED = (-25%) / (10%) = -2.5
- Elasticity Classification:
- Since |PED| = 2.5 > 1, demand is elastic.
- This implies consumers are sensitive to price changes.
Learning Outcome:
- Apply the PED formula.
- Distinguish between elastic and inelastic demand.
Week 4 – Tax and Elasticity: Cigarette Tax Case Study
Scenario:
Joe and Bruce discuss cigarette taxes and their economic impact.
Questions and Answers:
- Is the demand for cigarettes price elastic or inelastic?
- Demand is price inelastic because cigarettes are addictive and have few substitutes.
- Who bears the burden of the new tax?
- Consumers bear most of the tax burden due to inelastic demand.
- Illustrated in a graph where the demand curve is steep and consumers absorb most of the price increase.
- Is this economically efficient?
- Economically, it is efficient if the tax corrects a market failure (i.e., health externalities).
- It also generates government revenue while possibly reducing consumption over time.
Week 4 (Midweek) – Short Run Productivity: Tony’s Coffee Shop
Productivity Table Completion:
Staff Total Productivity Marginal Productivity Average Productivity 0 0 0 0 1 100 100 100 2 220 120 110 3 300 80 100 4 360 60 90 5 400 40 80 6 420 20 70 7 430 10 61
Analysis:
- Graph: Plot Total, Marginal, and Average Productivity curves.
- Diminishing Returns: Occurs from the third staff member onwards, where MP starts to decline.
- Why MP and AP behave as shown:
- Initially, both MP and AP increase due to specialisation.
- After a point, overcrowding and inefficiency lead to a decline in MP.
- AP continues to rise until it intersects MP and then declines.
Learning Outcome:
- Understand the law of diminishing marginal returns.
- Analyze how firms vary output by adjusting labor in the short run