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ECON1040 Principles of Economics– Tutorial 4 – S1 2022

Tutorial 4, Week 5.

1. Supply and demand in a perfectly competitive market. (Unit 8)

1.1. Assume that the market for bananas is perfectly competitive. Draw a set of axes (price on the vertical, quantity on the horizontal). Draw a demand curve and a supply curve. Identify the market equilibrium and describe what is meant by excess supply and excess demand. Why would price fall if there was excess supply? Why would price rise if there was excess demand?

Explain why a competitive equilibrium is Pareto Efficient.

1.2. Assume a large cyclone wipes out the banana crop in Queensland where a large proportion of Australian bananas are grown. Show this in a diagram and explain what happens using the concept of decrease in supply and decreases in the quantity demanded.

2. Supply and Demand in a competitive market. (Unit 8)

Answer Exercise 8.5 (Sec. 8.6).

3. Taxes (Unit 8. 7)

Australia has relatively high taxes on cigarettes and tobacco products (

https://www.abc.net.au/news/2019-09-01/heavy-smokers-will-spend-$10,000-a-year-amid- tax-increase/11468016). Nonetheless, some argue that such policies are likely to be inconsistent with the stated aim of such policies to decrease the level of smoking. Explain why using the concept of elasticity. What alternative policies that might be effective?

Key Terms

Note that at the end of each tutorial I will identify key terms or concepts that you should be familiar with and that are examinable:

• Competitive markets

• Willingness-to-pay

• Reservation price

• Price-taker

• Relation between MC and P* (must be equal to maximise profit)