Effects of Subsidizing Inputs Required to Make the Vaccine on Demand - Assignment Example

Running Header: Economics Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Q1 According to Mankiw (2011) price elasticity of demand deals with determining the changes in quantity demanded as a result of changes in price. It measures the percentage change in quantity demanded as a result of a one percentage change in price. In relation to price, demand of a product can either be elastic, inelastic or unit elastic. Demand is elastic if a small change in price results to a big change in quantity demanded. In elastic demand a small increase in price of a commodity leads to a subsequent large decrease in quantity demanded of the commodity. On the other hand, inelastic demand occurs when a change in price leads to a small change in quantity demanded. In this case an increase in price of the commodity leads to a small decrease in the quantity demanded of the product. Unit elastic demand arises when change in price leads to an exactly equal change in the quantity demanded. In this case, a one percentage increase in price leads to a one percentage decrease in quantity demanded. Thus, revenue remains unchanged as the increased price is offset by the decreased demand. The taxi drivers assume that the demand of the taxi rides is inelastic. This means that when they increase the price associated with their services there will only be slight decline in the demand of the taxi rides. The increase in the fares will be accompanied by a small percentage decline in the demand for taxi services. Bernanke (2003) argues that price elasticity of demand increases when a product has a variety of substitutes which are readily available. Commodities that have closely related substitutes have a tendency of being more elastic as consumers can easily switch to other related goods. The taxi drivers assume that there is no close substitute for their services. This is because the taxis are readily available and convenient to travel with in major Australian cities. The fact that passengers can find them easily and with ease as compared with other means of transport makes them to not have close substitutes. The taxi drivers are correct about their assumption. This is because a majority of people in major Australian cities are always in hurry. Taxis present them with the most convenient and fastest means of transport as it does not require various stops as other public means of transport would be required to do. Furthermore, the taxis do not require passengers to incur parking fees as they would do if they opted for private means. Moreover, unlike other means of transport, taxis present passengers with the most efficient way of ensuring that they reach their destination without getting lost in unfamiliar areas of the major cities in Australia. In addition, taxis can pick their passengers at their door steps or outside their offices unlike the public means of transport. Finally, taxis are more comfortable and passengers have easy control of the drivers unlike the public means of transport. Q 2 Gwartney at el (2008) argues that subsidies are government grants given to buyers in order to assist them to afford commodities. On the other hand, subsidies are granted to sellers with an aim of increasing their profits. Subsidies lead to a reduction in the price that buyers pay and thus leading to an increase in the quantity demanded. One way that the government can utilize to promote the uptake of influenza vaccinations is by offering customers a subsidized price in relation to the vaccine. This method will enable the customers to afford the vaccine due to its reduced price. A Chart Showing the Effects of Subsidizing the Price of Influenza Vaccine on Quantity Demanded. Price S P2 P0 D1 P1 DO Source: Gwartney at el (2008). When the government subsidizes the price of the vaccine, the demand curve will shift upward in an amount equal to the subsidy hence leading to a change in demand from Q1 to Q2. The market price of the vaccine will increase from P0 to P2. Customers will pay P1 and this will be a net benefit to them of P0-P1. Sellers will receive an additional P2-P0 as a result of the subsidiary. The subsidiary will cost the government P2-P1. Another way that the government can adopt in order to encourage the uptake of the influenza vaccine is by offering producers with input subsidy (Riley, 2006). The input subsidy enables the producers to minimize the cost associated with certain inputs required to make the influenza vaccine. This will consequently lead to a decrease in the production costs hence the producers will be able to sell the vaccine at a lower price. A Graph Showing the Effects of subsidizing inputs required to make the Vaccine on Demand Price S0 P1 S1 P2 D Quantity Source: Gwartney at el (2008). According to the figure above, the government subsidy on inputs will enable the producers to decrease the market price of the vaccine from P1 to P2. This will leads to a shift in supply curve from S0 to S1. Therefore, the producers will receive price P2. The reduction in price will lead to an increase in the quantity demanded from Q1 to Q2. The customers will be able to buy the vaccine at price P2. The government will incur P1-P2 cost as a result of the subsidy. Q3 The extra output resulting from an additional unit of input is referred to as marginal returns. Thus, diminishing marginal returns refers to the decrease in the marginal output per unit when the amounts of a particular unit of production are increased while the other factors of production are held constant (Rasmussen, 2010). This is explained by the law of diminishing marginal returns which states that as the amounts of inputs added in the production process are increased while holding other factors constant, the additional output will reach a point and start declining. Therefore, diminishing marginal returns refers to the decline in output per unit of production with the addition of an extra unit of input in the production process. This leads to short-run increase in marginal costs. On the other hand, increasing returns to scale or economies to scale refer to the cost benefit associated with large scale production. However, in the long-run the costs associated with large scale production may increase tremendously leading to diseconomies of scale. Steinmann (2007) states that diseconomies of scale occur when firms experience increased average total cost in the long-run as a result of increased output and expansion. Increased output can lead to inefficiencies and poor co-ordination. This may in turn make the firm to incur increased costs hence lead into diseconomies of scale. A Graph Showing Diminishing Marginal Returns Curve Number of workers per unit of time Source: Rasmussen (2010). In the above figure marginal product increases until it attains a maximum point at L1. From this point the amount of output starts do decline as more workers are added. This scenario is referred to as diminishing marginal returns. Graph Showing Diseconomies of Scale B 0 Source: Rasmussen (2010). In the graph above, as the firm continuous to increase its output, its short run average costs decreases subsequently. Point A indicates the reduction in cost associated with increasing the firm output up to Q1 units per day. Further increase in output leads to a decline in short term average cost up to point Q2. From this point onward, the short term average costs start to increase with each additional increase in quantity of output. In the long-run the firm experiences inefficiencies leading to increased average costs. Economists refer to this situation as diseconomies of scale Q 4 According to McEachern (2009) a perfect competition is a market that is characterized by many buyers and sellers who sell an identical product. Each seller sells a portion of the total market requirements and this means that no single participant can control the market. In this market, prices are determined by the forces of demand and supply. On the other hand, a monopoly is a market structure characterized by only one seller. In this case, prices are determined by the seller. Barriers that exist in the market prohibit new entrants. Economic efficiency involves the utilization of the minimum amount of resources with an aim of maximizing a firms output (Taylor and Weerapana, 2010). For economic efficiency to occur, a firm must produce the maximum output at the least cost possible. Economic efficiency can occur when a firm is either technically efficient, production efficient, X-efficient, allocative efficient or dynamic efficient. Technical efficiency refers to the ability of the firm to minimize inputs in relation to labour and capital for a given level of output. It may also occur where the firm maximizes its output for a given amount of inputs. Production efficiency occurs when the firm utilizes factors of production and techniques in a method that leads to the least possible cost per unit of output. X-efficiency requires firm to pay the lowest cost possible in acquiring inputs and factors of production. This is due to the reality that monopolies may tend to operate inefficiently due to lack of competition. For a firm to be allocativelly efficient it must ensure that its price is equal to marginal cost in every economic market. This occurs when it is difficult to improve general economic conditions by relocating resources among markets. An improvement in productive and technical efficiencies over a given time leads to dynamic efficiency. A firm must be innovative in order to achieve dynamic efficiency. A perfectly competitive firm achieves allocative and cost efficiency in the long-run under the condition that economies of scale do not occur. Production efficiency occurs because the firm is able to produce maximum output at the least cost on the average total curve. A Graph Showing Perfect Competition and Economic Efficiency x MR=AR Source: Taylor and Weerapana (2010). In the graph above the firm is productively efficient because it is able to produce the maximum amount of output at the minimum point on the average total curve. Furthermore, the firm is allocativelly efficient because the price is equal to marginal cost at point x. Therefore, at point x the firm achieves productive efficient, allocation efficiency and X-efficiency. In the long run the perfectly competitive firm is able to accomplish x-efficiency because for it to survive in the perfect market it must create normal profits and eliminate its inefficiencies. This requires the firm to produce at a cost above the average total cost curve. The lack of competitors makes a monopoly to be inefficient both allocatively and productively given that economies of scale do not exist. This is different with regard to perfectly competitive firms. A Graph Showing A Monopoly and Economic Efficiency Revenue X-inefficient and B ATC Cost S C1 D AR A Productively inefficient 0 Source: Taylor and Weerapana (2010). S represents an area of abnormal profits. A monopoly will maximize profits at output level Q1. At this point the monopolist average total costs are higher than the minimum point and price is greater than marginal cost. At point p1 price is greater than marginal cost hence the monopolist is allocatively inefficient. Therefore, a monopoly produces low output and charges high prices unlike a perfectly competitive firm. At point D the monopoly incurs needless production cost leading to production inefficiency. Availability of many sellers in a perfectly competitive market eliminates supernormal profits meaning the firms must be x-efficient. However, the lack of competitors may lead to a monopoly being x-inefficient. At point x, the monopoly will incur average costs which are higher than the average cost curve. Q5 According to Jain and Khanna (2010) there exists an inverse relationship between goods that complement each other. Complementary goods are goods that comprehensively necessitate the demand for each other. In this case, an increase in the price of a complementary product leads to a subsequent decline in the demand of the related product. To build new houses there is need for plasters and therefore new houses complement the use of plasters. As a result, a decrease in demand for new houses will lead to a subsequent decline in the market demand for plasters. This will lead to a shift of the demand curve to the left. A Graph Showing the Decline in demand of Plasters as a Result Of the Decline in Demand for New Houses DD P1 P2 D2 D1 Source: Jain and Khanna (2010). In the graph, the demand of plasters is shown by the demand curve D1. When the demand of new houses decline, the quantity demanded in regard to plasters declines to D2. This leads to a shift in the demand curve to the left. References Bernanke, B. (2004). Principles of Microeconomics, New Delhi, McGraw-Hill Companies. Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2008). Economics, Mason, South Western Cengage- Learning. Jain, T., & khanna, O. (2010). Managerial Economics, New Delhi, V.K. Publications . Mankiw, N. (2011). Principles of Economics, Mason, South Western Cengage- Learning. McEachern, W. (2009). Economics: A Contemporary Introduction, Mason, South Western Cengage- Learning. Rasmussen, S. (2010). Economics: The Basic Theory of Production Optimization, London, Springer Heidelberg Dordrecht. Steinmann, A. (2007). Economics, Mason, South Western Cengage- Learning. Taylor, J., & Weerapana, A. (2010). Principles of Microeconomics, Mason, South Western Cengage- Learning. Read More