Introduction to Economic Policy A: Final Exam 2022

Student Name: Sinéad Forrest

Student ID: 22337291
Exam Number: 35203
Programme Title: TJH
Module Title: Introduction to Economic Policy A

I have read and I understand the plagiarism provisions in the General Regulations of the University Calendar for the
current year, found at http://www.tcd.ie/calendar.

I have also completed the Online Tutorial on avoiding plagiarism ‘Ready Steady Write’, located at http://tcd-
ie.libguides.com/plagiarism/ready-steady-write.

Signed:

Part 1
Q3
(a) A dominant strategy is when the best strategy for an individual/firm is chosen regardless of
what another chooses. (Ignoring the others decision). This will arise when a one player
chooses the option that leaves them with a chance of being better off and avoid the worse case
scenario. The other player could end up worse off by choosing the other choice or either
chooses the same choice and they both end up with a middle ground and end up with equal
outcomes. This avoids the situation where a player could end up in the worst outcome but
simultaneously will not have the best outcome.
(b) The Dominant strategy would be to keep the fish. This would mean fisherman 1 could have
two outcomes. Either fisherman 2 returns the fish and therefore, fisherman 1 ends up with the
“best” case scenario where he makes the most profit while the other fisherman returns baby
fish to repopulate the waters and he ends up with the “worst” outcome. Or fisherman 2 could
also keep the baby fish which would mean the both end up in a “bad” situation as the fish
population will begin to deplete. However, they both still end up avoiding the “worst”
outcome by choosing to keep the fish as they will end up making more profit selling the fish
(short term anyway). Therefore, keeping the fish is the dominant strategy as you avoid the
“worst” and have a 50/50 chance of it being the “best”.
(c) If each fisherman, long term, sticks to their selfish strategy, the fish population will greatly
decline. The fishermen run the risk of completing obliterating the fish population all together.
(d) Yes. It does indicate to a market failure. The fishing lake is a good known as a common
resource. This good is non exclusionary but it is rival. Excludable goods are goods that a
person can be prevented from using ie. if they do not pay. The fishing lake is not excludable
as anyone is allowed to utilise the lake (as long as it isn’t a lake that requires a fishing
permit). Given this, a problem arses due to rivalry. A rival good means one persons use of the
good diminishes it for the use of another person. There is no limit to the amount someone can
fish on the lake, which means people tend to over consume the good. Without a price on the
use of the lake matching the impact fishing there has, people will over fish. Eventually the
fish will all be used up and no one will be able to fish there.
(e) The government can place regulations on the use of the lake. They can make it mandatory to
return young fish to the lake. They can also place a weight or number limit of the amount
each person can fish in a given time frame. Another action could be implementing a fishing
permit which would deter many people from fishing their in the first place.
Q4
(a) 1) A price ceiling is a legal maximum on the price of a good
2) A price ceiling can either be not binding, which mens it is a over the equilibrium point
(where the demand and supply curves meet). Therefore, it doesn’t impact the existing market.
Or it can be binding, where the price ceiling is below the equilibrium. In this case, the market
has to adjust itself as the existing price is no longer legal and must drop. The quantity
supplied is now less than the quantity demanded. This is because of the laws of both supply
and demand. The law of supply states that as the price drops, so does the quantity supplied
(cetris paribus- all else remains constant). The law of demand states that as the prices drops
the quantity demanded increases (cetris paribus). In the case of a binding price ceiling, this
creates a shortage or excess demand. Quantity supplied < quantity demanded. In relation to
the housing market, this would cause an uneven distribution of housing between the
population. People wont be likely to move and put their home up for rent or sale as they
themselves cannot find a home. The market can even become stagnant from this shortage of
housing. There would also be a huge waste of time questing, waiting and searching for a
home. The quality of what is available on the market also drops. Landlords are less likely to
maintain a high standard of quality if they do not feel they are getting the value of their
property and renters are less to expect better conditions at this decreased price. Illegal
activities is also an outcome of prices ceilings. A black market could emerge as people are
desperate for homes they could resort to bribery and “under the counter” contracts.
(b) 1) A subsidy is a form of government incentive relating to supporting the economic sector,
quite often in the form of financial aid but not exclusively.
2) Subsidies are often used to combat externalities. As opposed to tax which is aimed to
discourage behaviour, subsides are designed to rather encourage alternative behaviour. In
giving landlords a subsidy, they are encouraged to maintain the original standard of quality of
housing as if it is still at equilibrium. If prices are still to come down there will still be a
shortage as previously mentioned above. The difference is there is not a legal requirement to
sell at a particular lower price. However, with the subsidy the supply will maintain at a
similar quantity as if it were at equilibrium, even at a lower price, but the demand will still
increase due to lower prices (law of demand). This way there is less of a shortage, but still,
nonetheless, there will be a shortage without an increase in supply. As in the diagram below,
the price has dropped in the market. The supply of houses stays the same the government is
subsidising the amount landlords would be loosing at this price so they maintain the original
quantity supplied (landlords still gain the same amount, nothing has changed for them). With
the lower price the demand does slightly increase but the shortage that appears is far less that
would be seen with a binding price ceiling. In turn, the subsidies may also encourage
landlords
Part 2
Q8
Elasticity is the the measure of responsiveness of the quantity demanded or quantity supplied
to one of its determinants (something causing a change in the market). The price elasticity of
demand is a measure of how much the quantity demanded of a good responds to a change in
the price of that good. The price elasticity of supply is a measure of how much quantity
supplied of a good responds to a change in the price of that good. Both are computed by the
percentage change of the quantity supplied/demanded divided by the percentage change in the
price. The result will be negative for demand but you can ignore this. If the answer lies
between 0-1 it is price inelastic. If the answer is greater than one the price is elastic. If the
answer if exactly 1 this is known as unitary elasticity.

The price elasticity of demand can be determined by a variety of conditions. The availability
of substitutes being one. This will cause demand to be more elastic. If one good suddenly
increases in price, the demand will significantly decrease if there is a very close substitute.
For example, tinned baked beans. If Bachelors beans increased in price there is a wide variety
of other brands producing almost identical products such as Heinz, Newgate and Corale. This
means the demand elasticity for baked beans is greater than 1 (very elastic) due to the
availability of close substitutes. This means he graph with also be less steep for demand.

Another factor is the necessity of the good. If the good is something buyers highly rely on, the
demand for that good wont be very elastic. Take Wifi for example. This has become a very
necessary part of life as we depend on it for work, education, communication, social life ect.
There really isn’t an alternative to having Wifi. If the cost of Wifi increases most people will
still need to pay for it regardless as they depend on it. This means it has an inelastic demand
and the curve for this will be quite steep.

Consumers income also effects demand elasticity. If overall income rises, people have more
options to choose from therefor demand becomes more elastic. This can be connected to
inferior and normal goods. An inferior good is a good that has lower quality and lower price
that people will choose over another good because it is easier to afford. The normal good may
be too expensive so people have to buy the inferior good. An example of this is organic fruit
(normal good). If consumers income rises they will more likely try to source better products
so the demand for inorganic fruit becomes more elastic as people have a choice not to buy it.

Many factors also effect supply such as the storing and stocking ability of a firm. For
example, a clothing company like Zara. If their inventory is already filled with stock they are
unable to produce more until space clears up to store the next set of clothing. This means
there is a limit to the amount of clothing Zara can produce in one go due to the amount of
storage space they have. This creates inelastic supply. If the company has the ability to
purchase another warehouse to store the clothes they would allow their supply to become
more elastic.

The size of the firm or company also has an impact. Imagine a small local boutique in a town.
They may have the funds to produce more evening gowns but if production cannot happen
fast enough due to the small numbers of employees. This too creates inelastic supply. They
may be unable to match the demand for the gowns as they cannot produce them as fast as is
demanded.

This is similar to productive capacity. Some companies have a limit on how much of a good
they can produce every day. For example Cadbury’s chocolate bars. Their machinery has a set
amount it can make in a hour. Even going at its top speed it is unable to exceed the limit the
machinery is designed to make. This leads to inelastic supply.
Time plays a huge role for both supply and demand elastic. The more time a market has to
adjust, the more elastic it can become. Buyers can develop and change their habits and adjust
to a new way of dong things, while sellers can upgrade machinery, employ more staff and
expand the company.

We can also compare the elasticities of demand between companies to see how
interconnected they are. The cross price elasticity of demand is the measure of how much the
quantity demanded of one good responds to a change in the price of an other good. This is
computed by the percentage change of the quantity demanded of the first good divided by the
percentage change in the quantity demanded of the second good. This can aid us in more
closely analysing complementary goods. Complementary goods are goods that when the price
of one decreases the demand for the other increases. By measuring this we can see how
dependent the market for one is on the other,

Another benefit of elasticity is the ability to measure the income elasticity of demand. This is
a measure of how much the quantity demanded of a good responds to a change in consumers
income. This is computed by the percentage change in the quantity demanded divided by the
percentage change in income. By doing this we can see that in normal goods, when income
increases the quantity demand also increases. Then in inferior goods, when the income in
caresses the quantity demanded decreases.

Price elasticity of demand also Delos us to understand total revenue. This is the amount
received by sellers of a good, computed by the price times the quantity. When demand is
inelastic we can see a rise in revenue. This means that when the price increases the demand
does not fall much so the company gains more money. When the price elasticity of demand is
very elastic the revenue will decrease. This s because a slight change in price will cause a
bigger change in demand, which in turn can lead to a company gaining less money from an
increase in the price of a good.
Q7
A market is a group of buyers and sellers. Based on the needs and wants within the market this will
effect the demand and supply curves we see. Demand is the want or or need for a good based off the
consumers. The quantity demanded is the amount of a good purchasers are willing and able to buy at
different prices. The law of demand claims as price increases, demand falls (cetris paribus). The
demand schedule is a table that shows the relationship between the price of a good and the quantity
demanded. The quantity supplied is the amount of a good sellers are willing and able to sell at
different prices. The law of supply states that the quantity supplies increases when the price increases
(cetris paribus). When there is a change in price, there will be a movement along the supply/demand
curves. When there is a change in anything else there will be a movement/shift of either the whole
supply or demand curve or both.

The equilibrium/market price is the price where the quantity demanded is the same as the quantity
supplied- a state of rest. The equilibrium quantity is the quantity bought and sold at equilibrium price.
The market aims to reach this state of rest but sometimes it can fall into other a shortage or surplus
situation. A shortage is when the quantity demanded is grater than the quantity supplied at market
price. A surplus is when the quantity supplied is greater than the quantity demanded. The law of
supply and demand claims that the price of any good adjusts to bring the quantity supplied and the
quantity demanded into balance.

Many factors effect demand which in turn will effect the equilibrium. The first is income. If income
increases, generally, demand for a good will increase as people willingness and ability also increases.
This upsets the equilibrium that exists. The demand curve will move up to the right and the supply
that matches the new demand curve will increase until it matches the new demand. A new equilibrium
will now exist. Fig 1 below.

The availability of other goods also effects the equilibrium. If suddenly there is a shortage of golf
balls, then the demand for gold clubs will decline. The whole demand curve shifts down to the left.
Where the demand cure contacts the supply curve is different and this is the new equilibrium. Fig 2
below.

Taste, advertisement, supplier expectation, ect. Will all effect the position of the demand curve
therefore determining where the equilibrium price will be.

Supply can be effected by access to resources. If the crops in the Champagne region of France are not
as successful one year and some of the crop fails, there will be a shortage of grapes to make
champagne. This leads to a decrease in supply. The supply curve will shift up to the left. This means
the supply curve will intersect the demand curve at a different point. This new equilibrium will
change the price and demand for champagne (higher price, less demand). Fig 3 below.

An advancement in technology will effect the supply curve. If technology becomes faster and more
efficient this means that a company can produce more of a good in a given time frame. For example,
if the machinery in a factory that assembly’s iPhones was upgraded they could produce iPhones
faster. The supply curve would shift down to the right. This movement would cause a change in the
position of the equilibrium price. They can produce iPhones at a cheaper price and demand will be
higher. Fig 4 below.