Scarcity forces trade-offs

1. The scarcity forces to trade off are the first principle of economics which is explained through this case. Due to limited number of free bed and hotel beds, customers face trade off between booking earlier with security and booking late with less security. Cost vs benefit is the second principle of economics which is explained by the case as Priceline groups helps the airlines and the hotel owners to recover some of the costs (Bernanke, Antonovics & Frank, 2015). Thinking at the margin allows the hotel and the airline owners to have a look on how each transaction through Priceline group is impacting on the overall change. The principle that people respond to incentive is also explained through the case as lower price for hotels and full occupancy for the owners worked as an incentive for the respective parties. The principle that trade makes better off has also been justified though this case. Priceline group specialises on having a common platform for customers and sellers providing necessary information regarding the market to the sellers and the customers. Trade allowed each of the players to gain from the market (Goodwin et al. 2015). The principle that market coordinates trade has been depicted in the case as well. The lower market prices attract more customers filling the free seats of airplanes and free beds of hotels. Lastly, the future consequences count and that too has been explained in the case. The investment of Priceline group in European region became successful in the future that resulted in the high valuation of the company.

2. The fact that, on bad weather, the cost of supplying the taxi service is higher than the normal. The number of taxi reduces and hence the supply curve shifts to the left leading to a rise in price.

The surge prices used by Uber deals with the excess demand of the market during the bad weather condition. Increase in price in this situation reduces the demand and passengers who has more valuation of the ride gets their ride and in this way the market gets cleared (Onodipe, Ayadi & Marquez, 2016).

3) The uber drivers, by taking coordinated breaks can surge the price of each ride as it will reduce the number of available cab compared to the demand. That means the supply curve will shift to the left leading to a rise in the price. However, in larger cities like Toronto, established cab fleet can still keep the supply high leading to a failure of the strategy.

Cost vs benefit

3. This news talks about the firewood market of the Maine state of the USA. According to the article, the prices of the firewood are increasing as winter is approaching. Firewood is the main raw material for creating fire for warmth during the winter. In this case the changes in tastes and preferences of the customers has shifted the demand curve to the right leading to increase in equilibrium price and quantity sold in the market (Smith, 2016).

4. In this case the dealer is just reducing the supply of the coveted stamp. Now in order to increase the wealth of the dealer, the price should increase by proportionately more than the decrease in the quantity (Weber, 2017). Now this can only happen if the dealer assumes that the price elasticity of demand for the stamp is inelastic. In other words the dealer assumes that the demand curve is steep (Hussen, 2018). In the below figure the red rectangle is bigger in size than the black rectangle showing the increase in the revenue or the wealth of the dealer.

5. In this case, the Bruce Springsteen sold the tickets at $75 below the equilibrium price which is $250. As a result consumer surplus increased to (a+b) and the producer’s surplus reduced to c as per the above figure.

The resellers of tickets collect the ticket from the bands at low price and sell them to the fans at market equilibrium price (Zeman & Zydney, 2017). That means it is eating up the consumers surplus which used to be given as a present by the band to the fans. 

6. This policy acted as the price floor as the price cannot go lower than that.

b) If the price of bread was above the market equilibrium rate, the suppliers of the market would sell more quantities of bread in the market. On the other hand the customers would reduce their demand at this high price (Hardin, 2015). Consequently, there would be an excess supply in the market of bread.

This still remains as a price floor as price cannot go lower than that. However, it’s not bounding now like before as it will eventually reach the equilibrium (Skousen, 2016).

This cannot make any inefficiency in the market as this price floor is not bounding. The excess demand of the market would reduce as the price would rise and it will reach the equilibrium (Brown & Timmerman, 2015).

7. The elasticity of demand is,

(-40%)/(10%)= -4

Thus the elasticity of demand for books is elastic and hence tax would be more on sellers (Stiglitz & Rosengard, 2015).

1. ii) In this case the demand curve is more elastic

iii) Deadweightloss=

(50*1000000)-(55*600000)= $17000000

1. b)
2. i) The elasticity of demand,

(-50%)/(10%)= -5

Thus, the elasticity of demand for ticket is elastic and tax falls heavily on sellers.

1. ii) In this case the demand curve is more elastic.

iii) Deadweight loss=

(3 million* 500)- (1.5 million * 550) =$ 675 Million

c)

i)

Elasticity of demand is,

(-60%)/(33.33%)= -1.8

Therefore in this case also the tax would fall heavily on sellers

ii)The demand curve is more elastic than supply.

iii) Deadweight loss=

(2 mllion *1.50)-( 800000*2)= $ 1.4 Million

8. Consumer’s surplus before the taxation,

.5*(4*40)= $80

Consumer surplus after taxation,

.5(5*30)= $75

Therefore the reduction in welfare for customer is $5.

Reference

Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.

Brown, P. G., & Timmerman, P. (Eds.). (2015). Ecological economics for the anthropocene: An emerging paradigm. Columbia University Press

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Principles of economics in context. Routledge.

Hardin, R. (2015). Collective action. RFF Press.

Hussen, A. (2018). Principles of environmental economics and sustainability: an integrated economic and ecological approach. Routledge.

Onodipe, G., Ayadi, M. F., & Marquez, R. (2016). The efficient design of an online course: Principles of economics. Journal of Economics and Economic Education Research, 17(1), 39.

Skousen, M. (2016). The making of modern economics: the lives and ideas of the great thinkers. Routledge.

Smith, H. M. (2016). Understanding economics. Routledge.

Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the public sector: Fourth international student edition. WW Norton & Company.

Weber, C. M. (2017). Principles of Economics I.

Zeman, L. J., & Zydney, A. L. (2017). Microfiltration and ultrafiltration: principles and applications. CRC Press.