# B01BECO107 Business Economics Assignments Solution

## Question 1

In the theory of microeconomics demand constituted by consumers has a critical role to play. Economically, demand of a good describes buyers’ desirability and ability to purchase a good at the fixed market price (Phlips, 2014). Change in the demanded quantity differs completely from that of a change in entire demand and supply.

### Change in quantity demanded

The concept of change in demand corresponds to the amount of demand change for a commodity. It is own price of the good that causes quantity demanded to change. Change in quantity demanded captures only impact of own price change on demand keeping other factors constant. The direction of change in the quantity follows the principle of law of demand. The stated law proposes that price and demand move in opposite direction. That is demand increase when there is an increase in price and decreases with an escalation in price (Stiglitz & Rosengard, 2015). The former is called demand expansion while the latter is known as demand contraction. The change in quantity demanded is captured by movement on the demand curve from one point to another. During demand expansion, it moves from right to left while during contraction is shown by the movement from right to leftward direction on the demand curve. The impact on market following a change in quantity demanded is explained in figure 1 with the aid of following figure using both demand and supply curve

Figure 1: Change in quantity demanded

In the given figure equilibrium price is indicated as P*. At a higher price that is at P1,there is a decline in demand as shown by the upward movement on the demand curve from E1 to A. This leads to an excess supply pushing price down towards equilibrium (Devine et al. 2018). Corresponds to a lower price, indicated as P2,demand increases as show by a downward movement on the demand curve from E1to D. The increased demand exceeds available supply. This exerts upward push on price.

Change in demand

In a sharp contrast to change in quantity demanded, change in demand capture demand change followed by change in factors other than own price. The entire demand curve here shifts either rightward or leftward depending on direction of change in corresponding factors. The factors that are responsible for a change in demand include income, price of substitutes or complements, change in taste or preference and the like (Blad & Keiding, 2014) Favorable changes in any of these factors causes demand to increase and demand curve shifts outward accordingly. Unfavorable change, on the other hand, causes demand to decrease. Decrease in demand is observed from a leftward shift of demand curve

Figure 2: Increase in demand and equilibrium

As demand increase due to exogenous factors, the demand curve goes outward to D1.With the existing supply curve outward shift in demand settles new equilibrium at a higher price – output combination.

Figure 3: Decrease in demand and equilibrium

Conversely, demand curve moves inward when there is a decrease in demand. This settles new equilibrium at a lower quantity and price combination.

### Question 2

In the international trade theory, protectionists policy indicates any policy measures unfavorable to free trade. Such policies more often have a distortionary effect on the economic and political science environment (Helpman & Razin, 2014). A recent relevant aspect to this is the protectionist policies undertaken by the President Donald Trump.

Country’s access to abundant resources determine line of specialization of the nation. United State has abundant supply of capital and land. The nation thus has an absolute and comparative advantage mostly in capital and agricultural goods. Among the agricultural export of United State, the major is corn, meat, soybean and poultry. US exports capital goods such as commercial aircraft, electric apparatus, machineries, medical equipment and others (census.gov 2018). On the other hand, US imports mainly intermediary and final goods that are labor intensive.

### Trump’s protectionist policy and likely consequences

Growing import over the exportable has resulted in a large trade deficit for the nation. Huge trade deficit is given as an argument in favor of the restrictive policies. Trump announced protectionists policy imposes a substantially huge tariff on several goods imported from nations like Japan, China, Mexico and other EU nation. On import of steel a tariff of 25 percent has been imposed. In case of aluminum, the corresponding tariff rate is 10 percent.

The restrictive policies however are actually counterproductive harming the economic wellbeing of the nation. Trump’s attempt to eliminate all the commercial agreement would lead to trade disputes among US and its trading partners. In a world of globalization and integration Trump’s policies contrasting to global trend would harm American economy. The protectionist policy against China causes a trade war between two of the world’s largest economies. Trump’s policy triggers trade war as other retaliates in the same way (nytimes.com 2018). Increase in import tariff on many products would increase cost of production. The increased cost inflicted on consumer in form of higher price. There is net loss in social welfare from the resulted tariff. The following figure shows impact of protectionist policy on economic welfare.

Figure 4: Consequences of tariff

After tariff, the increased price lowers consumer surplus. There is a small increase in producer surplus and tariff revenue. The aggregate welfare loss is indicated by the shaded region in the figure.

### References list

1. Blad, M. C., & Keiding, H. (2014). Microeconomics: Institutions, equilibrium and optimality (Vol. 30). Elsevier.