Microeconomics Real Life Examples (V1)

Question 1

Income as a determinant of demand

Answer 1

Vietnam

• covid led to an average decrease in income by 7.8%
• Vinacafe experienced a 6.33% decrease in sales (normal good coffee)
• Nongshim experienced a 16.3% increase in sales of instant noodles (inferior good canned or preserved foods)

Question 2

Complements as a determinants of demand

Answer 2

• fuels and fuel powered cars
• countries increase indirect tax rates for fuels
• America: average fuel prices rises 18 cents a week —> consumption of fuel powered cars dropped by 60% since 2020

Question 3

Substitutes as a determinant of demand

Answer 3

• Pepsi and Cola
• 2015: Pepsi maintained prices below 40 cents as a long term average
• Consumers shifted from buying Coke to Pepsi, causing Coca Cola to lose market share by 3%
• Coca Cola decreases prices by 6% immediately after to preserve market share and demand in the market

Question 4

Tastes and preferences as a determinant of demand

Answer 4

• K-Pop idols as beauty care ambassadors
• 13% of 10-17 year old girls are interested in trying K-beauty products in the US
• South Korean beauty company reported a net profit of 181 billion Won in 2021, year on year rise of 728%
• Men in South Korea buy more cosmetics than men in other countries due to influence of K-Pop

Question 5

Population/Demographic changes as a determinant of demand

Answer 5

• HK housing demand
• aging trend over past decade: proportion of people aged >60 increased from 15% in 2001 to 19% in 2011
• more housing or larger living quarters needed to accommodate increasing population

Question 6

Excess Demand (Shortage)

Answer 6

• war in Iraq, 2003
• war disrupted supply of crude oil, reducing world supply
• oil prices rose from 20 USD to 47 USD per barrel in 2004

Question 7

Subsidy as a determinant of supply

Answer 7

• US gov implemented corn (agricultural good with high necessity) subsidy in 1930
• stabilizes fluctuating price and manages food supply
• subsidy totaled $116.6 billion from 1995 to 2020
• producers benefited up to 85 cents per gallon

Question 8

Supply shock

Answer 8

• Madagascar accounts to 75% of natural vanilla production
• Cyclone “Ava” in 2018 damaged major plantations, decreasing supply for vanilla ice cream
• Fall in supply rose vanilla ice cream prices to 600 USD per kg

Question 9

Price ceiling

Answer 9

• bare metal stents - high necessity, used in balloon angioplasty in medical procedures
• Price ceiling in India on bare metal stents implemented in Feb, 2017
• Sold for 650 USD prior, now capped at 100 USD

Question 10

Price floor

Answer 10

Carbon

• UK price floor on carbon, implemented April 2013
• 18 pounds per tonne of CO2 in 2019
• part of EU emissions trading system to combat climate change
• price floor promotes investment in low-carbon electricity generation

Minimum Wage

• Hong Kong $40/hour
• First implemented in 2011 of $28/hour
• Increased by 43% from 2011 to 2023
• Household income increased by 69.9% in 2011

Question 11

Indirect tax

Answer 11

• Mexico indirect tax on unhealthy food (2013)
• 8% on high calorie “non-essential” foods
• 2014: 5% decrease in junk food sales
• 2017: 7% decrease in junk food sales

Question 12

Positive consumption externality: Education

Answer 12

Externalities

• more productive workforce, lower unemployment rate, higher living standards
• Singapore (11.5 average years of schooling): 97.2% literacy rate, $93,400 USD per capita, 4.2% unemployment, 0.933 HDI
• Mali (2.3 average years of schooling) —> 35.5% literacy rate, $2250 USD per capita, 7.4% unemployment, 0.427 HDI

Policies

• Compulsory education act (2000): all Singapore citizens aged 6-15 born after 1996 must attend a national primary school
• literacy increases from 89% in 1990 to 96% in 2010
• low-income families can sign up for the financial assistance scheme for subsidized school fees, transportation, etc.

Question 13

Positive consumption externality: Healthcare

Answer 13

Externalities

• increased labour productivity: US 16.8% GDP
• vaccinations prevent spreading of diseases: US ~220,000 covid cases before vaccine, ~20,000 cases after vaccine, reduction of 94%

Policies

• New Zealand direct provision of healthcare
• national immunization schedule since 1958, free vaccines offered to citizens of all ages

Question 14

Negative consumption externality: Cigarettes

Answer 14

Externalities

• Reduces other’s health: 60% risk of lung cancer due to exposure to environmental tobacco smoke
• Strain on healthcare: 8.7% of US healthcare spending used to treat illness by tobacco smoke

Policies

• HK tobacco tax: $38 per pack, reduced smoking rate from 23.3% in 1980 to 9.5% in 2021
• mandatory pictorial warnings, 85% of front and 85% of back, at least 12 warnings
• ban on smoking in specific areas with penalty of $1500

Question 15

Negative consumption externality: Alcohol

Answer 15

Externalities

• Strain on healthcare: 29,500 liver disease deaths in US
• More drink-driving accidents: 10,142 alcohol-related traffic fatalities in US, 2019
• Higher crime rate: 15% of robbery in US linked to alcohol use

Policies

• HK ban on selling liquor to minors with penalty of $50,000
• Ban on alcohol advertisements
• Education campaigns e.g. “Young and Alcohol Free”
• Requirement of liquor license, penalty of HKD $1,000,000 + 2 years imprisonment
• Alcohol limit for driving, penalty = HK$25,000+ < 3 years imprisonment + 10 driving-offence points

Question 16

Negative consumption externality: Unhealthy food

Answer 16

Externalities

• Obesity dents productivity by 27 million in companies
• Long-term cost burdens to healthcare systems, more than 1.3 trillion per year by 2030
• Costs global economy 3% of GDP

Policies

• Indirect tax: 8% tax on high calorie “non-essential” foods in Mexico, 2013
• Indirect tax: 4% tax on packaged foods and drinks containing high levels of sugar and salt in Hungary —> 16% of interviewees opted for healthier products, 16% consumed less of the junk food, 40% of manufactures tweaked recipes
• Tax brought 61.3 billion revenue for healthcare spending

Question 17

Negative consumption externality: Unhealthy drinks

Answer 17

Policies

• Indirect tax: 20p per liter on sugary drinks imposed in UK, 2017 —> companies changed recipes to reduce sugar content
• Indirect tax: 1 peso per liter on sugary drinks imposed in Mexico, 2014 —> cut sales by 12%
• Regulations: HFSS products banned from being placed at key locations at stores in UK
• Advertisements banned from public transport in UK

Question 18

Positive production externality: Research and Development

Answer 18

Policies

• HKITF funded around 8500 projects with a total funding commitment of about $7.73 billion on the Researcher Programme
• Tax deductions of 300% to designated research institutions
• 2977 approved Innovation and Technology Support Programme Projects

Question 19

Negative production externality: Air pollution

Answer 19

Externalities

• 21% of the disease burden in China is due to air pollution
• Caused more than 1 million deaths per year

Policies

• HK vehicle emission control measures: replaces old diesel commercial vehicles with catalytic converters –> concentration of air pollutants at roadsides decreased by 38% in 2021
• Japan: since 2012, a carbon tax of 289 yen per tonne of CO2
• EU emission trading scheme: tradable permits cut emissions by 43% since 2005

Question 20

Common access resources

Answer 20

Policies

• Holland fishing license VISpas: license allows individuals to catch fish in Holland for a year, only obtainable by joining an angling association + fee of 40 euros
• Coral harvesting quota in Great Barrier Reef: quota of 200 tonnes annually, shared by 59 licenses

Question 21

Price ceiling (rent control)

Answer 21

New York

• price ceiling on rental housing set 60% lower than market price in 2008
• limit amount for landlords to charge rent - landlords are only allowed to increase rent by 7.5% every 2 years until the Max Base Rent is reached
• around 16,400 rent controlled apartments
• 1994 study in Berkeley, California, a city of 110,000 residents that had rent regulations for more than a decade, found that the city lost some $1.6 million a year in property taxes (=$3 million today)

Question 22

Public goods

Answer 22

Pakistan

• increased defence budget by 12% in 2021
• with the covid crisis 25 million families were relying on govt aid
• increasing military spending has angered many domestically as many felt the government should be focusing their resources on their internal socio-economic issues first

Hong Kong

• Highways Department of HK
• 240,000 public light facilities - street light, footbridge, street lighting
• Costs $104.1 million in 2016
• Better illumination, better environment e.g. Lampost beautification in MTR stations
• Reduced night time traffic accidents by 43%
• May cause cancer
• Disrupt sleeping patterns and hinders hormone production