Table of Contents

Introduction.

Question 1.

Use of Production possibility Frontier (PPF):

Question 2.

Market in action, demand and supply:

Question 3.

Price elasticity of demand and supply.

Question 4.

Production Costs:

Question 5.

Perfect completion and monopoly:

Conclusion.

References.

Introduction to Economics for Business 

In any business entity, there is various business activities are operated in daily basis, but for efficient completion of these activities, proper system should be there in respect of economical and costing perspective. In this report, five questions are given for five different circumstances. By solving these questions, an individual may gain knowledge about production possibility frontier, price elasticity of demand and other important terms.

Economics for Business - Question 1

Use of Production possibility Frontier (PPF):

Production of rice and machinery is given in following table related to Nepal:

Position

P

Q

R

S

T

U

V

W

X

Y

Z

Rice (1000 tons)

0

10

26

37

45

50

55

59

66

77

80

Machinery (units)

90

89

85

80

75

70

65

60

50

30

0

A. The position B, V and D given in above image should be elaborated as follows:

Position

B

V

D

Rice (1000 tons)

40

55

70

Machinery (units)

35

65

80

If Nepal is operating at level T (producing 45000 tons rice and producing 75 machineries) and from this level if Nepal will produce 10000 tons more rice then it wants to reach at the level of V. For this, it will require reducing production of 10 machineries, therefore; opportunity cost for producing 10000 tons more rice is 10 machineries reduction.

B1. If Nepal starts to produce fertilizers, then it impacts the economy of Nepal by having reduction in the production of rice and machineries per unit production of fertilizers. It may be understandable by taking one production possibility frontier (PPF) line as given in above image. For example, if PPF1 is taken where only two product rice and machinery is produced but at this level if fertilizers is also produced then PPF1 get more smaller than now. For illustration purposes, the highlighted part in green colour given in above image may indicate new PPF1 if fertilizer is also produce along with rice and machinery. But as per economy perspective, economy of Nepal will be bigger than existing due to production of fertilizers which is good for its future growth and developments as well as it will impact on rice and machinery by having reduced production of these two due to fertilizer (Anderson and et. Al, 2016).

B2. If there is discovery of steel then this country also starts to produce steel along with three existing products (Rice, Machinery and Fertilizers). Due to this, there will be big impact on the economy of Nepal and its economy will bigger because of having four products to produce but, apart from this, production of steel will decrease the production of existing product’s production and the existing PPF2 will become smaller as explained above in part B1.

B3. As given in this report that in order to increase the production of rice and machinery, it is mandatory to have investment of $50 billion in each sector (total amount required is $100 billion). As further given in the question that, amount of $100 billion is made available by World Bank to the Nepal. Due to availability of funds for both the sector, production of rice as well as production of machinery will increase. For example, if PPF3 is taken for understanding purpose then after investing $100 billion in both sectors, the existing PPF3 will become bigger than now. In existing PPF3 ride can be produced only 80000 tons maximum if there is no production of machinery but after investment of $100 billion, Nepal will be able to produce quantity of rice more than 80000 tonnes along with having some quantity production of machinery.

Economics for Business - Question 2

Market in Action, Demand and Supply:

A shortage is the resultant when demand for the product exceeds quantity supplied, alternatively when price is too low.

A surplus on the other hand is the resultant when price is too high and demand decreases even in the case supply available.

Price (10kg bag)

Demand

(10 kg bags)

Supply (SS)

(10 kg bags)

Surplus (+)

Shortage (-)

10

89

29

60-

20

70

40

30-

30

55

55

0

40

39

67

28+

50

25

80

55+

60

11

95

84+

(A) The market equilibrium price and quantity for rice is : Market Equilibrium is the point where demand for the product is equal to quantity supplied, in other words the point of no surplus and no shortage .As per the findings from above table calculations , it is analysed that

Market Equilibrium Price: 30 /10 Kg Bag

Equilibrium Quantity: 55 (10 Kg bags)

(B) The major factor that can motivate the government to reduce the price of rice at $20 per 10 kg bag is “Threat from other countries”, if those nations are able to deliver the same rice at less price in the market it create a difficult situation for local dealers and this situation take nation towards higher imports and less exports which is not a good sign for economy.

Another factor that motivates government to reduce price of food is to make it more affordable. Government in the public interest can take decision to reduce the price of food as it’s a basic necessity of society (Keller, 2015).

But when we go through Law of Supply which states that, all other factors remain constant, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa. Similarly when government reduce the price here from $30 to $20, it results in decrease in quantity of the rice supplied in the market and creates the situation of SHORTAGE. (Shortage of 30 (10 Kg per bag) against price @$20 as with reduction in price demand increases to 70 from 55 and supply decline to 40 from 55 ).

Economics for Business - Question 3

Price Elasticity of Demand and Supply

Price elasticity = the effect of price change on demand. Price elasticity is defined as the percentage change in consumption against percentage change in price. It helps to understand whether the product is sensitive to price fluctuations. Ideally, market desires the product to be INELASTIC— so that demand remains stable if prices do fluctuate. Here,

Given credentials:

Elasticity of Demand (Ed) =0.8, Price (P1) = 6 / packet, Quantity (Q1) =1000 Packets, company decided to increase in price by 25%

P1 = 6 per packet (as given)

Then, P2 = (6*125)/100 = 7.5

Ed = (∆Q/∆P) * (P/Q)

Now, Ed = {(Q2 – Q1)/ (P2-P1)}*(P1/Q1)

-0.8 = {(Q2-1000)/ (7.5-6)}*(6/1000)

Q2 = 800

A. As elasticity of demand is 0.8 which is less than 1, so demand is inelastic i.e. consumers still purchase a product despite a price increase (as in case of cigarettes).When price of cigarette increases, then, demand of quantity falls but by very less units i.e. by 200 units.

In this case board can go with value-based pricing strategy where price of the product is based on what the customer is willing to pay as consumers still purchase cigarettes despite a price increase. If it is used accurately, it does encourage customer satisfaction and loyalty and alternatively with more satisfied customers, sales can be maintained (Imbens and Rubin, 2015).

B. Recommended interventions in the cigarette market for Government:

If we accept that there is relationship between smoking and disease, the question arises on the role of government intervention to reduce tobacco consumption and regulate Cigarette market.

Towards this, government should firstly intervene with strict regulating authority to regulate all the three aspects from manufacturing, marketing, to sale of product. This authority focused on delivery of these products with care and restricts them from ruining the society.

Another area whether intervention from government requires is “Incomplete information about health consequences “Incomplete information by the market about the risks of smoking results in behavior that smokers would not otherwise choose. These industries not provide society with health information that results in reduce consumption of its products. In this regard government should set the guidelines to spread the correct information among the society.

And tough controls are required in this industry, in case, they involve in consistently hidden product information regarding ill effects of smoking and misinformation about risks associated.

Government can intervene here with strict tax regulations for running such industries and higher tax rates in this regard so that they can earn better revenue along with indirect control over such industry.

Economics for Business - Question 4

Production Costs:

In this case firstly we analyse what is the earnings for the year if John continue to work as a teacher not started his business:

High school teacher

From School

$80000

From Saving Account Interest

$110000*5%

$5500

Rental Income

 

$12000

 

Total

$97500/year

Calculation of Economics Profit and Accounting Profit:

Economic Profit = Total Revenue –Explicit Costs –Implicit Costs

Accounting Profit = Total Revenue – Explicit Costs (here, we ignore opportunity costs)

Here,

Total Revenue is described as total income i.e. total inflow out from sales. In other words, total income from the business.

Explicit costs are described as costs results in immediate outflow of cash from business, in other words out of pocket costs. Example: costs are paid in the form of wages, rest, material, salary, electricity bills, and other overhead miscellaneous expenses.

Implicit costs are described as value of sacrifice made by the business for conducting another action, in other words opportunity costs.

Item

Amount $

Revenue- Pizza Section

400,000

Revenue- Beverages Section

190,000

Less:

2 Cashiers (wages per worker) 

-55,000

Pizza ingredients

-50,000

Manager

-75,000

3 Pizza bakers (wages per baker)

-60,000

Interest Costs (50000*6%)

-3,000

Accounting Profit

3,47,000

Less : Opportunity Costs

Interest from Saving (110000*5%)

-55,000

Rental Income

-12,000

Economic Profit

2,80,000


Advice:

As per the calculations above , if John continue with his job he can have its total inflow for the year -$97500/year .On the other hand , when he go with business we can get a total revenue of $3,47,000. Even after analysing opportunity cost and economic profit we can easily say it’s beneficial for John to run his own business rather than working as a teacher.

Economics for Business - Question 5

Perfect Completion and Monopoly:

Calculation of profit or loss for Sarah Mat (a rice farmer):

As given in above diagram,

Price for a bag of rice (20kg) = AUD 40 amount

Particulars

100 bag

200 bag

300 bag

400 bag

500 bag

600 bag

Price per bag (In AUD)

40

40

40

40

40

40

Average total cost per unit

15

12

17

30

40

55

total price (AUD) [A]

4000

8000

12000

16000

20000

24000

Total cost[B]

1500

2400

5100

12000

20000

33000

Profit or loss (A-B)

2500

5600

6900

4000

0

(7000)

Key characteristics of perfect competition:

The key features are as follows:

  • In perfect competition economy, there is large number of small business firms. It means that each business firm in such economy has small market share as compared to total market share (Card and DellaVigna 2017).
  • There are identical goods in the market, it means that products produced by all the firms are homogeneous and identical in all aspects.
  • The another key characteristics of perfect economy is that there is a perfect mobility of resources, it means that everyone can acquired required resources for their businesses without having any barriers on the side of government and there is no barriers to entry or exit in the market.

Conclusion on Economics for Business 

From the above report it is concluded that there are various economical and statistical instrument that are useful to an business firm so that it may evaluate its efficiency and effectiveness of its business operations and take decisions accordingly. It is further concluded that having knowledge of various cost accounting related term may be helpful to a manufacturing unit.

References for Economics for Business 

Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2016. Statistics for business & economics. Nelson Education.

Card, D. and DellaVigna, S., 2017. What do editors maximize? Evidence from four leading economics journals (No. w23282). National Bureau of Economic Research.

Card, D. and DellaVigna, S., 2020. What do editors maximize? Evidence from four economics journals. Review of Economics and Statistics. 102(1). pp.195-217.

Chang, A. and Li, P., 2015. Is economics research replicable? Sixty published papers from thirteen journals say'usually not'. Available at SSRN 2669564.

Graetz, G. and Michaels, G., 2018. Robots at work. Review of Economics and Statistics. 100(5). pp.753-768.

Imbens, G.W. and Rubin, D.B., 2015. Causal inference in statistics, social, and biomedical sciences. Cambridge University Press.

Jones, R.W. and Kierzkowski, H., 2018. The role of services in production and international trade: A theoretical framework. World Scientific Book Chapters. pp.233-253.

Keller, G., 2015. Statistics for Management and Economics, Abbreviated. Cengage Learning.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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