Eco help on: Opportunity & growth
Q1. Define describe & illustrate with a diagram one opportunity cost for a person starting up their own business.
a) The opportunity cost for a person starting their own business would be Investment Capital. The investment done in capital would be in terms of capital invested, machinery bought, buildings, technology & training & development of the personnel. Investment Capital would be referred to as one of the most important opportunity cost while staring up the business.
Explain the difference between Explicit & Implicit Cost.
b) Explicit Cost: Explicit Cost refers to the type of cost which has been incurred by the organization. Such type of costs is recorded in the books of accounts. Some of the examples of explicit cost are rent paid, salary to the workers, price paid, etc. Such type f costs are also known as “Accounting Costs”. In simpler terms, explicit cost refers to the type of costs wherein cash is paid from the company’s accounts (Davig, Leeper & Walker, 2011).
Implicit Cost: Implicit Cost refers to the type of costs which are not actually paid & therefore not recorded in the books of accounts. Implicit costs have been related to the opportunity costs. This means that, if a person is chooses an alternative them he/she would falsify the benefit from the same. In a given company, the implicit cost would be referred to as a cost which would be attained by the owner of the organization.
Explain the difference between accounting profit & economic profit.
c) Accounting Profit: Accounting profits refers to the profit which could be summarized as a difference between the revenue incurred & cost earned. In case of accounting profits, calculations have been done as revenue minus explicit costs.
Economic Profit: Economic Profit refers to the profit which could be summarized as a difference between revenues incurred, cost earned & the opportunity cost. In case of economic profits, calculations have been done as revenue minus implicit costs. Economic profits have been regarded as one of the best measure to perform the financial calculations (Davig, Leeper & Walker, 2011).
How do opportunity cost, explicit cost, implicit cost, accounting profit & economic profit relate to each other?
d) The relationship between opportunity cost, implicit cost, explicit cost, economic profit & accounting profit could be seen as follows. Opportunity costs have been defined as the total of explicit & implicit cost. The economic profit has been defined as the difference between revenue earned & cost incurred. The cost takes into consideration both explicit & implicit cost. Hence, it could be stated that all the four costs are related to one another.
Q2. Explain & illustrate with a diagram the impact of external costs on resource allocation.
a) External Costs refers to a type of cost which would lead to a fall in the people or other who relate within the activity. It must be noticed that, externalities’ lead to a decline in the efficiency.
It must be noted that, when activities would not be able to create externality, a sufficient level of activity would be created for the society which would be equal to the socially optimal level of the activity.
Explain & illustrate with a diagram the impact of external benefits on resource allocation
b) External benefits refer to the type of benefits which would be attained by the people apart from all those who are not related to the activity. It must be noted that, externalities whether positive or negative the prices would not have an effect over the consumption of a particular product or a service. The producers along with the consumers would not bear the costs attached to it.
Why are public goods not produced in sufficient quantities by the private markets?
c) Public Good refers to a type of good or a service which is majorly produced due to the two features attached to it. The first feature refers to the benefits attached to it terms of consumers & the second reason attached to it is in regards to the free riders i.e. the people who are not likely to pay. The above mentioned are the two sole reasons as to why the public goods are not produced in sufficient quantities by the private markets.
Q3. Why consumption demand considered to be more stable than investment demand.
a) The consumption demand has been referred to as more stable as compared to investment demand as consumption or aggregate demand refers to the demand of final goods & services at a given price level. It refers to the amount of goods & services available at a given price level. This is also known as effective demand as compared to the investment demand.
Explain two basic non interest rate determinants of investment demand.
b) The two non interest rate determinants of investment demand are discussed as follows. They are:
Þ Stock of Capital: The levels of capital which has been used leads too high levels of effectiveness in the investment demand in two different ways. The investments lead to the replacement of the capital which would be depreciated. Secondly, high levels of capital stock would lead to reduction in investment.
Þ Capacity Utilization: Capacity utilization refers to the rate which majorly takes into consideration the percentage of capital stock which is taken into account. It has been seen that, if the utilization of the capital stock is quite large then the firms would be accountable to expand the levels of investment.
Why did classical economists believe that the economy would, except in the very short run, operate in full employment?
c) The classical economists believe that the economy would, except in the very short run, operate at full employment due to the following reasons. The economists have been argued that, the economy would attain full employment in long run only. This is because at this level, all those people who are willing to work would have a job in their hands (Davig, Leeper & Walker, 2011). In case of classical economists, aggregate supply would show the economy at the full capacity levels.
Q4. Why is the multiplier effect of an increase in welfare payments less than the multiplier effect of an increase in the government spending of an equal amount?
a) The multiplier effect of an increase in the welfare payments is less than the multiplier effect f an increase in the government spending of an equal amount due to the following reasons. The multiplier which would lead to high levels of incremental amount of spending would have increased levels of consumption.
What is the difference between discretionary fiscal policy & automatic stabilizers?
b) Discretionary fiscal policy: Discretionary fiscal policy refers to the type of policy which has been formulated in order to recognize the various types’ of changes in case of the fiscal policy. Implementation of the fiscal policy would take longer time. The fiscal policy would have an advantage as compared to the monetary policy with respect to an increase in the government spending (Davig, Leeper & Walker, 2011). This would lead to a rise in the aggregate demand.
Automatic Stabilizers: The automatic stabilizers refer to the type of stabilizers which would lead to an increase in the budgets even at the time of recession. The automotive stabilizers would take into consideration the countercyclical policies. Some of the examples in case of automotive stabilizers refer to corporate profits, progressive income tax & unemployment insurance program.
Q5) Suppose you own a coffee shop. List some of the fixed inputs & variable inputs you would use in operating the shop.
a) In order to make the coffee shop operational the following fixed & variable inputs should be kept in mind. They are as under:
Fixed Inputs:
Þ Cost to entry
Þ Property tax
Þ Rent
Þ Cost of the utilities
Þ Wages
Þ Equipments
Variable Inputs:
Þ Packaging material such as receipt paper, containers, utensils
Þ Ingredients such as dairy products, coffee beans, beaked food
Þ Cost of Labor involved
Baubles & Beads manufacturing produces 100units per day. The total fixed cost is $ 4000 per day & the total variable cost is $13000 per day. Calculate the average fixed cost, total cost, average variable cost & average total cost.
b) Units manufactured by Baubles & Beads 100 units
Total Fixed Cost = $4000
Total Variable Cost = $13000
Average Fixed Cost = Fixed Cost/ number of units
= 4000/100 = $40
Average Variable Cost = Variable Cost/ number of units
= 13000/100 = $130
Total Cost = Total Fixed Cost + Total Variable Cost
= 4000 + 13000 = $ 17000
Average Total Cost = Total Cost/ number of units
= 17000/100 = $170
An owner of a firm estimates that the average total cost is $6.71 & the marginal cost is $6.71 at the current output level. Explain the relationship between the two.
c) The relationship between marginal cost & average total cost could be seen as under. It be taken into consideration that when average total cost declines there is a decline in the marginal cost. It must be stated that, with an additional output level, the production unit is expected to be at a constant level. Therefore, the amount of marginal cost along with average total cost is the same at the current output level.
Q6) Illustrate & explain with diagrams the difference between demand pull & cost push inflation.
a) Illustrate & explain with diagrams the difference between demand-pull & cost-push inflation.
The difference between demand pull & cost push inflation could be illustrated with the help of the following explanation & diagrams.
Demand Pull inflation refers to a circumstance where in the demand of the goods & services is faster as compared to the supply of the goods & services. Due to an overdue demand of goods & services in the market, leads to an increase in the prices of the goods & services offered within the market. The increase in price creates inflation in the market. Demand Pull inflation leads to an increase in the levels of demand in the four main sectors i.e. government, households, buyers (foreign) & business.
Cost Push inflation refers to a situation which arises in the market when there is an increase in the cost of production. When there is a decline in the average supply of the goods, there would be an increase in the levels of cost production. This is when Cost Push inflation occurs within the economy (Davig, Leeper & Walker, 2011). Cost Push inflation refers to a situation when the prices of the goods & services have been inflated with an increase in the cost of the factors of production (land, labor, capital & entrepreneurship).
b) Provide (describe) two causes of each of inflation.
Cost Push Inflation: The main cause of Cost Push Inflation is due to the increase in the levels of cost of production. This might be due to hostile trade unions which would lead to an increase in the levels of wages, price of the raw materials, services etc.
Demand Pull Inflation: The main cause of Demand Pull Inflation is due to the economic dynamics. A rise in the government purchases would lead to an increase in the levels of average demands. This would lead to an increase in the levels of prices of the goods & services (Davig, Leeper & Walker, 2011). The second factor while determining the demand pull inflation would be a reduction in the local exchange rates. This would lead to an increase in the levels of imports & a decrease in the levels of exports.
Q7) Discuss with diagrams, the importance of money in an economy. Your answer should include a discussion on the following:
Bank creation of money
Demand of money
Money supply
Determination of the equilibrium interest rate in the money market
a) Bank creation of money: Creation of money refers to a process with which money supply could be controlled within the economy. There are mainly two stages in creation of money i.e. introduction of money by lending or buying the assets. The second stage would take into consideration the expansion of new money introduced within the economy.
The graph above denotes how money is created within the economy. The graph denotes the creation of money with the help of fractal reserve system. The two main bodies involved within the creation of money refer to Central Bank & Commercial Bank (Woodford, 2003).
b) Demand for money: The demand for money refers to the desire of holding cash either in form of hard cash or bank deposits. The demand for money could be denoted as M1 (non interest holdings), M2 or M3. It must be stated that, the demand of money has a direct link with the rate of interest.
In general terms, the demand of money would be increased with the levels of output & decreases with a decrease in the levels of rate of interests.
c) Money Supply: Money supply refers to the levels of money available within the economy. This means the money in the economy at a specified period of time. The data related to money supply would be recorded or published by the government officials of a particular economy. Various strong evidences have been seen between the rate of inflation & supply of money within a particular economy (Woodford, 2003).
Types of money which would be supplied within an economy could be explained with the help of the following graph:
d) Determination of the equilibrium interest rate in the money market: Equilibrium in case of the money market would take into consideration that, the real supply should be equal to real quantity of money. In order to determine the equilibrium interest rate in the money market, a LM curve would be plotted denoting the various levels of output.
It must be seen that, the LM & the levels of output consists of a positive relationship. This would help to restore the equilibrium in case of the money market.
Q8)
| Price $(average revenue) | Quantity(units) | Total Revenue ($)Price x Quantity | Marginal Revenue |
| 20 | 0 | 0 | — |
| 18 | 1 | 18 | 18 |
| 16 | 2 | 32 | 14 |
| 14 | 3 | 42 | 10 |
| 12 | 4 | 48 | 06 |
| 10 | 5 | 50 | 02 |
| 8 | 6 | 48 | (2) |
| 6 | 7 | 42 | (6) |
The price elasticity of demand at P = $10 would be calculated as under
Price (new) = 10
Price (old) = 12
Quantity (new) = 5
Quantity (old) = 4
Price elasticity of demand = change in the quantity demanded/ change in the price
= 10-12/ 12 = -2/12 = -1/6
= 5-4/ 4 = 1/ 4
Therefore, the POD = 1/ 4 x -6/ 1
= -1.5
Over what price range is demand price elastic = $20
Over what price range is demand price inelastic = $6
Q9)
a) Which of the following are final goods & services and which are intermediate goods & services? Please explain your answer.
(i) A windscreen purchased by a motor vehicle spare parts supplier: The windscreen would be regarded as an intermediate good. This is because it would be used in the manufacturing of the car.
(ii) A new bulldozer to be used by a construction company: The new bull dozer would be regarded as an intermediate good. This is because it would be used for construction purposes.
(iii) A household cleaning service purchased by a family from a domestic cleaning service company: The cleaning service purchased by a family would be regarded as a final good.
(iv) Coal: Coal would be regarded as a final good. This is because it would be used by the consumers & will not be used in the production of any commodity or good
b) An economy produces final goods and services with a market value of $800 billion in a given year, but only $750 billion worth of goods & services is sold to domestic or foreign buyers. Is the nation’s GDP $800 billion or $750 billion? Explain
In economic terms, Final Goods refers to the type of goods or services which could be used consumed by the consumer. Such types of goods are not used to produce any other commodity or good. While measuring the national income or GDP, only final goods should be taken into consideration. Therefore, $800 billion would be regarded as the nation’s GDP.
Q10)
a) Consumer Price Index (CPI) refers to a change in the price levels of the goods & services. According to the Bureau of Index, CPI has been defined as a “measure which leads to a change in the levels of prices of the goods & services available in the market place”. CPI has been referred to as a statistical index which would publish the prices of the consumer goods & services on periodical basis.
Some of the advantages & disadvantages of CPI have been highlighted as under:
Advantages:
The first advantage attached with CPI refers to the price data & measuring the cost of living index. With the help of CPI, the various commodities would be measured along with the estimation of consumption expenditure. This statistical element would be able to measure the change in the price level of the various consumer goods majorly acquired by the family or the households.
Disadvantages:
Þ New products: The first disadvantage of CPI refers to the newly introduced consumer products in the market. This means that, the newly consumer products are added within the various goods or services already included (Woodford, 2003) in calculating the CPI. In case of new products, the prices generally fall in the beginning. While calculating the CPI, it does not take into consideration the falling prices of the goods.
Þ Change in the preference: Change in the preferences of the consumers would also lead to high levels of inaccuracy levels while calculating CPI. CPI will not take into consideration the fact that; most of the people generally buy from big stores during the sale’s season (Woodford, 2003).
Þ Quality of goods: The last disadvantage attached with CPI refers to the fact that, it does not take into consideration the rise in the cost of living. While calculating CPI, the up gradation in the quality of the product will not be taken into consideration.
b) Why do some people “lose” from inflation and why do some people “win” from inflation?
Inflation refers to a state which leads to a sudden rise in the prices of good & services within a given economy. Inflation is unexpected & leads to a win-lose situation within the society. The people who win from inflation refers to the borrowers as inflation would lead to a general increase in the purchasing power (Canzoneri, Cumby & Diba, 2011). The producers are also expected to benefit from inflation in the short run. It must be regarded that, inflation creates a harmful situation rather than benefiting the people. The lenders or the savers would lose form inflation when the actual rate of return over powers the expected rate of return.
Q11) Illustrate and explain using diagrams, the likely effects through transmission mechanisms and on whole economy, of a decision by a central bank to sell government securities in the money market.
The likely effects of transmission mechanisms & on whole economy, of a decision by a central bank to sell government securities in the money market. The various assumptions of monetary transmission mechanism would include various components such as currency & bank reserves. The central bank would control the monetary base. The central bank would change the monetary base within the open market, etc (Canzoneri, Cumby & Diba, 2011). The currency along with the bank reserves would be majorly measured in terms of unit. This would lead the policy movements to enclose real as well as monetary base which would be unchanged.
There are various channels which could be used in order to perform various policy measures. This would help in order to describe the monetary policy along with the stock of money & the interest rate in short run.
Q12)
a) Consider this statement: “A firm should increase output when it makes a profit”. Do you agree or disagree.
“A firm should increase output when it makes a profit”- Yes, it has been noticed that most of the firms would increase the levels of output when it makes a profit. With more firms entering in to the market, the levels of output would increase further & the prices would fall till the time the entire profit would fade away (Canzoneri, Cumby & Diba, 2011).
With more number of firms in the market, new equilibrium would be formed at such a position which would be higher as compared to the initial price.
b) Consider the statement: “When marginal revenue equals marginal cost, total cost equals total revenue & the firm would makes zero profit”. Do you agree or disagree
Marginal revenue (MR) has defined the type of revenue which would be earned with every additional output or unit produced. MR has been defined as a difference of Total revenue & the price charged for a particular unit. It has been noticed that, in a competitive market, when the price of a particular commodity is equal to the marginal cost, the profit generated is equal to zero.
Q13) Will each of the following changes in the price levels cause total revenue to increase, decrease or unchanged?
(i) Price falls & demand is elastic: There would be a fall in Total revenue
(ii) Price rises & demand is elastic: This will lead to an fall in total revenue to zero
(iii) Price falls & demand is unitary elastic: No affect on the total revenue
(iv) Price rises & demand unitary elastic: This will lead to a fall in the total revenue
(v) Price falls & demand is inelastic: There would be an increase in the total revenue
Q14)
(a) Assuming that the firms form a cartel, what price will the cartel choose if it wishes to maximize the overall profits of the cartel = $25
(b) What total output must the cartel produce in order to maintain this price =
(c) To what output will an individual firm be restricted if this price is to be maintained = 8 -10
(d) If the other firms stick to this output, how much would an individual firm be tempted to produce if it wished to maximize the own profits at the agreed price = 20
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