Business Economics Name of the University Student ID BUSINESS ECONOMICS

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Student ID

1BUSINESS ECONOMICS
Table of Contents
Part A...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................5
Question 4....................................................................................................................................7
Question 5....................................................................................................................................8
Question 6..................................................................................................................................11
Part B.............................................................................................................................................13
Question 8..................................................................................................................................13
Answer 9....................................................................................................................................14
Question 10................................................................................................................................17
Question 11................................................................................................................................19
Question 14................................................................................................................................20
References......................................................................................................................................23

2BUSINESS ECONOMICS
Part A
Question 1
Question a
i)
Figure 1: Oil price and automobile demand
For a given increase in oil price automobile demand increases because of complementary
relation between the two. Demand curve here shifts to the left.
ii)

3BUSINESS ECONOMICS
Figure 2: Oil price and home insulation demand
With the objective of efficient energy use, home insulation demand increase for the said
increase in oil price. Demand curve here shifts to the right.
iii)
Figure 3: Oil price and coal demand
Increase in oil price increase coal demand shifting the demand curve rightward.
iv)

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Figure 4: Oil price and tyres demand
As automobile demand reduces for a rise in oil price, demand for tyres also decreases
(Baumol & Blinder, 2015). Demand curve shift to the left.
v)
Figure 5: Oil price and bicycle demand
As there is no need of oil for using bicycle, demand for bicycle increase as an alternative
to automobile. There is a rightward shift in the demand curve.
Question b

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External cost, also known as negative externality inflicts an additional cost burden on the
third party of the society. As private party does not consider these cost private marginal cost is
below the social marginal cost. Free market thus misallocates resource resulting in
overproduction. External benefit known as positive externality is the external benefit enjoyed by
the society. Here marginal social benefit exceeds that of the private marginal benefit. Resource
allocation is inefficient in the sense of underproduction of the desired good.
Question c
The obvious problem associated with public goods are they are non-excludable and non-
rival. Because of non-excludability there arises free riding problem in the distribution of public
good. Private parties never express their true preference for the good (Sloman & Jones, 2017)
Demand curve thus fails to reorient actual marginal benefit. Private parties therefore lack
incentives to produce public goods in sufficient amount.
Question 2
Question a
Scarcity in economics refers to the scarcity of resources to meet unlimited wants of
people. As resources are limited people have to make choice among the available alternatives.
This gives rise to the concept of opportunity cost. Opportunity cost is cost associated with a
decision resulted from forgone benefit that could have enjoyed from the next best alternative.
The scarcity and opportunity cost can be addressed using the concept of PPF. For a student, the
opportunity cost of playing cricket is the foregone grade that the student could get by studying
this time. Similarly, the opportunity cost of pursuing higher studies is the foregone salary from a
full time job.