Economic Principles and Decision Making

Economic Principles
&
Decision Making

Table of Contents
TASK 1............................................................................................................................................3
1. Income Elasticity of Demand:.................................................................................................3
2. Production Possibility frontier (PPF):......................................................................................4
TASK 2............................................................................................................................................5
1. Computation of accounting profit and economic profit:..........................................................5
2. Negative Externalities:.............................................................................................................8
REFERENCES................................................................................................................................9

TASK 1
1. Income Elasticity of Demand:
Income Elasticity of Demand relates to a resilience of quantity demanded for a certain
item to a shift in actual consumer earnings that purchases this item, holding all other factors
unchanged. Formula for determining Income Elasticity of Demand is the percentage shift in
demanded quantity separated by increase in income rate. Income demand elasticity tests market
sensitivity to shifts in consumer earnings for specific product. The greater the actual income
elasticity of demand for a specific product, the greater the reaction of customers in their
consumption habits when their actual income varies. Businesses usually measure demand
elasticity of income for their items to aid in forecasting the effect on product's sales of a business
cycle (Koh, Lee and Choi, 2013).
Here given task is concerned with income elasticity of demand as individual who earn
250 dollars per week prefer to buy noodles but if income of individual will increase what will be
possible impact on demand of noodles. Here noodles are available at cheaper rate so this product
is considered as inferior goods as with increase in consumer income they may purchase fewer
inferior-goods. So as per income-elasticity of demand in case of increase in income of individual
noodles demand will decrease because individual may shift to other eatable items.