Economic Principle and Decision Making

ECONOMIC PRINCIPLE AND
DECISION MAKING
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Question 1
1) A good which follows the law of demand is termed as normal good. As per the law of
demand, there is an inverse relationship between the price and demand of the good. As a
result, the demand curve would be downward sloping (Arnold, 2017). Considering the
above , the demand curve for a normal good such as noodle is indicated as follows.
In the demand curve shown above, the quantity demanded is denoted by Q on the horizontal
axis whereas the price is represented on the vertical axis. It is evident that as the price
decreases there is an increase in the quantity demanded.
2) The impact of changing income levels with regards to noodles purchase would depend on
the income elasticity. In case of normal goods, typically higher income leads to higher
quantity demanded of normal goods. This is on expected lines as increase in income
would reply higher availability of financial resources to make the purchase of goods. Thus,
with increasing income levels, affordability of a given good improves resulting in higher
consumption (Krugman, 2017). As a result, for noodles it is fair to expect that as income
increases, the consumers would purchase more noodles.
3) The demand for organic foods has increased in the recent times as consumers have started
realising the health benefits associated with the consumption of organic foods. However,
the supply of organic foods has not been to catch up with the increased demand primarily
on account of the production techniques involved. Since organic foods can only use
organic fertilisers, hence the growth is comparatively lower than with chemical fertilisers
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leading to higher maturity period. Additionally, the labour requirement for organic food
cultivation is also higher than the conventional farming owing to no use of chemical
pesticides resulting in manual removal to weeds. Owing to higher use of labour and less
scope for automation, the cost of organic foods is higher than conventional foods.. For soil
replenishment, traditional techniques such as crop rotation are practiced. The above
mentioned factors inhibit mass production of organic foods in a economic manner (The
Daily Meal, 2016). This leads to limited supply of organic foods.
Question 2
1) Information Technology (IT) revolution is a significant factor leading to differential wages
for the skilled and unskilled workers. Owing to IT revolution, there has been an increased
emphasis on automation with regards to production and delivery of products and services.
While the upfront costs incurred for automation and technology application is high, but
this makes economic sense since in the long run significant cost savings is realised
through reduction of labour costs (Mankiw, 2014).
The automation drive fuelled by IT revolution tends to have an adverse impact on the demand
for unskilled labour. However, the situation is opposite for the skilled labour whose demand
would increase so as to operate the technology systems and processes. Further, the companies
providing these automation and technical services would also require more skilled labour for
rolling out more products. Thus, the demand for skilled labour tends to increase leading to an
increase in the equilibrium wages. However, for the unskilled workers, demand becomes
lower which tends to lower their equilibrium wages (Arnold, 2017). As a result, IT revolution
has worsened the wage inequality between the skilled and unskilled workers
3) The price elasticity of demand (PED) needs to be estimated for the movement from G to H
using mid-point formula approach. The requisite formula for determination of PED is
indicated below (Pindyck & Rubinfeld, 2016).
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