This document discusses various economic principles such as elasticity of demand, cross price elasticity, fixed and variable costs, monopoly market, monopolistic competition, dominant strategies, and Nash equilibrium. It also includes examples and explanations for each concept.
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Running head: ECONOMIC PRINCIPLES Economic Principles Name of the Student Name of the University Student ID
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2ECONOMIC PRINCIPLES Task 2 Answer 1 Elasticity of a good depend on nature of the good. For common people 3D television is costlier and luxury items. Hence, demand is very sensitive to price change, which implies a relatively elastic demand for 3D television1. Prescription medication in contrast one of the necessary items whose consumption cannot be preponed or postponed. Demand is very less sensitive to price change, which indicates relatively inelastic demand. Answer 2 The sold coffee in a café has various substitutes. One common substitute of coffee is tea. Because of large availability of substitutes, demand responds more for any given change in price making demand relatively elastic2. Number of substitutes for electricity is limited and therefore demand cannot respond more to a price change. Hence, the elasticity of demand is relatively less. Answer 3 CrossPriceElastcity=Percentagechange∈quantitydemandedofagood Percentagechnage∈priceoftherelatedgood Percentagechange∈quantitydemandedoftyres=21000−25000 25000×100 ¿−4000 25000×100 1Frank, R, & Jennings.,Principles Of Microeconomics. in , North Ryde, McGraw-Hill Education, 2015. 2Mankiw, N,Principles of microeconomics. in , Stamford, CT, Cengage Learning, 2015.
3ECONOMIC PRINCIPLES ¿−16 Percentagechnage∈priceofcars=35000−25000 25000×100 ¿10000 25000×100 ¿40 Therefore, cross price elasticity of demand between cars and tyres is Crosspriceelasticity=−16 40 ¿−0.4 The cross price elasticity of demand is negative. This implies an increase in price of cars not only reduces demand for cars but also lowers demand for tyres. Cars and tyres are therefore complementary goods. The estimated value of cross price elasticity of demand implies for every 10 percent increase in cars, demand for tyres falls by 4 percent.
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4ECONOMIC PRINCIPLES Task 3 Answer 1 Licence fee is a compulsory payment to the government and has to be paid irrespective of production level. As Licence fee has to be carried out irrespective of production, it is kind of a fixed cost for television network companies. Answer 2 Cost related to power board varies with number of units produced by Samsung. Power Boards thus are variable input of production. The new contract lowers the price that the company pay for power boards in TVs. The signed contract therefore affects the variable cost of production3. Answer 3 Figure 1: Long run average cost Airbus A38) is the largest civilian airplane in the world. The capacity of A380 is double compared to Dreamliner. Dreamliner however is more cost effective compare to A380 in term of 3Vohra, R, & L Krishnamurthi,Principles of pricing. in , Cambridge, Cambridge University Press, 2013.
5ECONOMIC PRINCIPLES fuel efficiency4. The large size of A380 indicates a higher maintenance cost and a higher depreciation cost. The airline company targets to minimize their average cost over the long run. Therefore, in making choice between the two airplanes the concept of long run average cost has been used5. Dreamliner provides the company maximum capacity of passenger at the least possible cost because of its fuel efficiency and relatively smaller size. The choice between planes however varies with the season. During off-peakseason, number of passengers are below the full capacity. Therefore, the company should choose Dreamliner to minimize average cost. However, during peak season strength of passengers exceeds the full capacity. It is therefore optimal for the company to choose Airbus A380 during this time. Task 4 Answer 1 Figure 1: Long run situation for Adidas when it is the only seller 4popularmechanics.com, "Airbus or Dreamliner: Which Passenger Plane Will You Fly?.". inPopular Mechanics, , 2010, <https://www.popularmechanics.com/flight/a5819/airbus-vs-boeing-battle-for-air-space/>[accessed5 May 2019]. 5Pepall, L,Microeconomics for dummies. in , Hoboken, John wiley, 2016.
6ECONOMIC PRINCIPLES A market with a single seller is known as monopoly market. The single seller in the market enjoys huge market power allowing the seller to charge a price above the marginal cost and enjoys a supernormal profit even in the long run. If Adidas is the single seller in the market then it operates as a monopoly and can enjoy a high profit margin6. The Long run equilibrium for Adidas in the above figure is shown as E and the shaded area shows supernormal profit. Figure 2: Long run situation with many brands If the market situation is like that many other brands, enter the market selling similar products then the market becomes monopolistically competitive market. In such a market, each firm in the long run earns only a normal profit in contrast to previous situation of excess profit in the long run. 6Mateer, D,Principles of microeconomics. in W W Norton, 2015.
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7ECONOMIC PRINCIPLES Answer 2 Cattle firms face a perfectly competitive market. All the cattle firms in the world sell homogenous goods. The firms here face a horizontal market demand curve. The reason for horizontal demand curve is explained by the presence of large number of buyers and sellers. Numer of sellers are so large that any single firm cannot influence price or market supply. Infinitely large quantity of goods are available at fixed price making demand curve perfectly elastic shown by the horizontal demand curve. There are though may fast food sellers like Mc Donald operate across the world however, they do not sell homogenous items. Items offered at the restaurant are rather differentiated allowing firms some degree of market power. Firms here are monopolistically competitive and hence, face a demand curve that slopes downward7.The situation however is different if two Mc Donald stores are located next to each other; then again, identical products are available in the location reducing the market power. Market demand curve then becomes flatter lowering indicating a higher elasticity. Task 5 Answer 1 Strategic dominance in a game refers to a state where one strategy always leads to a better outcome for a player compared to other strategies for any strategic choice of the opponent8. A strategy is considered as dominant if chose of the strategy results in a better outcome to the player than the strategy chosen otherwise. Answer 2 7Mcclung, B,Principles of microeconomics. in , [Place of publication not identified], Kendall Hunt, 2015. 8Antoniou, J, & A Pitsillides,Game theory in communication networks. in , Boca Raton, CRC Press, 2013.
8ECONOMIC PRINCIPLES For Jim’s coffee, two available strategies are enter and do not enter. If Stars and Coffee sets high price, then the strategy to enter the market leads to a higher profit to Jim’s coffee (2 million profit). If opponent sets low price then also entering the market, gives a higher profit to Jim’s coffee (1 million profit). Therefore, entering the market is dominant strategy for Jim’s coffee. Answer 3 Similar to Jim’s coffee, Stars and Coffee has a dominant strategy. If Jim’s coffee enter the market, charging high price yields stars and coffee a higher profit (3 million profit) compared to charging low price. If Jim’s coffee do not enter the market, then setting high price again results in a larger profit (7 million profit) compared to setting low price. For Stars and Coffee, therefore high price is the dominant strategy. Answer 4 NashequilibriumdiscoveredbyNobelWinningAmericaneconomistsJohnNash indicates solution to a game that involves two or more players desired to achieve the best outcome for themselves taking into consideration the action taken by other players9. Once Nash equilibrium is achieved individual players cannot improve their pay off by changing their strategy independently. Star and Coffee Jim's Coffee High Price Low Price Enter(2,3)(1,1) Donot enter(0,7)(0,2) 9Maschler, M, E Solan, & S Zamir,Game Theory. in , Cambridge, Cambridge University Press, 2013.
9ECONOMIC PRINCIPLES Irrespective of Jim’s coffee strategy, setting high price is optimal for Stars and coffee as it give a higher profit (3 million > 1 million, 7 million > 2 million). Similarly, irrespective Stars and Coffee’s strategy, optimal strategy for Jim’s coffee is to enter the market as it gives a higher profit. Nash equilibrium strategy for Stars and Coffee is therefore charging high price and that for Jim’s coffee is to enter the market. Answer 5 For Stars and Coffee, strategy of setting low price is a dominated strategy. Regardless of what Jim’s coffee chooses, high price always yields a higher pay-off to Stars and Coffee10. Therefore, even if Stars and Coffee threatens Jim’s coffee to set a low price resulting in a lower profit for Jim’s coffee, in reality it will never set low price. Jim therefore should not believe such threat. 10Wang, S, "General Equilibrium vs. General Nash Equilibrium.". inSSRN Electronic Journal, , 2018.
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10ECONOMIC PRINCIPLES References list Antoniou, J, & A Pitsillides,Game theory in communication networks. in , Boca Raton, CRC Press, 2013. Frank, R, & Jennings.,Principles Of Microeconomics. in , North Ryde, McGraw-Hill Education, 2015. Mankiw, N,Principles of microeconomics. in , Stamford, CT, Cengage Learning, 2015. Maschler, M, E Solan, & S Zamir,Game Theory. in , Cambridge, Cambridge University Press, 2013. Mateer, D,Principles of microeconomics. in W W Norton, 2015. Mcclung, B,Principles of microeconomics. in , [Place of publication not identified], Kendall Hunt, 2015. Pepall, L,Microeconomics for dummies. in , Hoboken, John wiley, 2016. popularmechanics.com,"AirbusorDreamliner:WhichPassengerPlaneWillYouFly?.". inPopularMechanics,,2010,<https://www.popularmechanics.com/flight/a5819/airbus-vs- boeing-battle-for-air-space/> [accessed 5 May 2019]. Vohra, R, & L Krishnamurthi,Principles of pricing. in , Cambridge, Cambridge University Press, 2013. Wang, S, "General Equilibrium vs. General Nash Equilibrium.". inSSRN Electronic Journal, , 2018.