Economic Principles

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.

Running head: ECONOMIC PRINCIPLES
Economic Principles
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1ECONOMIC PRINCIPLES
Table of Contents
Task 2...............................................................................................................................................2
Answer 1......................................................................................................................................2
Answer 2......................................................................................................................................2
Answer 3......................................................................................................................................2
Task 3...............................................................................................................................................4
Answer 1......................................................................................................................................4
Answer 2......................................................................................................................................4
Answer 3......................................................................................................................................4
Task 4...............................................................................................................................................5
Answer 1......................................................................................................................................5
Answer 2......................................................................................................................................7
Task 5...............................................................................................................................................7
Answer 1......................................................................................................................................7
Answer 2......................................................................................................................................8
Answer 3......................................................................................................................................8
Answer 4......................................................................................................................................8
Answer 5......................................................................................................................................9
References list................................................................................................................................10

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
Cross Price Elastcity= Percentage change∈quantity demanded of a good
Percentage chnage∈ price of therelated good
Percentage change ∈quantity demanded of tyres= 21000−25000
25000 × 100
¿ −4000
25000 × 100
1 Frank, R, & Jennings., Principles Of Microeconomics. in , North Ryde, McGraw-Hill Education, 2015.
2 Mankiw, N, Principles of microeconomics. in , Stamford, CT, Cengage Learning, 2015.

3ECONOMIC PRINCIPLES
¿−16
Percentage chnage ∈ price of cars= 35000−25000
25000 ×100
¿ 10000
25000 ×100
¿ 40
Therefore, cross price elasticity of demand between cars and tyres is
Cross price elasticity=−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.

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
3 Vohra, 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-peak season, 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
4 popularmechanics.com, "Airbus or Dreamliner: Which Passenger Plane Will You Fly?.". in Popular Mechanics, ,
2010, <https://www.popularmechanics.com/flight/a5819/airbus-vs-boeing-battle-for-air-space/> [accessed 5 May
2019].
5 Pepall, 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.
6 Mateer, D, Principles of microeconomics. in W W Norton, 2015.

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
7 Mcclung, B, Principles of microeconomics. in , [Place of publication not identified], Kendall Hunt, 2015.
8 Antoniou, 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
Nash equilibrium discovered by Nobel Winning American economists John Nash
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)
Do not
enter (0, 7) (0, 2)
9 Maschler, 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.
10 Wang, S, "General Equilibrium vs. General Nash Equilibrium.". in SSRN Electronic Journal, , 2018.

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, "Airbus or Dreamliner: Which Passenger Plane Will You Fly?.".
in Popular Mechanics, , 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.". in SSRN Electronic Journal, ,
2018.