Economic Principles: Elasticity, Cost of Production, Market Power, Business Strategy

This article discusses economic principles such as elasticity, cost of production, market power, and business strategy. It covers topics such as network externality, barriers to entry, Nash equilibrium, dominant strategy, and more.

Running Head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
Author note
Course ID

1ECONOMIC PRINCIPLES
Table of Contents
Task 2: Elasticity.............................................................................................................................2
Answer 1......................................................................................................................................2
Answer 2......................................................................................................................................2
Answer 3......................................................................................................................................2
Answer 4......................................................................................................................................3
Task 3: Cost of Production..............................................................................................................5
Answer 1......................................................................................................................................5
Answer 2......................................................................................................................................6
Task 4: Market Power......................................................................................................................6
Answer 1......................................................................................................................................6
Answer 2......................................................................................................................................6
Task 5: Business Strategy................................................................................................................7
Answer 1......................................................................................................................................7
Answer 2......................................................................................................................................7
Answer 3......................................................................................................................................8
References........................................................................................................................................9

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Task 2: Elasticity
Answer 1
Holiday to Europe accounts for a higher elasticity as compared to a bag of rice. If the trip
to Europe becomes too costly then people might postpone the trip or plan their holidays to some
other destination. For rice however people can neither postpone nor substitute their demand and
therefore have a lower elasticity (Cowen & Tabarrok, 2015).
Answer 2
Electricity used has a comparatively higher elasticity as it has different alternative usage.
People can adjust their demand in various ways (Cowell, 2018). Weetbix on the other does not
have much alternative usage and hence, demand cannot be changed largely constituting a lower
elasticity.
Answer 3
Cross Price elasticity=
Δ QX
QX
× 100
Δ PY
PY
× 100
¿ Δ QX
Δ PY
× PY
QX
¿ ( 12000−10000 )
(1.80−2.40 ) × 2.40
10000
¿ 2000
−0.60 × 2.40
10000
¿−3.33× 0.240

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¿−0.8
The cross price elasticity of hot dogs and hot dog rolls is obtained as -0.8. The negative
cross price elasticity implies that an increase in price of hot dogs’ increase demand for hot dog
rolls decreases and vice versa. This is likely to be happen when two goods are complementary
(Baumol & Blinder, 2015). This can be seen from the graph as well. As the price of hot dogs
decreases from $2.40 to $1.80, leading to an increase in demand for hot dog rolls from 10,000 to
12,000. Hot dogs and hot dog rolls are thus complementary goods.
Answer 4
Figure 1: Market for Government childcare service
The market for government childcare service described in figure 1. For government
childcare service, seats are available at a fixed number. It is given that, the publicly funded
Kindergarten there are space for just half of 146000 children. As the available seats for children
are fixed, the supply curve is a vertical straight line, given as SS. The demand curve follows the

4ECONOMIC PRINCIPLES
standard norms of demand and is slopes downward from left to right. Given the demand and
fixed supply, market equilibrium occurs at E. Corresponding price is P*. As the available space
of children for government childcare service is fixed at any price, the supply curve is perfectly
inelastic that is parallel to the vertical axis (Kolmar, 2017). Now, if demand for childcare service
increases then the demand curve shifts rightward. As the supply cannot be increased, there is a
shortage of available seats given as EG, the problem that parents are facing in Mongolia.
Figure 2: Market for private Childcare service
For private childcare service, demand and supply are given as D’D’ and S’S’
respectively. Equilibrium is occurred at the point E’. Equilibrium price and number of seats for
private childcare service is given as P1 and Q1 respectively. Unlike government childcare service
with fixed number of available seats, in private childcare service seats can be increased in
response to increased demand or price. The supply curve therefore is elastic in this case (Maurice

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& Thomas, 2015). In response to high demand, there may exists a shortage at the existing price,
however the shortage will be eliminated as the seat availability increases with increase in
demand.
Task 3: Cost of Production
Answer 1
Total cost=$ 60,000
Total ¿ Cost =$ 20,000
Total Variable Cost =Total Cost – Total ¿ Cost
¿ $ 60,000−$ 20,000
¿ $ 40,000
The variable cost of producing 10,000 tennis ball is therefore $40,000
Average Variable cost = TotalVariable Cost
Number of tennis ball
¿ 40,000
10,000
¿ $ 4
Average ¿ cost=Total ¿ Cost ¿
Number of tennis ball
¿ 20,000
10,000
¿ $ 2

6ECONOMIC PRINCIPLES
Answer 2
Salaries sacrificed from the full time job and spending for university fees out of saving
are the two examples explicit opportunity cost. These are the opportunity cost realized in term of
money and hence, are explicit opportunity cost (Boardman et al., 2017). The implicit opportunity
cost is the time and energy given for attending classes and doing course related work. An
example of cost of attending university which is not an opportunity cost is the payment made for
room and board. This is an accounting cost of attending university.
Task 4: Market Power
Answer 1
Network Externality and barriers to entry
Network externality is said to exist when usefulness of a produce measured in terms of
the surplus or benefits that an agent derives increases as other agents purchase the same product.
For example, social networking sites. Social networking site with larger members has more
popularity and seems to be more attractive to new users. This serves as an entry barrier because
with increasing popularity of a product, more and more customer enters the market that the
dominance of existing sellers in the market increases (Fanti & Buccella, 2017). The presence of
network effects makes entry of new firms difficult in the market. This form of barrier however is
not insurmountable It is possible for customers to get attracted to the new rival’s product if the
rival seller has a superior quality of product.
Answer 2

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In a perfectly competitive market, there are numerous buyers and sellers in the market.
With the presence of so many sellers with a homogenous product in the market, single seller has
a negligible market share and thus has no control on either price or quantity. Sellers thus accept
the price determined from market demand and market supply. In monopolistic competition in
contrast sellers have some market power arises from product differentiation (Sloman & Jones,
2017). Sellers of each brand can set a slightly different market price and thus are price makers
instead of price takers like competitive firms.
Task 5: Business Strategy
Answer 1
Alistair
Baine
Advertis
e
Non-
advertise
Advertise (30, 30) (40, 20)
Non-
advertise (20, 40) (50,50)
Answer 2
Nash equilibrium provides solution to a non-cooperative game that involves two or more
people. It indicates the optimal strategy for both players such that no one has any incentive to
deviate from the chosen strategy given strategy of the opponent (Dresher, Shapley & Tucker,
2016). In the above case, if Alistair choses to advertise then Baine obtains a profit of $30 from
advertising while $20 from non-advertising. Therefore, Baine would chose to advertise. If
Alistair choses to advertise, then optimal strategy for Baine is to choose non-advertise as it gives
higher pay-off ($50 > $40). If Baine choses to advertise, then it is optimal for Alistair to choose
advertise as it gives $30 million profit as against $20 profit from non-advertising. When Baine

8ECONOMIC PRINCIPLES
choses non-advertise, then non-advertising is optimal strategy for Baine as it is associated with
higher pay-off ($50 > $40). Therefore, it is seen that when Baine chooses advertise then Alistair
do the same. Similarly, when Baine choses non-advertisement then Alistair also choses non-
advertise. The game thus have two Nash equilibriums. One where both advertises and other
where neither advertises.
Answer 3
In game theory, a strategy is said to be dominant if regardless of any strategy choice of
the opponents the concerned strategy provides a larger pay off than that would be obtained from
other available strategy (Colman, 2016).
Baine does not have any dominant strategy. When Alistair choses Adevertise then Baine
goes with the strategy of advertising. On the other hand, Baine’s strategy choice is non-
advertisement when Alistair choses non-advertise. Therefore, both the strategies are useful to
Baine depending on strategic choice of Alistair.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2017). Cost-benefit
analysis: concepts and practice. Cambridge University Press.
Colman, A. M. (2016). Game theory and experimental games: The study of strategic interaction.
Elsevier.
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Dresher, M., Shapley, L. S., & Tucker, A. W. (Eds.). (2016). Advances in Game Theory.(AM-
52) (Vol. 52). Princeton University Press.
Fanti, L., & Buccella, D. (2016). Bargaining agenda and entry in a unionised model with
network effects. Italian Economic Journal, 2(1), 91-121.
Kolmar, M. (2017). Principles of Microeconomics. Springer International Publishing.
Maurice, S. C., & Thomas, C. (2015). Managerial Economics. McGraw-Hill Higher Education.
Sloman, J., & Jones, E. (2017). Essential Economics for Business. Pearson.