Economic Principles

Running head: ECONOMIC PRINCIPLES
Economic Principles
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1ECONOMIC PRINCIPLES
Table of Contents
Task 2: Elasticity........................................................................................................................2
Question 1..............................................................................................................................2
Question 2..............................................................................................................................2
Question 3..............................................................................................................................2
Task 3: Costs of production.......................................................................................................3
Question 1..............................................................................................................................3
Question 2..............................................................................................................................3
Question 3..............................................................................................................................3
Task 4: Market power................................................................................................................4
Question 1..............................................................................................................................4
Question 2..............................................................................................................................5
Task 5: Business Strategy..........................................................................................................6
Question 1..............................................................................................................................6
Question 2..............................................................................................................................6
Question 3..............................................................................................................................6
Question 4..............................................................................................................................6
Question 5..............................................................................................................................7
References..................................................................................................................................8

2ECONOMIC PRINCIPLES
Task 2: Elasticity
Question 1
3D television is a luxury item. Therefore, quantity demanded changes largely for a
given change in price. This makes demand for 3D television highly price elastic that is having
absolute value of elasticity greater than 1. Prescription in contrast is a necessary items and
hence, people cannot change the demand much whenever price changes. The demand of
prescription is relatively price inelastic with absolute value less than 1.
Question 2
Coffee sold in café have a large number of substitutes. As people have alternative
choice to coffee they can change their demand to a relatively large extent given the change in
price. Electricity in contrast has only limited substitute and demand therefore can be adjusted
only to a limited extent in response to price change (Baumol and Blinder 2015). Coffee
therefore has a higher price elasticity of demand compared to electricity.
Question 3
Cross Price Elastcity= Percentage change ∈quantity demanded of tyres
Percentage chnage∈ price of tyres
¿
21000−25000
25000 × 100
35000−25000
25000 × 100
¿ −16
40
¿−0.4
The estimated cross price elasticity of demand between tyres and cars is -0.4. This
estimated value of cross price elasticity of demand implies that 10 percent increase in price of

3ECONOMIC PRINCIPLES
cars reduces demand of tyres by 4 percent. The negative value of cross price elasticity
indicates tyres and cars are complementary goods (Kreps 2019).
Task 3: Costs of production
Question 1
Licence fee does not depend on level of production and hence is considered as a fixed
cost. The application of license fee therefore affects the fixed cost of production.
Question 2
As power boards are used as an input in making TVs, the price of power boars form
variable cost of production. If Samsung signs a new contract that change price of power
board, it will affect the variable cost (Cowell 2018).
Question 3
Figure 1: Long run average cost curve
In the business decision, average cost plays an important role. For making long run
business decision in the position of long run average cost curve should be taken into
consideration. The long run cost curve is U shaped. Initially with increase in production,