Week 8 Economy

This document provides information on various topics related to the economy, including measuring the level of output in an economy, calculating national income at basic prices, understanding fiscal drag and costs of deflation, differentiating between fiscal and monetary policy, exploring the tradeoff between inflation and GDP, defining and measuring inflation, discussing types of unemployment, explaining how governments manage the economy through controlling aggregate demand, and examining the impact of inflation targeting on firms and consumers.

B51876
Economics

Week 8 Economy
Q1 List the three potential ways of measuring the level of output in an economy.
Measurement of level of output or the total sum of production that a firms makes, has two
ways of measurement.
 Considering total value of goods and services that are produced by the firm, and adding
the values of final goods and services that the firm produces.
 By adding the value in terms of prices that are added at each stage of production.
Through these two ways, the outputs and its value can be measured in an economy.
Q2 How is national income at basic prices calculated from gross national product at market?
National income at base price is the income that is generated by the residents of that
country, in calculation to the base year pries. This income is also sometimes referred to as the
real national income. It shows the real picture of economic growth of a country. For calculating
National income at base prices from Gross national product at market prices, formula that can be
used is:
National income at P0= Consumption expenditure+ Government Expenditure+
Investments+ Exports+ Foreign income- Depreciation
Q3 What is a fiscal drag?
Fiscal drag sis that situation in economy where, inflation or accrual of higher income
growth to people, moves people into larger taxable bases. In this Taxation also increases with
increase in income.
Q4 What are the costs of deflation?
Under the costs of Deflation, aggregate demand in economy is seen falling, leading to
lower reasons with producer to produce more goods in economy. Low production means lower
reasons to invest and this means decreasing incomes to people. Deflation increases value of reall
debt ultimately.
Q5 How does fiscal policy differ from monetary policy?
Both Fiscal and Monetary policies are tools of government that government uses for
bringing stability in economy of a nation. However, there is some basic difference between the
two policies, in fiscal policies the cost is met through fiscal reserves of government, but in

monetary policies changes in different types of economic rates are fluctuated to fluctuate
economic sentiments of people.
Q6 Explain the tradeoff between inflation and GDP
The tradeoff between inflation and GDP, is the relation between these two in larger
contexts. The inflation in general terms is indicative of higher economic growth and good
production sentiments as the aggregate demand is seen higher. When production are grown, then
factor cost will be more divisible in factors of production meaning more income to the people.
Q7 What is meant by inflation? How is it measured?
Inflation in simple terms, is the rise in prices of goods and services in the economy,
which are in usual deviations from regular price stability. This measure the average price change
in basket commodities and services over time. The most common methods to measure inflation
in economy is through two indices, that are Consumer Price Index and Wholesale Price Index.
Q8 What are the different types of unemployment?
In basic economics, there are three types of unemployment;
 Demand deficient unemployment
 Structural unemployment
 Voluntary unemployment
Q9 How do governments manage the economy by controlling aggregate demand… tools used
by the central bank of a country?
For controlling aggregate demand in the economy, the government is more frequently is
seen using monetary policy measures. Aggregate demand in the economy is seen increasing
because of increase in flow of money and liquidity in the economy, therefore, through fluctuation
in interests rates in a manner which soaks liquidity from hands of people, government controls
aggregate demand in the economy.
Q10 How does inflation targeting affect firms and consumers in an economy?
Inflation targeting is that mechanism of government from which government decides to
control the rise and fall in the inflation and keep it in a specific range which is favorable for all
the consumers in the market. Inflation in market becomes high and low because of the flow of
market forces in the economy. And, if the government intervenes in flow of market forces then
natural predictability by firms is eroded and external influences are increased.

Week 9 Economy
Q1 What are the different growth strategies that can be adopted by a firm?
In the Economics studies, there are various business models that describes various
strategies that can be adopted by firms. However, considering the most relevant model for
growth strategies of firms, Ansoff Matrix, four strategies are illustrated.
 Market penetration
 Market development
 Product development
 Diversification
All these strategies are sufficiently well enough seen focusing over markets and products
for a firm.
Q2 How can a firm grow horizontally? What are the benefits of integrating horizontally?
Horizontal growth for any forms is descriptive of that strategy through which a firms
expand growth of products and services to new markets. This can be one by firm after forming a
new market penetration strategy. While this s beneficial in entering new markets and making
significant developments in product portfolios, a new business domain is also opened for firms.
Q3 What are transaction costs? When are transaction costs likely to be high?
Transaction costs are those costs incurred by businesses in the process of selling their
goods and services to the consumers. In financial markets or firms involved in financial
businesses, transaction costs are seen on every transaction made and costs in flow of services as
well. Transactions costs are mostly likely to be higher when number of intermediaries are
increased in the process of flow of goods and services. Intermediaries are mediators facilitating
flow of goods and services.
Q4 What is the hold- up problem explain vertical integration?
Hold up problems in economy are the difficulties faced by firms or the individual private
players as well, in completion of the contracts. These problems are also defining difficulties in
writing complete contracts.
Q5 What are economies of scope? How is control related to economies of scope!
Economies of scope is the concept of economics where unit cost of a product is estimated
to decline as variety of products increases. In this, the scope for improvements in production
technologies and the charges incurred on various factors are seen getting diversified, rather than
focus on singular type of products.

Q6 Write a short note on organic growth
Organic growth is that concept, defining increase in sales and enhancements in output of
the firm internally. However, this is not inclusive of the profits for the firm which are achieved
through expansion of business from merger of businesses and acquisitions of new business
entities. But, the organic growth is totally achieved by expansion of business from increase in
sales and outputs, which is facilitated by increase in demand of products.
Q7 explain the profit maximizing level of output and profit with respect to the total revenue and
total cost curves.
Profit maximization is more like a strategy of business entity, in the short term, where the
company focuses on achieving supernormal amount of profits. However, this strategy can also be
adopted by firms, who are seen having high competitive advantage in market for long run. In this
respect, a firm adopts all such methods and strategies that focuses on maximization of revenues,
relating to cost, prices and production methods as well. They all should be supportive of availing
high profits.
Q8 Explain the concept of the learning curve
The concept of learning curve in economics shows the graphical presentation of
relationship between cost and output for a firm, over a definite period of time. Also, the concept
of learning curve is used t show repetitive relationships of tasks between employer and workers.
The concept marks that in the initial stages higher learning translates into higher savings of the
cost for company, and subsequently in the later stages savings of cost becomes more difficult for
the firm.
Q9 Explain why curves grow vertically
Growth of a curve is the graphical presentations, and it reflects the particular behavior
and manner in which curve, that is of specific nature as well, like demand and supply curve, acts.
In the vertical growth of a curve, subject matter marked on the Y-axis of graph is seen to be
acting or fluctuating in slower manner then the subject matter on the X-axis. When X-axis will
behave in more frequent manner, curve will stretched towards height and will gain a vertical
shape. This concept is relevant in the case of every curve.
Q10 Diversification can reduce a company’s exposure to risk. Explain
Diversification means that, any firm which produces a particular type of products is seen
diversifying its portfolio to various types of products. In this strategy, firm is seen having
multiple type of products to offer for its consumers. This reduces the dependence of firm on any
one type of product and therefore, the risks of losses also reduces for that firm. This is evident
from the fact that, even if that firm is seen making loss in one category of product, then higher

sales and growth in other type of firm will balance that loss. Recoveries are seen becoming
possible in Product diversification.
Q11 a) Explain what is meant by the term horizontal integration
Horizontal integration is the process through which firms are seen increasing production
of goods and services at the same part of the supply chain. The company has three approaches
for making it possible, this can be done by the company from internal expansion, that is also
bought by organic growth of the company, or the company can also opt for external sources, like
acquisition or merger with other firms. Horizontal integration is sometimes criticized in
economics. This is because, if any company focuses over horizontal integration too much, and
narrow down its approach of success to this one concept only, then there are chances that
particular firm can be seen gaining monopoly rights in market.
b) Evaluate the benefits of mergers in the beer industry
Beer industry is one of the oldest and still fastest growing industry in market of beverages
and alcoholic products. This industry has its prominence in other industries as well, such as
Tourism and Hospitality industry. In recent times, firms in this market are seen making business
expansion through merger with many other firms in this market. Merger with other companies is
regarded as tool of business expansions by firms here. However, this tool itself has its
significance that can be listed as follows:
 If two or more firms decides on undertaking their businesses together, then they also
share market shares with each other. Hence, market share of both the firms gets
increased.
 It also reduces the cost of operations, and the revenues are higher.
 Merger between two firms, brings exchange of technological know-how and other
business expertise between the firms.