Economics Assignment: Crude Oil Price Elasticity, Ice Cream Market Analysis, Cost Curves, Unemployment, GDP and Monetary Policy

This economics assignment covers topics such as crude oil price elasticity, ice cream market analysis, cost curves, unemployment, GDP and monetary policy. The short-run price elasticity of crude oil is very low in absolute terms. The demand and the supply curve are having less slope in the long run as compared to that in the short run. The equilibrium price of the market is at P and Q, where P is the price and Q is the quantity demanded. Unemployment can be broadly classified into three categories. There is an inverse relationship between the quantity of money supplied and the interest rate.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the university
Author Note

(a) Short Run (b) Long Run
Price Price
Quantity Quantity
Figure 1:Short run and Long run elasticities
Source: Drawn by Author
Demand
Demand
Supply
Supply
1ECONOMICS ASSIGNMENT
Answer to Question 1
Crude oil is the most essential product that is required in all the sectors of the economy.
From manufacturing to transport the whole world is dependent on the different derivatives that are
derived from crude oil. In the present context crude oil is necessary good. The price elasticity of
demand measures the sensitivity or the responsiveness of the demand for crude oil with respect to
the changes in price. The price elasticity demand is calculated by the following formula,
e p=
∆ q
q
∆ p
p
=
∆ q
∆ p∗p
q
Where, q is the quantity demanded and p is the price level of the commodity. The value of
e pis calculated in mod values. The short-run price elasticity of crude oil is very low in absolute terms.
This means that it is highly price inelastic in short run. However, in the long run the price elasticities
are much higher than the short run values. This means that in the long run the price elasticity is less
inelastic than the short run (Baumeister & Peersman, 2013). The graphical analysis is provided
below.
The demand and the supply curve are having less slope in the long run as compared to that
in the short run. The main reason for a more steeply sloped demand curve in the short run is that in
the short run people do not have close substitutes to oil. However, in the long run due to

2ECONOMICS ASSIGNMENT
Quantity
Price
P
Q
Price Ceiling
P*
Excess Demand
Graph 2: Price Ceiling
Source: Author’s own creation
Demand
Supply
Qs Qd
technological advancement, substitutes like solar energy may reduce the over dependence on crude
oil. A slight change in price level may lead to huge changes in the quantity demanded for crude oil.
Thus, relatively more elastic in the long run and inelastic in the short run. Similarly, for the supply
curve in the short run even if the producers are making losses they will keep on producing. However,
in the long run producers might think of alternate choices and leave the business making an elastic
supply in the long run.
Answer to Question 2
Consider the market of ice cream. The demand and supply of the ice cream market are the
traditional downwards sloping demand and upwards sloping supply curve. The equilibrium price of
the market is at P and Q, where P is the price and Q is the quantity demanded. Now, suppose that
the government decides to put a binding price ceiling on the ice cream market. Consider that the
binding price is below the equilibrium price level. This will create an excess demand of ice creams in
the market. This phenomenon will result in various malpractices. The suppliers will tend to give the
produced goods to their near relatives and friends and the consumers in need of the good may miss
out. Another effect may be that the sellers might lower the quality of the goods produced. The
graphical analysis is provided below.
From the above diagram it can be clearly observed that the Qs is the quantity supplied and
Qd is the quantity demanded. Qd – Qs is the excess demand that is prevailing in the market. The
equilibrium price and quantity is at P and Q respectively.
Now consider for the welfare of the sellers the government decides to set a binding price
floor. Suppose that the price set by the government is more than that of the equilibrium price. This
will create an excess supply in the market for ice creams. The supply will be more than the demand.

3ECONOMICS ASSIGNMENT
Excess Supply
Price Floor
Quantity
Price
P*
P
Q
Supply
Demand
Graph 3: Price Floor
Source: Author’s own creation
Qd Qs
This will lead to improvement in the quality of the ice creams produced and increase the efficiency
of the producers. The graphical analysis of the above said explanation is provided below.
From the above the equilibrium price and quantity is at P and Q respectively. Qd is the
quantity demanded at price level P* and Qs is the quantity supplies at P*. Qs – Qd is the excess
supply in the ice cream market.
Answer to Question 3
Quantity
of soap
sold per
hour
Total cost
($) Fixed cost
($)
Variable
cost ($)
Average Average Average
Marginal cost ($)fixed cost
($)
variable cost
($) total cost ($)
0 15 15 0 0 0 0 0
1 15.5 15 0.5 15.00 0.50 15.50 0.50
2 15.6 15 0.6 7.50 0.30 7.80 0.10
3 16.7 15 1.7 5.00 0.57 5.57 1.10
4 17 15 2 3.75 0.50 4.25 0.30
5 17.1 15 2.1 3.00 0.42 3.42 0.10
6 17.2 15 2.2 2.50 0.37 2.87 0.10
7 17.3 15 2.3 2.14 0.33 2.47 0.10
8 18.3 15 3.3 1.88 0.41 2.29 1.00
9 19.3 15 4.3 1.67 0.48 2.14 1.00
10 20.3 15 5.3 1.50 0.53 2.03 1.00

4ECONOMICS ASSIGNMENT
0 2 4 6 8 10 12
0
0.2
0.4
0.6
0.8
1
1.2
Average fixed cost ($) Average variable cost ($) Average total cost ($)
Marginal cost ($)
Figure 4: Cost Curves
Source: Author’s own creation
According the above diagram, the conventional cost curve properties are not met. To some
extent, it can be argued that there exist economies of scale, which can be identified by the falling
average cost.
Answer to Question 4
Unemployment is a situation when people belonging to the labour force are actively
searching for a job but are unable to find a job (Fujita &Moscarini, 2017). Unemployment can be
broadly classified into three categories.
1. Cyclic Unemployment: This type of unemployment occurs due to fluctuations in the business
cycle. When there is an economic downturn there is a reduction in the demand for various
goods and services this result in a severe lack of jobs. When there is a cyclic unemployment,
the economy operates below the potential level (Diamond, 2013).
2. Structural Unemployment: This type of unemployment occurs when there exists a mismatch
between the number of available jobs and the number of job seekers. This occurs mainly
because of the fact that the employees might not possess the desired level of skills for the
job. In some cases, it might be that the employees need to develop new skills in order to
meet the requirements of the employer. In this case, the employee may be structurally
unemployed (Diamond, 2013).
3. Frictional Unemployment: Labourers move from one firm to the other in order to find the
suitable job. However, the workers require investing time in order find the job. During this

5ECONOMICS ASSIGNMENT
period of transition time the workers are frictionally unemployed. This type of
unemployment occurs for a short period of time (Pigou, 2016).
Answer to Question 5
There are primarily three ways of measuring Gross Domestic Product (GDP) namely the
product Method, expenditure method and income method. All these three methods are
discussed in details (Kennedy & Prag, 2017).
1. Product Method: One way to calculate the value of the final goods and services
produced is the value added method. In this method the gross domestic [product is
simply calculated by adding up the value added at each stage of the production
procedure.
Value added = value of the firm’s output – value of the intermediate goods
In an economy, the sum of the total value added is always equal to the value of the final
goods and services.
2. Expenditure Method: In this method, the gross domestic product is calculated by the
sum of all the final goods and services purchased in an economy. The total output is
found using the total amount of money spent. The major components of expenditure in
this model are private consumption, investment, government expenditure, net exports.
The mathematical equation relating to this method is,
Y = C + I + G + (X-M)
Where C is consumption, I is investment, G is government expenditure, X is exports and
M is imports.
3. Income Method: In this method, the total output is calculated by calculating the total
factor income that is received by the residents of the nation. These total factor incomes
include, employee compensation, interest received net of interest paid, rental income
(net of expenses paid to land owners), royalties paid. These when summed together
gives the gross national product of the nation.
Answer to Question 6
Contractionary Monetary Policy:
A contractionary monetary policy shift the LM curve to the left, this reduces the level of
output and an increase in the interest rate. As shown in the figure below, LM shifts from LM0 to LM1
reducing output from Y0 to Y1 and increasing interest from r2 to r1.

6ECONOMICS ASSIGNMENT
Figure 5: Contractionary Monetary Policy
(Source: Mankiw, 2014)
Expansionary Monetary Policy:
Figure6: Expansionary Monetary Policy
(Source: Mankiw, 2014)
The above diagram shows that the LM curve shifts rightwards from LM1 to LM2. The output
level increases from Y1 to Y2 and interest rate decreases from r1 to r2.
There is an inverse relationship between the quantity of money supplied and the interest
rate. When there is an increase in the interest rate then the cost of borrowing will be lower.
Therefore people will draw out money from their saving and spend them. Thus increasing the supply
of money. However, when there is an increase in the interest rate then the cost of borrowing money
increases, people will spend less and thus reduction in the supply of money(Walsh, 2017).

7ECONOMICS ASSIGNMENT
References
Baumeister, C., &Peersman, G. (2013). The role of time varying price elasticities in accounting for‐
volatility changes in the crude oil market. Journal of Applied Econometrics, 28(7), 1087-1109.
Diamond, P. (2013). Cyclical unemployment, structural unemployment. IMF Economic Review, 61(3),
410-455.
Fujita, S., &Moscarini, G. (2017). Recall and unemployment. American Economic Review, 107(12),
3875-3916.
Kennedy, P. E., &Prag, J. (2017). Macroeconomic essentials: Understanding economics in the news.
MIT Press.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Pigou, A. C. (2016). Keynes's General Theory-A Retrospective View. Read Books Ltd.
Walsh, C. E. (2017). Monetary theory and policy. MIT press.