Economics for Business

This document provides an introduction to economics, covering microeconomics and macroeconomics. It explores concepts such as demand and supply, elasticity, production costs, market structure, and more. The document also includes solved assessment questions related to these topics.

Economics for Business
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Table of Contents
Introduction......................................................................................................................................3
Assessment Question Week 2 and 3 – Demand and Supply, and Elasticity....................................3
Question1....................................................................................................................................3
Assessment Question Week 4 – Production Costs..........................................................................7
Question 2...................................................................................................................................7
Assessment Question Week 5 and 6 – Market Structure.................................................................8
Question 3...................................................................................................................................8
Assessment Question Week 7 and 8 – Measuring the size of the economy..................................11
Question 4.................................................................................................................................11
Assessment Question Week 9 and 10: Inflation and unemployment, and Macro economics.......14
Question 5.................................................................................................................................14
Assessment Question Week 11......................................................................................................17
Question 6.................................................................................................................................17
Conclusion.....................................................................................................................................19
References......................................................................................................................................21
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Introduction
Economics is a subject or branch of knowledge which is concerned with the production,
consumption and transfer of wealth. It is further bifurcated into microeconomics and
macroeconomics. Microeconomics deals with study of individual aspects like demand and
supply of individual firm while macroeconomics deals with study of economy in general and
focus on exploring concepts that aggregate individual factors like aggregate demand and
aggregate supply (Browning and Zupan, 2020). Measures like demand and supply lead to further
concepts like elasticity which determines responsiveness of demand and supply in response to
determinants like price and income. These measures impact profitability of a firm, it could be
both accounting profit and economic profit. However, accounting profit and economic profit are
supplementary concepts for accounting profit only includes explicit transactions while economic
profits take into account both explicit and implicit cost such as opportunity cost. Firms operate
under market conditions which could exhibit different types of characteristics. Based on those
characteristics, markets are divided into various categories such as perfect competition,
monopolistic, oligopoly and monopoly. Further, combined production in all the markets in a year
in an economy is known as gross domestic product or GDP (Goodstein and Polasky, 2020).
Below mentioned assessment contains questions that aims to explore various concepts
related to microeconomics and macroeconomics. There are six questions attempted below – first
of which is related to explore elasticity of demand in individual commodities using mid-point
formula, next is related to calculation of accounting profit and economic profit. Third question is
related to assess characteristics of monopoly market and in the next, concepts related to GDP are
explored with discussion over difference between real GDP and nominal GDP. In the fifth
question, determinants of aggregate demands are discussed and in the final question, concept of
money supply in the economy is explored.
Assessment Question Week 2 and 3 – Demand and Supply, and Elasticity
Question1
(I) Calculation of price elasticity of demand using mid-point formula
Midpoint method for calculating elasticity uses change in average percentage in
both quantity and price to determine price elasticity of demand
Statement for Petrol at 7-Eleven Petrol Station, Sydney
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Price Demand
1.35 AUD (P1) 2500 litres (Q1)
1.45 AUD (P2) 2450 litres(Q2)
Change in quantity = Q2 – Q1 / ((Q2 + Q1) / 2) *100
= 2450 – 2500 / ((2500 + 2450) / 2) * 100
= (-50 / 2475) * 100
= (2.02 %)
Change in price = P2 – P1 / ((P2 + P1) / 2) *100
= 1.45 – 1.35 / ((1.45 + 1.35) / 2) *100
= (0.10 / 1.4) *100
= 7.14%
Price elasticity of demand = change in quantity / change in price
= (2.02%) / 7.14%
= (0.28)
Statement for Hyundai 7.5kW Inverter Split System Air Conditioners (Reverse Cycle)
Price Demand
950 AUD (P1) 2500 litres (Q1)
990 AUD (P2) 2000 litres(Q2)
Change in quantity = Q2 – Q1 / ((Q2 + Q1) / 2) *100
= 2000 – 2500 / ((2000 + 2500) / 2) * 100
= (-500 / 3250) *100
= (15.38%)
Change in price = P2 – P1 / ((P2 + P1) / 2) *100
= 990 – 950 / ((990 + 950) / 2) *100
= (40 / 970) * 100
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= 4.12%
Price elasticity of demand = change in quantity / change in price
= (15.38 %) / 4.12 %
= (3.73)
*Negative value denotes negative relationship between price and demand, as per law of demand.
(II) Determination of elasticity of demand for each commodity
Price elasticity of demand calculates relative change in demand due to change in
price. It can be divided into five broad categories:
Value of elasticity Known as
infinity (∞) Perfectly elastic
More than one (>1) Elastic
One (1) Unitary elastic
Less than one (<1) Inelastic
Zero (0) Perfectly inelastic
From the above figures, it can be seen that price elasticity of demand of petrol is 0.28 i.e.,
less than one and therefore, can be termed as inelastic. Inelastic demand means that demand is
less responsive to change in price. On the other hand, price elasticity of demand of air
conditioners is 3.73 i.e., more than one and can therefore be termed as elastic. Elastic demand
means that demand is highly responsive to change in price (Kreps, 2019).
(III) Incidence of tax
Incidence of tax is used to understand bifurcation of tax burden between buyers and
sellers. It can be determined using price elasticity of demand and supply.
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As seen in the case of petrol above, it has relatively inelastic demand as it almost
essential commodity. It means that in case of increase in prices, demand would remain relatively
constant. This would enable sellers to pass tax burden to consumers in the form of higher prices.
Therefore, it can be said that in case of inelastic demand, tax burden is mainly on the consumer
(McClellan and et. al., 2019).
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Illustration 1: Tax incidence in case of
inelastic demand, 2021

As seen in the case of air conditioners above, it has elastic demand as it is considered as
luxury commodity. It means that in case of increase in prices, demand would react sharply in the
decline side. This would leave sellers with no choice but to bear larger part of tax incidence and
continue with lower price to survive in competitive market. Therefore, it can be said that in case
of elastic demand, tax burden is mainly on the producer (Cowell, 2018).
Assessment Question Week 4 – Production Costs
Question 2
(I) Calculation of accounting profit and economic profit
Accounting profit = total monetary revenue minus total explicit costs, as per
accounting principles.
Accounting Profit and Loss Account
Particulars Amount Particulars Amount
Wages 80000 Revenue -Orange Section 250000
Truck expense 80000 Revenue -Beverages Section 180000
Manager expense 60000 Other revenue 100000
Milk sales assistant expense 30000
Equipment expense 50000
Motorcycle expense 30000
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Illustration 2: Tax incidence in case of elastic
demand, 2021

Interest Expense (@8%) 3200
Net profit 196800
530000 530000
Economic profit = total revenue – (explicit costs + implicit costs), as per economic
principles.
Economic Profit and Loss Account
Particulars Amount Particulars Amount
Explicit cost: Revenue -Orange Section 250000
Wages 80000 Revenue -Beverages Section 180000
Truck expense 80000 Other revenue 100000
Manager expense 60000
Milk sales assistant expense 30000
Equipment expense 50000
Motorcycle expense 30000
Interest Expense (@8%) 3200
Tuition fees 3000
Outstanding tuition fees 3000
Implicit Cost:
Opportunity cost – rent on land 11000
Opportunity cost – salary
earned 54000
Opportunity cost – interest on
saving account 2500
Net profit 123300
530000 530000
(II) Advice to James
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Accounting profit only takes into account explicit monetary costs and incomes while
economic profit is the profit that encompasses not only explicit costs but also implicit costs and
incomes and is therefore, generally lesser than accounting profit. It accounts for a complete
picture and hence, it is a better parameter to check profitability and financial viability of the firm
(McConnell, Brue and Flynn, 2018). Economic profit can be positive, negative or zero and if
only, the economic profit is positive, should the firm continue. In the provided case, firm of
James has an economic profit of $123,300 which shows that his kiosk business is a profitable
venture. Also, the profit earned is higher than his annual salary. Therefore, it is suggested that
James should continue with kiosk business.
Assessment Question Week 5 and 6 – Market Structure
Question 3
(I) Elasticity of monopoly firm demand curve
Pure monopoly firm is the only firm in the market and thus, the demand curve of the firm
is the demand curve of the market and is downward sloping. Monopoly firm is not only able to
make production decision for itself but also price decision for those output. Therefore, it can be
said to be a price-maker. However, unlike a firm in the perfect competition market, which can
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sell any number of units at the market price, a monopolist can sell greater quantity, only by
cutting its price (Becker, 2017).
Elasticity of the demand curve of monopolist can be seen with a respect to change in
demand due to change in price decided by the firm (Stoneman, Bartoloni and Baussola, 2018).
Impact can be seen either in short run or long run. In the short-term, demand for the products do
not always shift in the proportion to the change in price as the shifts are of temporary nature but
in the long-term, shifts are likely of permanent nature.
(II) Benefits of the characteristics of monopoly demand curve to ABC Inc. Ltd.
ABC Inc. Ltd. is a monopolist firm and therefore, its demand curve is the demand curve
of the whole market. This characteristic of the demand curve enables it to earn maximum profit
as there is no competition in the market and firm can charge the prices as it wants, even those
which it couldn't have been able to charge in a competitive market. This also underlined one
more characteristic of the firm that it is price maker. Company is a multinational enterprise that
supplies Hi-tech components and it is assumed, that its products are high in demand and its
demand curve enables its to choose for its own production limit and the desired price
accordingly, to earn maximum revenue. Also, it can change or discriminate price and quantity of
the good and services as per its own suitability. However, it needs to consider whether consumer
demand is elastic or not, which can be assessed through determining elasticity of demand curve.
If the demand is elastic, it will be able to sell higher quantities of the products in the market only
if the prices are kept at lower side while if the demand is inelastic, it will be able to sell higher
quantities at a slightly higher price as well (Whitehead, 2020).
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Illustration 3: Shifts of demand curve of a monopolist

(III) Profit in the long run
It is assumed that cost curve and demand curve of the company results in the economic
profit for the firm in short-term. In the long-term, it is assumed that all other factors are constant
and this means that company is still only firm and enjoys monopoly in the market. Monopolist
still have economies of scale which empowers them to have lower long-run average cost and
good demand, when combined with it, will enable the ABC Inc. Ltd. to earn profits in the long
term. However, in the long run, if the condition of ceteris peribus does not work, it is highly
possible that new firms will enter the market and, in that case, it is possible that long-term profit
f the company reduces or either reduced to zero.
(IV) Effects of ABC Inc. Ltd. On consumers
ABC Inc. Ltd. is a monopoly and like other monopolists restricts the option for its
consumers to choose out of multiple options and since there is no alternative option for the
customer to buy the commodity if it is needed, it will have to purchase the product even on
higher prices than expected. Moreover, company can restrict its output in the market according
to its own suitability and this would leave the consumers with no option than waiting for the
product, even at the cost of harming its own efficiency and effectiveness of operations. All these
benefits at the end of the company not only restricts the choices of the consumers but also
reduces their sovereignty. In addition, it reduces consumer surplus. Consumer surplus is derived
whenever the price a consumer actually pays is less than they are prepared to pay (Kirschen and
Strbac, 2018). Reduced consumer surplus affects the demand of the firm in long run as now the
consumer would only demand as much as they require and if the ABC Inc. Ltd. wants to increase
its sales, it has to compulsorily reduce the price to attract them.
Assessment Question Week 7 and 8 – Measuring the size of the economy
Question 4
(I) Calculation of nominal GDP and real GDP in 2016
Gross Domestic Product (GDP) of an economy is the total market value or monetary
value of all the finished goods and services that have been produced within the economy in a
definite time period (Welch and Welch, 2016). GDP is calculated and reported by Australian
Bureau of Statistics (ABS) at a quarterly interval. It collects data from government agencies,
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companies and household to calculate GDP in three different ways – production (P), income (I)
and expenditure (E), which are mentioned below:
 GDP(P) – It includes sum total value from all goods and services produced.
 GDP (I) – It includes total income that has been generated by employees and businesses
(net of taxes minus subsidies)
 GDP (E) – It includes total value of spending by businesses, consumers and government
on final goods and services.
These three different ways estimate almost same things but in Australia, ABS uses average
of three to arrive at GDP (A).
Information given
Particulars Included or excluded Reason
Used car Excluded They would have been added in the GDP of the
year of their actual production and including
them here would be counted as double counting.
Factory components Included They are part of capital formation. In addition,
no information has been provided about them
being used further as part of some other final
goods and hence, being treated as final goods in
itself.
Cloth Included Final goods
Beef Included Final goods
Milk Included Final goods
Computers Included Assembled units has different value for users
than its components and hence, included by
treating them as separate final goods
Printer Included Final goods
Raw materials for
tractor assembling
Excluded These are intermediate products and would be
further part of tractor and hence, excluded.
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plant
Item Base year (2015) 2016
Production Price Value Production Price Value
Used car 5000 2000 10000000 6000 2500 15000000
Factory components 8000 500 4000000 10000 1200 12000000
Cloth 8000 20 160000 14000 35 490000
Beef 1500 10 15000 1800 12 21600
Milk 5000 1.3 6500 6000 2.5 15000
Computers 2000 500 1000000 2500 800 2000000
Printers 500 300 150000 400 355 142000
Raw materials for tractor
assembling plant 4500 250 1125000 4450 300 1335000
Total of included items 25000 5331500 34700 14668600
Below mentioned is GDP calculation for the year 2016:
Nominal GDP is that GDP value which takes into account value of all final production in
the economy in a specific time period (Billi, 2017.). Value factors both volume of production and
current market price.
Nominal GDP = Value of production = production * Price = $14,668,600
Real GDP is that GDP value which takes into account volume of all final production in
the economy in a specific time period. It is based on base year's price.
Real GDP = Volume of production = 34700 units
(II) Difference between real GDP and nominal GDP
Basis Nominal GDP Real GDP
Meaning Total of economic produce in a year
at current market price
Total of economic produce in a
year at a pre-determined base price
Based on Current Market Price Base year's market price
Inflationary effect Does not factor inflationary effect It is inflation-adjusted GDP
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Value Higher, since it is based on current
market price
Lower, since it is based on base
year's price
Growth analysis Complex and not easily analysed Simpler and easier to analyse
Nominal growth of GDP is more than real growth as it is based on value of current year's
prices which are much higher considering taking current market changes into effect than, base
year's prices (Pan and et. al., 2018). Below mentioned is GDP growth calculation from two
manners:
Nominal GDP growth = (Valueyear2 – Valueyear1) / Valueyear1 * 100
= ($14668600 - $5331500) / $5331500 *100
= 175.13%
Real GDP growth = (Volumeyear2 – Volumeyear1) / Volumeyear1 * 100
= (34700 units – 25000 units) / 25000 *100
= 38.8%
Assessment Question Week 9 and 10: Inflation and unemployment, and
Macro economics
Question 5
(I) Effects of the determinants of aggregate demand on real GDP of a nation
Aggregate demand (AD) is like GDP (E), which considers the total spending in the
economy (Economic Growth, 2021). Therefore, they are measured in the same way. Aggregate
demand comprises of total spending of household (also known as consumption, C), investments
made by businesses and households (I), government spending (G) and net of export and import
(net spending out from overseas (X-M)).
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Consumption(C)
15
Illustration 4: Multiplier effect of AD on GDP, 2021

It includes the components of households spending on utilities. Since, it covers average
spending of large masses, it makes up largest share of aggregate demand. It is directly dependent
over the income of the household and the part that is not spent, is taken as savings of the
households. Therefore, when the income increases, spending of the households increases as well,
which is covered by the marginal propensity to consume (MPC). MPC refers to the amount that
has been extra spent because of an extra dollar rise in the income. Its impact on GDP can be
calculated by referring to a simpler multiplier. It refers to the change in GDP with change in
expenditure (Cheng and Wang, 2019). In other words, it determines additional GDP that results
as a change in the level of expenditure. Expenditure of one household is earning of other
household or business or government, which in turn makes another expenditure. This forms a
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Illustration 5: Multiplier effect of Consumption over GDP, 2021

chain of reaction and the multiplied impact can be seen on GDP as shown in the figure
mentioned above.
Government Spending (G)
Figure 1Multiplier effect of government spending on GDP. 2021
Government spend money on public welfare and to create infrastructure. Its spending can
either be cyclical or structural. Cyclical expenditure is dependent on business cycle and is aimed
at balancing the economy while structural expenditure is to sustain the infrastructure on which
economy is based irrespective of the stage, economic cycle is in. Each expenditure of
government is capable of causing an injection in the economy which can see a further multiplied
impact on the GDP (Deleidi, Iafrate and Levrero). For example, government decides to build a
new medical university and hospitals for the aboriginals to improve their healthcare inclusions.
Construction of this university and hospital would provide salaries or wages to so many people,
creating increase in national income and personal disposable income. Either this income would
be saved or spent or part saved or part spent. Expenditure made out of this income will create
demand further in the economy and demand plays an important role in increasing the production
and supply level.
(II) Effects of anticipated general rapid increase in price for goods and services
A situation is provided that there is an expectation of a rapid general price increase in
goods and services in Australia in near future. In such case, there are possible chances that
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present day demand of those commodities sees a surge. It is likely that looking at a high demand,
sellers might increase the prices of the products to a little extent in the present and even that is
not able to budge customers from demanding in higher quantity in the expectation of further
price rise in the future. This can be taken as an exception to law of demand which says that as
price rises, demand falls. This is a chance for sellers to earn supernormal profit but this should
not be ignored that this is a short-term phenomenon which will not have an effect over the long-
term aggregate demand or GDP (Uxó, Álvarez and Febrero, 2018).
Assessment Question Week 11: Monetary Policy
Question 6
Reserve Bank policy that can overcome the effect of increasing money supply in the
economy
Context provided:
In order to reduce the severity of COVID 19, government of Australia has unveiled many
policies like Job Keeper and subsidies to firms in the economy. These have resulted in positive
stimulus in the demand but has also resulted in additional liquidation in the economy. In view of
the situation of increasing money supply in the economy, Reserve Bank of Australia predicts that
economic expansion in the present manner is not sustainable and will be having adverse effects.
Money Supply
Money supply refers to the liquidation in the economy. In other words, all the currency
and other liquid instruments like deposits are included in it. Flow of money supply is either
regulated by Central Bank of the country through money market operations or the government
through fiscal measures (Soon, Hong and Selvachandran, 2019). Its flow is needed to be
controlled as it impacts general price level, business cycle and can lead to inflationary and
deflationary conditions. Reserve Bank should however take only regulating measures, not
controlling measures and should allow market to re-gain its balance itself with the free
interaction of market forces of demand and supply at various price levels.
Impact of increase in money supply on money market
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Figure 2 Effect of increase in money supply on money market, 2021
It has been provided that to control adverse effects brought by COVID-19, government of
Australia has injected 30 billion AUD into the economy which has stimulated demand in the
economy and to provide further stimulus, interest rates were reduced by 2.5% from equilibrium
interest rate. The equilibrium interest rate is the rate at which the quantity of money demanded is
equal to the quantity of money supplied in the economy and with reduced interest, government
has increased the amount left with consumers to spend further, to create demand (Wu and et. al.,
2020). However, this has led to inflationary conditions which can turn to hyperinflation if not
controlled timely. Therefore, the Reserve Bank should increase the short-term bank rates to
allow market to gain equilibrium interest rate again which has been provided at the rate of 4%.
Further, to reduced lending power of the banks, it can increase reserve requirements for them.
Such measures will create a multiplier effect like the bank would extend less in the market,
leaving little with consumers to spend. This will induce them to save more and spend less which
will further, re-instate the balance in the economy.
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Figure 3 Effect of increase in money supply on AD-AS, 2021
It has further been provided that there was reduced demand conditions during COVID-
19, which has led CPI to a level of 65 representing deflationary conditions in the economy which
achieves equilibrium at the CPI level 120. To improve these conditions, government had injected
direct money in the market which must have resulted in inflationary condition by instigating
demand which results in demand led inflation. In the wake of expansionary policy adopted by
government and the impact it has caused on economy, Reserve Bank has to induce measures that
will withdraw those extra funds from the market like open market operations of selling securities
with a lock-in period (Beckworth, 2018). Further, it has been provided that to overcome this
inflationary crisis, aggregate demand has to be reduced by AUD 30 billion to help the market
reach equilibrium. Macroeconomic equilibrium occurs when the quantity of real GDP demanded
equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS
curve. It should be allowed to function freely in the long run to attain equilibrium on its own. In
case, the quantity of real GDP supplied surpass the quantity demanded, prices and production
would have to be adjusted by seller to adapt to market and vice versa.
Conclusion
In the assessment above, various concepts related to microeconomics and
macroeconomics have been explored. It has been elucidated above that microeconomics deals
with factors and their impact over the individual unit of economy like effect of changes in prices
of commodities in individual market over the demand of those commodities in the form of
concept of price elasticity of demand while macroeconomics deals with factors and their impact
over the economy in general like aggregate demand in the economy or total production in the
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economy in the form of concept of GDP. It was illustrated that there can be various ways to find
out elasticity of demand due to determining factors and in the same way, there can be different
ways to calculate GDP of an economy. Further, it was concluded that all the components in an
economy are inter-related and thus increase in money supply by government can have impact
over the demand of a household and vice versa. It could lead to inflationary and deflationary
conditions which are then to balanced by either Reserve Bank through monetary policy measures
or by government through fiscal measures.
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References
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