Economics for Business

Economics for Business
1

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
2

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
3

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
4

= 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.
5

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).
6
Illustration 1: Tax incidence in case of
inelastic demand, 2021