Economics for Business - Assignment
Added on 2021-04-17
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Running Head: Economics for BusinessEconomics for Business
Economics for Business1Question 1:Define and explain the three key economic ideas:People are rational: Rationality plays an important role in the field of economics. It is acommon to assume that people are rational in behaviour. They choose a bundle of goods,from the given alternatives, which gives them highest level of satisfaction. The resources aretaken to be constant and the decision is made according to the priorities andpreferences[ CITATION Kla12 \l 16393 ]. Consumer, producers and society try to maximise theirlevel of satisfaction, profits and welfare respectively. They all work at margin. A consumertries to consume a commodity till the point his satisfaction from additional unit turns to zero,given his level of income and prevailing prices[ CITATION Boj15 \l 16393 ]. Producer producestill the point where his gains from additional unit turn to zero. For example, if Georgeproduces belts, he will produce till the point where his profits (revenue- cost) turn to zerowith given resources and technology. There is no incentive for him to produce further as thecosts will be higher than the revenue.People respond to incentives: Incentive motivates consumers, producers and society toincrease their consumption, production and welfare respectively. A rational person compareshis costs to his gains. Positive incentives increase the gains of each while the negative onesforbid further consumption or production[ CITATION Edd10 \l 16393 ]. Fall in prices is apositive incentive for consumers to increase their consumption while the same phenomenonis negative for the producers and vice versa. They then decrease their production until theincrease in demand (because of lower price) pushes the prices back to the initial value.Decline in prices both increases the demand and decrease the production. Producers decreasethe output because their profits are reduced[ CITATION Mat14 \l 16393 ]. For example, if theprice of apples falls, Serena increases her consumption of apples with her given level ofincome. The reduced prices acts as in incentive and persuades Serena to increase hersatisfaction with increased consumption.Optimal decisions are made at the margin: A rational person makes a decision based on agiven number of alternatives. He trade-offs the ones associated with lesser satisfaction for thebetter ones, as per his preferences. These decisions are made with respect to the existingcircumstances. It is about increase or decrease in the current consumption or production.Decisions are never about all or none. Optimum decisions are made in terms of satisfaction orprofits derived from the subsequent unit. Decision will be favourable when the satisfaction orgains from the subsequent unit exceeds the cost or it and vice versa. At the optimum level,
Economics for Business2marginal cost is equal to marginal revenue. After this point, gains are less than the costs andthe production or consumption is reduced[ CITATION Lun10 \l 16393 ]. For example, Dan, abread baker, uses marginal analysis to compare the costs and gains associated with theadditional production of breads. He employs his funds and other resources to increase theproduction when there is high demand. The gains will be more than the cost associated withthe production increase.Question 2: Using the economics or other literature to identify estimates of the incomeelasticity of demand for at least three different products.Income Elasticity of Demand estimates:Income elasticity of demand refers to the responsiveness of demanded quantity of a good fora given change in the income of the consumer[ CITATION Fou10 \l 16393 ]. It is used to estimatethe future production gains associated with the rise in the income level of the consumers. Itcan be calculated as follows:Income elasticity of demand (η)¿%change∈quantitydemanded%change∈incomelevelThe income elasticity of demand has a range from zero to ∞ infinity. As the value ofelasticity gets closer to infinity, the more elastic is the good. If the magnitude is closer tozero, then the good is inelastic to the income. Income elasticity range is as follows:ValueElasticity0Perfectly Inelastic0< η <1Relatively Inelastic1Unit Elastic1< η <∞Relatively Elastic∞Perfectly ElasticIncome elasticity of demand bifurcates goods into normal and inferior. Normal goods have apositive relationship between income level and demand while inferior goods’ demandincreases with the decrease in income level and vice versa[ CITATION Kha12 \l 16393 ].
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