Microeconomic Principles and Applications

This assignment delves into fundamental microeconomic principles. It covers topics such as the law of diminishing returns, marginal cost, public goods vs. private goods, and social costs associated with externalities. The assignment explains these concepts through definitions, illustrations, and real-world examples. A key focus is on understanding how market forces operate and influence resource allocation in various scenarios.

Economics

Table of Contents
QUESTION 1...................................................................................................................................1
A).................................................................................................................................................1
b).................................................................................................................................................2
c)..................................................................................................................................................2
QUESTION 2 ..................................................................................................................................3
QUESTION 3...................................................................................................................................4
..........................................................................................................................................................4
QUESTION 4...................................................................................................................................5
(a) determination of fixed and variable cost in jewellery making shop......................................5
(b) Law of diminishing returns and its relation with cost...........................................................6
QUESTION 10.................................................................................................................................8
A).................................................................................................................................................8
B).................................................................................................................................................8

QUESTION 1
A)
External cost and benefits impact on resource allocation to great extent. Negative
externality is the example of external cost; if it is not taken into consideration then it would help
in increasing production. This will create situation of over allocation of resources. On other hand
external benefits such as positive externality create situation of under allocation of resources in
the business unit (Kneese, Ayres and d'Arge, 2015).
Figure 1 Social cost
Source: (Social cost and externalities, 2018)
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Figure 2: Positive externalities
Source: (Social cost and externalities, 2018)
b)
Public goods have features of no excludable and non-rivalrous. This makes easy for the
producers to sell their goods in the market. Such type of items and services are financed by Tax
revenues. Thus, good and services have become the public goods, by this way companies can sell
their material in the market easily (Public Good and Private Good: Difference, 2018). Public
goods are consumed by everyone and private goods are rival thus, all the goods became public.
Another reason of becoming public good is that these types of materials are non- rejectable.
That is beneficial for the company in order to increase its production and enhancing sales
revenues.
c)
Privately owned engineering
and material research
public goods This is public goods because it
has non rivalry characterises
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laboratory because consumption of
laboratory will not decrease
availability of goods
(Boardman and et.al, 2017).
Quaranteen services public goods It is included in public
services because of non-
excludability features, it is not
possible to exclude people
from the benefits of
Quaranteen services.
Toll road financed through
government debts
Public goods It is public goods because of
non- rivalry feature.
Courses offer by fee charging
privately owned teaching
institutes
Public goods The reason of including in
public good is that it is non
rivalry in nature (Kagel and
Roth, 2016).
Contact lenses Private goods It is private material because it
is purchased and consumed by
one person as per their own
need.
QUESTION 2
(a) As per considering the income elasticity scale of +0.6 and -0.6 was well as the consumer
price index of 10%. thus, it insists that there will be 0.6 or 6% increase in the income.
(b) this can be state with income price elasticity and demand of the product in market of both
goods. With an increase in demand of one of the product demand of other will reduce (Miller
and Alberini, 2016). This can be determined with calculation of cross price elasticity.
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(c) income elasticity of demand measures the responsiveness of demand to change in
income, this means with a change in income what is relative change in demand of a
product. The result of YED is interpreted as
 YED >0 ; normal goods
 YED <1 ; luxury goods
 YED<0 ; inferior goods
= 100.8/96.2
= 1.04
it is normal good
d) this can be measured as responsiveness of a demand for one good with a change in price
of another good. This reflect effect of a change in price of one good on another good.
= 100.79/96.5
= 1.45
a positive sign indicates that both products are substitute to each other.
QUESTION 3
(a)
Firm A
Quantity 0 1 2 3 4 5 6
total revenue 0 10 20 30 40 50 60
Average
revenues 10 10 10 10 10 10
marginal
revenues 10 10 10 10 10 10
Total cost 30 42 50 60 76 100 140
marginal cost 12 8 10 16 24 40
Average cost 0 42 25 20 19 20 23.33
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Firm B
Quantity 0 1 2 3 4 5 6
total cost 100 134 154 177 216 266 366
average
cost 0 134 77 59 54 53.2 61
marginal
cost 34 -57 0 -18 0 -5 0 -0.8 0 7.8 0
price 140 130 120 110 100 90 80
total
revenue 0 0 130 0 240 0 330 0 400 0 450 0 480
marginal
revenue 130 110 90 70 50 30
(b)
 Firm A- short run
 Firm B- long run
(c)
 Firm A - perfect competition
 Firm B - imperfect competition
(d) production in short run
 Firm A - 1 units
 Firm B - 1 unit
(e) firm an is operating at dame level of profits as with an increase in output same level of
increments is there in revenue (Olmstead and et.al., 2015). Firm B have a good profit position as
with increase in unit production revenue have increased with a better pace.
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QUESTION 4
(a) determination of fixed and variable cost in jewellery making shop
1. The cost of solder: this is fixed cost as this is used to join ornaments which is main
product of jewellery shop and do not change with production volume.
2. Basis minimum wages of workers: this also fixed cost as whether there is production or
not wages have to be paid to workers. There can be change in wages amount but its
nature will not change.
3. Advertisement campaign on valentines day: this is considered as variable cost as this
is non recurring in nature. This cost is not related with production, hence there is not
impact of this cost on production volume and vice versa.
4. Overtime pay: this variable cost for shop as this is not a regular cost and this will incur
in case when extra time work is done.
5. Electricity cost for one month: this also variable in nature as this cost is paid only for
one month and will not occur on a regular basis.
6. Interest on mortgage for factory: this is fixed cost, interest on loan is paid for a long
time until al instalments are repaid, with a change in interest there will be no change in
nature of cost (Burke and Liao, 2015).
7. Depreciation: this also a fixed cost as this expense will go on throughout life of a
machinery and there are more than one machines in shop, so this is of recurring nature.
8. Taxes: again a fixed cost as taxes have to be paid by shop keeper every year without any
default and irrespective of production.
9. Electricity cost (regular): this can be considered as semi variable cost as with change in
production electricity used related with production will also reduce but for other usage
there will be no change.
10. Were and tear on machines: this also a fixed cost as this is similar to depreciation and
this will incur until useful life of a machine.
(b) Law of diminishing returns and its relation with cost
This law can be defines as when more and more unit of variable units are employed in on
fixed input for a given quantity, the increment in total output will be at increasing rate at first
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than it will become constant and last growth in total output will be at diminishing rate
(Labandeira, Labeaga and López-Otero, 2017). In other words it can be stated that with an
increase in input of variable unit keeping units of fixed input constant, total output increase with
a high rate initially and then increases with slow pace.
Relation with marginal cost can be determined as with an increase in output the gain
from resulting form volume of output gets smaller and smaller. The marginal cost curve firstly
shows a downward sloping which represents added efficiency with an increase in production.
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Illustration 1: Law of diminishing returns
Illustration 2: marginal cost
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Illustration 3: law
of diminishing return
QUESTION 10
A)
Scarcity forces individuals and society to incur opportunity cost because finite amount of
goods are available in the economy. Opportunity cost can be define as value of one good that is
received by give up other material. Society and individuals can use limited scarce resources for
producing goods. Thus, it is essential for them to look upon the opportunity cost (Cárdenas and
et.al, 2017).
For example if 100pieces of wood are available in planet then individual can only produce
50 bookshelves or 30 tables. If bookshelves are to be produced then opportunity cost would be
30 tables. The wants of human being is always great than the available amount of material or
resources. Thus, individual has to compromise with their choice, opportunity cost can be
considered as alternative sacrificed.
B)
In the given case scenario, car is not free because opportunity cost is involved in it.
Consumers have to pay to chocolate bar for winning this free car. Thus, individual have paid for
the same (Kneese, Ayres and d'Arge, 2015).
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C)
Production possibility curve represents the maximum quantity which can be produced
with given resources with an assumption that all of then are optimally utilized. The curve is
outward bowed because there is an increase in quantity of production and production of other
products have been decreased which creates a curve when a graph related with production of tow
goods are presented.
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