Managerial Economics: Allocation of Resources, Social Cost of Cars, Tax on Petrol, Subsidies for Bus Travel

This document discusses various topics in managerial economics, including resource allocation in a market economy, the social cost of cars, the effect of a tax on petrol, and the need for subsidies for bus travel. It also explores the argument on the decline of luxury cars with decreasing prices and evaluates the adoption of flexible exchange rates in large countries. The document provides an explanation of demand terms and concepts.

Managerial Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
TASK 1............................................................................................................................................1
Way of allocating resources in a market economy......................................................................1
Reason behind cause of greater social cost of car than private cost............................................2
Effect of a tax on petrol on market for petrol..............................................................................3
Discussion on whether bus travel need to be subsidised by government....................................4
TASK 2............................................................................................................................................5
Argument on declination of luxury cars with decreasing its price, as per law of demand..........5
TASK 3............................................................................................................................................6
Evaluation on a large country which is more open for adopting flexible exchange rate as
compared with small nation.........................................................................................................6
TASK 4............................................................................................................................................7
Explanation of demand terms and concepts................................................................................7
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12

INTRODUCTION
Managerial economics considers as one of the main theory which includes business
practices, to make effective decisions and future planning. It helps management of a firm to
formulate logical decisions relating to internal functions and solve practical problems, by using
analytical and statistical tools (Wang and Wu, 2020). A report is made under present assignment
on traffic congestion, which is one of the main problem of various cities. To resolve this
transportation issue, a key discussion is done on way to allocate resources to taxing petrol,
building roads and subsidising the bus travel. Along with this, some arguments make on demand
of declination of luxury cars, adoption of flexibility of exchange rates, with explanation of
demand terms and concepts.
MAIN BODY
TASK 1
Way of allocating resources in a market economy
Rising peak-hour traffic congestion is one of the inescapable problem in growing
metropolitan areas and large cities. It an inherent result of manner, in which modern cities are
operated (Nadar and Vijayan, 2020). This condition on transport can be categorised in terms of
slow speed of vehicles due to high traffic, longer times to reach destination and increase
vehicular queueing. Along with this, extreme congestion sets when demand approaches beyond
the capacity of roads, which leads to create frustrations and road rage among drivers. But public
policy makers couldn’t find any specific ways to overcome or reduce traffic congestion.
Therefore, some possible ways that helps in reducing congestion includes allocation of more
resources, for constructing roads, taxing petrol as well as subsidizing bus travel, in following
way –
 As today in urban areas, mostly people avoid to travel from buses, therefore, more
electric buses need to be launches which are equipped with quiet and battery-powered
engines, through which advantage from trams can be diminished (Novack and et. al.,
2019). This would also help in improving public’ perception about buses
 Instead of building new roads, interventions need to be taken for traffic management by
using CCTV cameras for monitoring congestion, enforcing traffic laws, improve bus
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services and cycling infrastructure, rationalise distribution and more (Resat and Turkay,
2019).
Reason behind cause of greater social cost of car than private cost
As car is considered as negative externalities therefore, in a free market, its social cost is
mostly greater than private costs. In general, private cost includes total costs which is paid by
owner for purchasing it, where to drive it, expense is made on fuel, oil, depreciation,
maintenance, drive time experienced and more (Nwafor and Onya, 2019). While, social cost on
the other hand, refers to a total of external and private or personal cost. The external cost hereby,
includes cost spend for occupying parking space and payment for utilisation of other social
services. Since, vehicles causes higher pollution, so, it also considers as external cost where to
reduce it, people also pay for it. Therefore, social costs refer to cos pertaining transaction
towards society as whole. In this regard, it has evaluated that external cost is more than zero,
which results in exceeding it from personal cost (Tavasszy and et. al., 2019).
Mathematically –
Social cost = Private cost + External cost
As External cost of car > 0,
so, Social cost > Private cost
The key point in this regard, states that if individual avoids to pay for external cost
(environmental clean-up, congestion, visual degradation, pollution and more) of cars, then
socially cost remain at inefficient rate of output as a whole (Nowak, Hewitt and Bachour, 2019).
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Effect of a tax on petrol on market for petrol
Tax refers to be most important policy, where government sets and levy certain rate of tax
on producers or consumers as GST (Government Sales Tax), PST (Provincial Sales Tax) and
more (Ragusa and Crampton, 2019). In context with fuel market, to understand effect of tax on
petrol, principles of demand and supply can be applied, as shown below –
Figure 1: Effect of tax on demand of oil
As demand curve mainly represents the willingness of consumers to pay for purchasing a
thing, therefore, increase or decrease in price also fluctuates the same. In context with market of
petrol, with increase in tax rates, price of also increases (Bektaş and et. al., 2019). So, under such
condition, it shift demand curve in left or downside as shown in above figure, with shifting in
equilibrium.
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Figure 2: Effect of tax on supply of oil
According to supply curve which is derived from Marginal Costs of petrol as shown in
above figure, it has been analysed that shift in curve mainly caused due to changes in market. It
fluctuates MC with every level of quantity, instead of difference in tax (Hsiao and Chang, 2019).
From perspective of producers or suppliers, it has been evaluated that any tax which is levied,
lead to increase in MC per unit. For example – If government set tax $3 on petrol, then it will
shift right by $3, then it a new equilibrium will create at P = $5 with Q = 2mn barrels. In this
regard, from producers’ perspective they won’t get $3 because it will send to government. While,
from perspective of consumers, it will increase price of petrol for them, which decreases demand
of same also (Belenky, Fedin and Kornhauser, 2019).
Discussion on whether bus travel need to be subsidised by government
Having a sustained reduction faced by bus in patronage, due to withdrawal of a vicious
circle of subsidy (Kalil, 2019). It makes the services comparatively less convenient, with fall in
patronage falls. Similarly, with increasing growth of urbanisation, bus services and other public
transportation offer less quality of services. This result in increasing personalized mode of
transport in most cities, that leads to arise problems related to traffic congestion. It would further,
results in longer time of travel, reduced the average speed, increased fuel consumption, increase
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in pollution levels and discomfort to road users etc. Therefore, to improve bus services, it is
essential for government to provide subsidies to bus travel (Shi and et. al., 2019). In addition to
this, volume of car traffic is also increasing day by day, due to negative perception of people for
bus services. Since, peak traffic in such condition can’t directly be taxed, henceforth, subsidizing
the alternative modes of transport like bus would reduce price of bus travelling as well as, also
shift shift of demand of car travel to left.
TASK 2
Argument on declination of luxury cars with decreasing its price, as per law of demand
In order to travel more comfortable and maintain status in a society, people of upper class
mostly seek to purchase luxury cars. For exceeding travel experience, they highly concern on
features, competitive advantage and market position of car firms, before purchasing (Najafi and
et. al., 2019). In UK, Audi, Mercedes, Lamborghini, Bugatti and more, are some of the luxurious
cars which are equipped with high fuel efficiency and innovative features, for enhancing driving
experience. In this regard, demand of luxury cars might be declined if price of the same
decreasing, because the prestige or brand reputation will also decline. However, this contradicts
the law of Demand, which states that with decreasing price of a certain commodity, its demand
will increase more (Wang and Wu, 2020). But in luxury market, instead of price factor, people
concerns more on brand image and prestige of company. A number of examples present that
shows how declining the brand image of luxury cars, results in decreasing of sales.
One of such example is Volkswagen scandal, in the year 2015, Environmental Protection
Agency have found that VW cars are equipped with a cheat device (software) in diesel engines
that shows less pollution on testing (Nadar and Vijayan, 2020). This firm has admitted that it has
sold low emission cars in Europe and market, near about 11 million which are fitted with defeat
device. So, after opened up this scandal, this firm has broken the customers trust and fail to gain
their loyalty. This would highly impact on brand image of Volkswagen at worldwide level, with
declining its sales. After scandal of cheat emission, market rate of Volkswagen in 2016, has been
highly declined from $95billion to $60 billion (Volkswagen: Could The Cost Of The Dieselgate
Scandal Be Lower Than Expected? 2016.). The sales of this firm is continuously declined after
then, where to overcome from it, various strategies in terms of investment in CSR activities,
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society development and more, to gain back the loyalty of its customers. Therefore, from this
case it has been clearly explained that decreasing prestige of luxury car, reducing its sales also.
Figure 3: Volkswagen: Could The Cost Of The Dieselgate Scandal Be Lower Than Expected?
2016.
However, if automobile companies like BMW, Tata Motors, General Motors and more,
decrease price of its luxury products, due to economy recession and other factors with positive
brand image, then it will increase demand of the same also. So, this fact holds the applicability of
demand law, i.e. fluctuation in price factor due to economic recession will change its demand at
marketplace also (Resat and Turkay, 2019). Therefore, it has been evaluated that in declining
sales of luxury cars, only prestige of automobile firms plays the crucial role.
TASK 3
Evaluation on a large country which is more open for adopting flexible exchange rate as
compared with small nation
In the current economic system, the exchange rates within major currencies like U.S. dollar,
AUS dollar, euro, Japanese yen and more, majorly fluctuate in response with market forces,
including short-run volatility as well as occasional due to large medium-run swings (Novack and
et. al., 2019). The medium-sized or developing industrial countries might also have regimes of
exchange rates as per market-determined floating rate, while large nations have adopted the
harder pegs, such as few of European countries that outside the euro area. In this regard,
transitional and developing economic nations have a wide variety of arrangements of exchange
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rate, with a higher tendency for many, although, by no means entire nations to move towards
rising exchange rate flexibility (Nwafor and Onya, 2019). This type of exchange rate regimes
variety that exists within an environment possess some special characteristics, as explained
below –
 Partly, flexibility of adoption of exchange rates happen for efficiency reasons, with
limited effectiveness of the capital controls. Developed countries have generally
abandoned such kind controls, where emerging market economies have gradually moved
away from them (Tavasszy and et. al., 2019). Therefore, growth of global capital flows
and financial markets’ globalisation also has been spurred through revolution within
telecommunications as well as information technology, that has been radically lowered
cost of transaction in financial markets. Along with this, large countries as comparison,
promoted more liberalization with deregulation of financial transactions at international
level
 Private capital flows internationally, finance the substantial imbalance in current account,
but changes in same flows appear due to macroeconomic disturbances causes sometime
(Nowak, Hewitt and Bachour, 2019).
 Developing and transitional nations have increasingly been drawn into integrating global
economy, in terms of trade in products and services as well as of financial transactions.
Therefore, through characteristics of exchange rates regimes, it has been evaluated that
flexibility of same are being adopted by major industrial countries, whose currencies likely seem
to remain a system key feature (Ragusa and Crampton, 2019).
TASK 4
Explanation of demand terms and concepts
Demand and supply
Concept of both economic terms are contrast with each other, however, both depicts
relationship between quantity and price of a product at a certain market place. The law of
demand states that there is an inverse relationship between demanded quantity and its price, i.e.
demand will raise with reduction in price of an item and vice versa (Bektaş and et. al., 2019).
While, supply law on contrast, shows the direct relationship i.e. with increase in price, supplied
quantity will also raise. For example – In transportation, through conventional perceptive of
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economic, changes in price not only affect demanded quantity of level of transport, but can also
shifts demand curve to alternative modes of transport. In long-term or medium-term structural
changes, it has evaluated that in pricing of transport, it majorly can affect locational decisions of
public (Hsiao and Chang, 2019). As per the figure given below, when supply of transport is more
than demand then demand shift to other routes, on specific period of time. Through demand
curve, it has been analysed that if cost of transport are high, then demanded quantity will be low,
because passengers seem likely to use less such services. Similarly, if transport cost is low, then
demand will be raised with increasing consumer willingness to use the services on reduced cost.
While supply curve which behaves inversely, if costs will be high, then transport providers or
suppliers would be willing for supplying quantities on higher manner, due to probability of
getting high profits is likely to be more under such conditions (Belenky, Fedin and Kornhauser,
2019). But if transportation costs are low, then there will be shortage of quantity of such services
quantity, because providers or suppliers would gain less benefits.
Figure 4: Provision for demand and supply in transportation
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Marginal cost (MC)
This economic concept defines cost which vary with cost of production, i.e. with increase
in one unit of production, MC will also raise (Kalil, 2019). For example – In transportation,
when cost of trip is increased from average cost to transport cost then, traffic volume will be
dropped at a certain rate and vice versa. Since to reduce traffic congestion, a number of
approaches are applied like subsidising the public transport (buses and trams), increasing tax
rates on petrol and more. Therefore, such type of changes directly affects marginal cost of
transportation, where increase in tax, raise its price that leads to increase MC of transport.
Similarly, subsiding bus services reduces price of tickets and other services, is resulted due to
reduction in MC of same (Shi and et. al., 2019).
Mathematically, Marginal cost can be calculated as –
Marginal cost = Change in cost of production
Change in volume/ quantity
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Price elasticity
In economic terms, price elasticity defines as change in volume or quantity of a product
with respect to change in price. In other words, it shows degrees to which willingness of
consumers changes to purchase a thing, as with price changes (Najafi and et. al., 2019). For
example –In transportation, price elasticity helps in measuring effect of changes in freight or
fares of one mode of transport on demand of others. When price of petrol increases suddenly,
then under such circumstances, volume of demand of other alternatives or public transport
services will raise. Within urban cities, peak-period trips in general, tend to be price inelastic due
to traffic congestion, which discourages the lower-value trips, leaving the automobile trips
having higher value. In transportation, price elasticity can be calculated by –
Price Elasticity = Change in volume of traffic
Change in cost of production
= T2 – T1
C2 – C1
Figure 5: Price elasticity of transportation
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Monopoly
This key concept defines market structure which is characterised by single seller, who
sells a unique product at a certain place. Therefore, being a solo seller, there is no competition
arise of such individual firms (Wang and Wu, 2020). For example – Within transportation sector,
railways, highways, road and other routes are the standard example of monopolies. In general,
public transport is considered as operated in monopoly market, because despite of earned profit
and gain competitive advantage, they mostly seek to provide best services to passengers.
Oligopoly
It is completely different from monopoly market, because a higher competition occurs
among firms who are operating in same market, with homogenous products but with
differentiable cost or services. In transportation, automobiles or cars refers to perfect example of
oligopoly market, because to increase sales, companies dealing in this sector, focuses more on
offering fuel efficiency, luxury cars, comfortable and safe driving facilities etc. Therefore, for
this purpose, as per facilities, technology and production cost, they offer cars on better profitable
rates instead of selling them on low cost.
CONCLUSION
It has been concluded from all over report that managerial economics helps in taking
effective decisions, regarding with approaches and strategies which can be utilised for a
particular market or business issues. As main focus under this assignment is made on
transportation sector, therefore, it has evaluated that growing urbanisation and decreasing quality
of public transport, personalised transport is increasing continuously. This leads to create traffic
congestion in most of the cities and can be improved only if, quality of public transportation will
improve.
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REFERENCES
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Investment in a Public–Private Partnership to Develop a Regional Energy/Freight
Transportation Infrastructure. International Journal of Public Administration. 42(15-16).
pp.1275-1310.
Hsiao, W. H. and Chang, T. S., 2019. Exploring the opportunity of digital voice assistants in the
logistics and transportation industry. Journal of Enterprise Information Management.
Kalil, N., 2019. PREDICTION OF TAX AVOIDANCE BEHAVIOR AMONG
TRANSPORTATION AND LOGISTIC SECTOR FIRMS IN BRAZIL. International
Journal of Advanced Economics. 1(2). pp.55-60.
Nadar, E.N. and Vijayan, S., 2020. Managerial economics. PHI Learning Pvt. Ltd..
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in Iran. International Journal of Transportation Engineering. 7(1). pp.77-89.
Novack, R. A. and et. al., 2019. Transportation: A Global Supply Chain Perspective. Cengage
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Nowak, M., Hewitt, M. and Bachour, H., 2019. Mileage bands in freight
transportation. European Journal of Operational Research. 272(2). pp.549-564.
Nwafor, M. E. and Onya, O. V., 2019. Road transportation service in Nigeria: problems and
prospects. Advance Journal of Economics and Marketing Research. 4(3). pp.104-117.
Ragusa, A. T. and Crampton, A., 2019. Alternative Transportation Enterprises for Rural
Australia: An Organizational Study of Greener Options and Use. International Journal of
Rural Management. 15(2). pp.269-292.
Resat, H. G. and Turkay, M., 2019. A bi-objective model for design and analysis of sustainable
intermodal transportation systems: a case study of Turkey. International Journal of
Production Research. 57(19). pp.6146-6161.
Shi, Y. and et. al., 2019. Sustainable transportation management: Integrated modeling and
support. Journal of Cleaner Production. 212. pp.1381-1395.
Tavasszy, L. and et. al., 2019. Logistics Decisions in Descriptive Freight Transportation Models:
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Online
Volkswagen: Could The Cost Of The Dieselgate Scandal Be Lower Than Expected? 2016.
[Online] Available Through:<>.
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