This document provides information on various topics related to the principle of economics, including elasticity, cost of production, market power, and business strategy. It discusses the concepts and provides examples to help understand the principles of economics. The document also includes references for further reading.
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Running head: PRINCIPLE OF ECONOMICS Principle of Economics Name of the Student Name of the University Author Note
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2PRINCIPLE OF ECONOMICS Task 2: Elasticity Answer 1 3D television is a luxury product and its demand change significantly with change in price. Thus, it is highly price elastic. On the other hand, prescription medication belongs to necessary product group and it has no close substitutes (Gowrisankaran and Rysman 2012). Thus, prescription medication is inelastic, as its demand does not change with change in price. Hence, elasticity is more for 3D television. Answer 2 Electricity is a necessary good with no close substitutes and its demand does not change with price change. Hence, it is inelastic. However, coffee that are sold café is a normal good with substitutes and thus it is price elastic (Paraje 2016). Therefore, coffee is more elastic than electricity. Answer 3 CrossPriceElastcity=Percentagechange∈quantitydemandedoftyres Percentagechnage∈priceofcars ¿dQx dPy ×Py Qx ¿21000−25000 35000−25000×25000 25000 ¿−4 10 ¿−0.4
3PRINCIPLE OF ECONOMICS Cross-price elasticity of complementary products is negative having a value of -0.4. In this case, cars and tyres are complementary because fall in car sales due to price increase, decrease the sales of tyres (Baylis, Fullerton and Karney 2014).Therefore, price of tyres will be lowered to recover its lost market. The sales of tyres will improve but will fail to reach its previous sales value as market of cars still suffering from low sales. Task 3: Cost of production Answer 1 Governmentimposesone-timelicencefeetoalltelevisionnetworkanditis compulsory and non-refundable. Hence, licence fee cost is fixed. Answer 2 Samsung uses new power boards in its television and it changed production cost. However, if Samsung change this power board with another of different price, production cost will again change (Mankiw 2014). Thus, power board changing cost is variable one. Answer 3 Figure 1: Long run average cost for the airline company
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4PRINCIPLE OF ECONOMICS The airliners now have choice of running planes as per market demand. They have now two types of planes, one is the old Dreamliner and the other is new A380 airbus. Both the airplanes are different from each other in various aspect. Dreamliner is much smaller, accommodates half the number of passengers A380 is able to carry (The National 2019). It is also more fuel efficient and economical than A380. On the other hand, A380 is the largest civilian airplane in the world. It is also expensive to run as it comes under luxury category and it has high opportunity cost. Thus, the airline companies should choose between these two planes alternatively depending upon the market demand. Hence, the choice will be assessed with the help of long run average total cost (LAC) (Varian 2014). In the above figure, PQ gives the minimum cost at full capacity (maximum passenger capacity). Airliners minimizes cost when it uses Dreamliner. Thus, the maximum capacity is considered as the capacity of Dreamliner. Therefore, during off-season when the market demand is low and is below the PQ level, it is cost effective to use Dreamliner. However, during peak season when number of passenger exceeds PQ level then it is better to use A380 because it can carry more passengers. It is convenient and cost effective to use one airplane than using two. Therefore, when the number of passengers is below PQ level the airliners should use Dreamliner, otherwise it should use A380. Task 4: Market power Answer 1 In monopoly, there is only one seller that serves many buyer, firms maximize profit by charging price above equilibrium point of marginal cost (MC), marginal revenue (MR), and average total cost (Goering 2014) . Adidas being the only seller of exercise shoes in Australiaenjoysmonopolypower.Thus,itcanchargemonopolypriceandthereby appropriate super normal profit in the long run as shown in figure 2.
5PRINCIPLE OF ECONOMICS Figure 2: Long run monopoly profit of Adidas However, if many other firms enter the same market then Adidas would lose its monopolypower(Djolov2014).Therefore,themarketwilltransformintoperfectly competitive one as the price level falls from the monopoly to perfect competition level. In such a market firms in the long run can only earn a normal profit. This is shown in the figure below. Figure 3: Normal profit under perfect competition
6PRINCIPLE OF ECONOMICS Answer 2 McDonalds is a brand and it operates all around the world. It has many branches that offer same products at identical prices. It operates in a monopolistically competitive market and serves exclusive products to numerous customers (Zeuthen 2018). Therefore, with increased demand, price of products increase to so that supply demand equilibrium persists. Hence, McDonalds has a downward sloping demand curve. However, if a new McDonalds branch opens in the area of the previous one then both the branches will cater to same market. Hence, both supply and demand curve will shift to the left keeping the price fixed. On the other hand, there are numerous cattle farms in the world and all are part of a single world market. Therefore, the cattle farm in this context do not have any monopoly power, rather it operates in a perfectly competitive market and its change in supply does not affect the market demand or price (Rothbard 2012). Thus, the demand curve of the cattle farm is horizontal. Task 5: Business strategy Answer 1 Dominant strategy refers to the particular strategy in a game that enables a player to reach a higher pay off relative to other available strategies to the player regardless of the decision of opponent player. Answer 2 Considering the pay-off matrix, it can be said that entering the market is the dominant strategy for Jim’s Coffee because if it does not enter it will earn no profit. However, if it enters, it can earn 2 million profit when stars and Coffee sets high price and earns 1 million profit when Stars and Coffee sets low price. Thus, ‘enter’ is the dominant strategy for Jim’s Coffee
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7PRINCIPLE OF ECONOMICS Answer 3 The dominant strategy for Stars and Coffee is to set high price because it will fetch more profit by setting a higher price irrespective of the decision of Jim’s coffee. From the payoff matrix, it can be seen that at high price Stars and Coffee earns 7 million profit if Jim’s Coffee does not participate in the competition and 3 million if Jim’s Coffee participates in the competition. Hence, Stars and Coffee should set high price. Answer 4 Nash equilibrium is defined as the equilibrium where no player has any incentive to deviate from the chosen strategy taking the strategy of the opponent as given (Daskalkis 2013). In this duopoly between the two coffee shops, the Nash equilibrium occurs when Jim’s Coffee and Stars and Coffee enters the competition and sets price high respectively because both the firms optimize their profit in this combination. Both earns the maximum profit possible under the duopoly condition that is 3million profit for Stars and Coffee and 2 million profit for Jim’s and Coffee. Answer 5 From the options in the payoff-matrix, it is evident that setting high price is the best option available to Stars and Coffee for profit maximization because it earns 3million profit if Jim’s Coffee enters the competition and 7 million if Jim’s Coffee does not. Thus, believing Stars and Coffee’s threat would be a bad decision for Jim’s Coffee.
8PRINCIPLE OF ECONOMICS References Baylis,K.,Fullerton,D.andKarney,D.H.,2014.Negativeleakage.Journalofthe Association of Environmental and Resource Economists,1(1/2), pp.51-73. Mankiw, N.G., 2014.Principles of economics. Cengage Learning. Daskalakis,C., 2013.OnthecomplexityofapproximatingaNashequilibrium.ACM Transactions on Algorithms (TALG),9(3), p.23. Djolov, G.G., 2014.The economics of competition: the race to monopoly. Routledge. Goering, G.E., 2014. The profit‐maximizing case for corporate social responsibility in a bilateral monopoly.Managerial and Decision Economics,35(7), pp.493-499. Gowrisankaran, G. and Rysman, M., 2012. Dynamics of consumer demand for new durable goods.Journal of political Economy,120(6), pp.1173-1219. Mankiw, N.G., 2014.Principles of economics. Cengage Learning. Rothbard, M.N., 2012. Competition and the economists.Quarterly Journal of Austrian Economics,15(4), p.396. The National (2019).The Airbus A380 versus the Boeing 787 Dreamliner: leg room, turbulenceandspeed.[online]TheNational.Availableat: https://www.thenational.ae/lifestyle/travel/the-airbus-a380-versus-the-boeing-787- dreamliner-leg-room-turbulence-and-speed-1.826784 [Accessed 7 May 2019]. Varian, H.R., 2014.Intermediate microeconomics with calculus: a modern approach. WW Norton & Company.
9PRINCIPLE OF ECONOMICS Zeuthen, F., 2018.Problems of monopoly and economic warfare. Routledge.Paraje, G., 2016. The effect of price and socio-economic level on the consumption of sugar-sweetened beverages (SSB): the case of Ecuador.PloS one,11(3), p.e0152260.