Business Economics Assignment: Application of Economic Theories

This business economics assignment explores various economic concepts and principles. Part A delves into microeconomic topics, examining the impact of oil prices on demand, externalities, and public goods. It analyzes scarcity, opportunity cost, and production possibility frontiers. The assignment also addresses elasticity, including income and cross-price elasticity, and explores different market structures, specifically perfect competition, covering short-run and long-run equilibrium for firms. Part B shifts to macroeconomic principles, calculating GDP, GNP, and related economic indicators. It analyzes the effects of fiscal policy, including tax changes and government spending, on aggregate demand and supply. The assignment also covers unemployment types, including frictional and structural unemployment, and examines inflation, differentiating between demand-pull and cost-push inflation. Overall, the assignment provides a comprehensive analysis of both microeconomic and macroeconomic concepts, offering detailed explanations and graphical representations to illustrate key economic principles.

Running head: BUSINESS ECONOMICS
Business Economics
Name of the Student
Name of the University
Student ID

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Table of Contents
Part A...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................5
Question 4....................................................................................................................................7
Question 5....................................................................................................................................8
Question 6..................................................................................................................................11
Part B.............................................................................................................................................13
Question 8..................................................................................................................................13
Answer 9....................................................................................................................................14
Question 10................................................................................................................................17
Question 11................................................................................................................................19
Question 14................................................................................................................................20
References......................................................................................................................................23

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Part A
Question 1
Question a
i)
Figure 1: Oil price and automobile demand
For a given increase in oil price automobile demand increases because of complementary
relation between the two. Demand curve here shifts to the left.
ii)

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Figure 2: Oil price and home insulation demand
With the objective of efficient energy use, home insulation demand increase for the said
increase in oil price. Demand curve here shifts to the right.
iii)
Figure 3: Oil price and coal demand
Increase in oil price increase coal demand shifting the demand curve rightward.
iv)

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Figure 4: Oil price and tyres demand
As automobile demand reduces for a rise in oil price, demand for tyres also decreases
(Baumol & Blinder, 2015). Demand curve shift to the left.
v)
Figure 5: Oil price and bicycle demand
As there is no need of oil for using bicycle, demand for bicycle increase as an alternative
to automobile. There is a rightward shift in the demand curve.
Question b

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External cost, also known as negative externality inflicts an additional cost burden on the
third party of the society. As private party does not consider these cost private marginal cost is
below the social marginal cost. Free market thus misallocates resource resulting in
overproduction. External benefit known as positive externality is the external benefit enjoyed by
the society. Here marginal social benefit exceeds that of the private marginal benefit. Resource
allocation is inefficient in the sense of underproduction of the desired good.
Question c
The obvious problem associated with public goods are they are non-excludable and non-
rival. Because of non-excludability there arises free riding problem in the distribution of public
good. Private parties never express their true preference for the good (Sloman & Jones, 2017)
Demand curve thus fails to reorient actual marginal benefit. Private parties therefore lack
incentives to produce public goods in sufficient amount.
Question 2
Question a
Scarcity in economics refers to the scarcity of resources to meet unlimited wants of
people. As resources are limited people have to make choice among the available alternatives.
This gives rise to the concept of opportunity cost. Opportunity cost is cost associated with a
decision resulted from forgone benefit that could have enjoyed from the next best alternative.
The scarcity and opportunity cost can be addressed using the concept of PPF. For a student, the
opportunity cost of playing cricket is the foregone grade that the student could get by studying
this time. Similarly, the opportunity cost of pursuing higher studies is the foregone salary from a
full time job.

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Figure 6: PPF and opportunity cost
Question b
Figure 7: Free car and opportunity cost
The car is not free actually. The price for the car is paid by every buyer who pay for the
chocolates. Every consumer though not win the car but contribute a small fraction. Additionally,
there is an associated opportunity cost. With the desire to win a car, people tend to increase

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expenditure on chocolates. Given fixed income this implies less money are available to spend on
other goods.
Question c
Production possibility frontier of an economy bowed outward because an economy faces
increasing opportunity cost in production. That means, as the economy move to produce
increasing amount of one good it has to sacrifice more and more of the other.
Question 4
Question a
Given income elasticity of pre-recorded music compact disc is +7, the resulted decline in
consumer income by 10 percent because of recession reduces demand by (7*10) = 70 percent.
The income elasticity for cabinet maker’s work is 0.7 percent. That means 10 percent reduction
in income reduces demand by (0.7*10) = 7 percent. Recession hence has a larger effect on
demand of pre-recorded music compact disc.
Question b
The competition between MP3 music players and pre-recorded music compact depends
on the sign of cross price elasticity (Hill & Schiller, 2015). Negative cross price elasticity
indicates the two goods are substitutes and hence, it can be concluded that competition prevails
between these two goods.
Question c
YED = +0.8. The value signifies for every 1 percent increase in income, demand increase by 0.8
percent. Positive income elasticity implies the good is a normal good.

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YED = -2.4. The value signifies for every 1 percent increase in income, demand decreases by 2.4
percent. Negative income elasticity implies the good is an inferior good.
Question d
XED = +0.85. The elasticity value implies for every 1 percent increase in price of a good,
demand of the related good increases by 0.85 percent. The relation between two goods are
substitutes.
XED = -4.5. The elasticity value implies for every 1 percent increase in price of a good, demand
of the related good decreases by 4.5 percent. The two goods are complementary.
Question 5
Question a
The perfectly competitive model is a market structure that is characterized by the
presence of large number of buyers and sellers in the market. Sellers here sell homogenous
product. Market prices are determined by demand and supply forces and the market achieves
both productive and allocative efficiency. In real world, no market has unique characteristics like
the competitive market. There is some degree of differentiation, inefficiency and market power
in every market. This reduces the practical value of perfectly competitive market.
Question b
Short run equilibrium for firms in the perfectly competitive occurs where price equals
marginal cost and marginal cost curve interest marginal revenue curve from the below. At this
point, firms may earn positive economic profit, economic loss or zero economic profit (Cowen &

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Tabarrok, 2015) The three cases of short run equilibrium for perfectly competitive firm are
described in the following three figures.
Figure 8: Short run economic profit
Figure 9: Short run economic loss

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Figure 10: Short run normal profit
For a competitive industry, equilibrium is a state where market demand and market
supply matches. The equilibrium price is the price faced by all the firms and equilibrium quantity
is the quantity supplied by all the firms together.
Figure 11: Industry equilibrium in the short run
Question c
The long run equilibrium for competitive firms occur where price equals minimum of
long run average cost (Mochrie, 2015). At this point, P = LAC(min) = MR = AR = SAC = SMC
= LMC. Firms here earn only zero economic profit.

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Figure 12: Long run equilibrium for firms under perfect competition
Question 6
Question a
For a coffee shop, the fixed inputs are coffee machines, land, equipment and some
utilities. These inputs do not depend on the level of coffee sold. The variable inputs are
containers, workers, coffee beans, sugar, baked products, serving materials and components used
for coffee preparation. These inputs vary with quantity of coffee sold.
Question b
The fixed cost and variable costs are given as $4000 and $13000 respectively. Total units
of hammer produced equal 100.
Therefore,

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Average ¿ cost= $ 4000
100
¿ $ 40
Average variable cost= $ 13000
100
¿ $ 130
Total cost=$ 4000+ $ 13000
¿ $ 17000
Average total cost= $ 17000
100
¿ $ 170
Question c
` Labor is a variable cost when wages are given to temporary workers or for overtime work
(Maurice & Thomas, 2015). Labor is fixed cost is case of salaries of mangers and other higher
level staff who receive a fixed salary.

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Part B
Question 8
Question a
Gross National Expenditure=C onsumption expenditure+ I nvestment expenditure+G overnment expenditure
¿ $ 3010+$ 725+ ( $ 720+ $ 165 )
¿ $ 3010+$ 725+ $ 885
¿ $ 4620
Gross Domestic Product=Consumption expenditure+Investment expenditure+ Government expenditure+ ( Export−
¿ $ 3010+$ 725+($ 720+ $ 165)+($ 625 – ( −$ 550 ) )
¿ $ 3010+$ 725+$ 885+$ 1175
¿ $ 5795
Question b
Gross National Product=GDP−net property income pays overseas
¿ $ 5795− (−$ 35 )
¿ $ 5795+$ 35
¿ $ 5830
Question c
Net National Product =GNP−Consumption of ¿ capital

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¿ $ 5830−$ 285
¿ $5545
Question d
Current account balance=Export – Import −factor income paid overseas
¿ $ 625 – ( −$ 550 ) −(−35)
¿ $ 625+$ 550+$ 35
¿ $ 1175+$ 35
¿ $ 1210
Question e
Gross national saving=Y −C−G
¿ $ 5795−$ 3010−$ 885
¿ $ 1900
Answer 9
Answer a
Decrease in the rate of personal income means a high income for household disposal.
This increase consumption expenditure. As consumption expenditure increases, there is a
rightward shift of the aggregate demand curve (Uribe & Schmitt-Grohe, 2017) This would result
in an increase in economic acivity, level of employment and increase in prices.

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Figure 1: Impact of a decline in personal income tax
Answer b
The special training program that increase workforces’ skills raises productivity of
workers and hence, increases aggregate supply. Consequently, economic activity and
employment increases while price level falls.
Figure 2: Impact of special training program

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Answer c
A decrease in export increases aggregate demand. As aggregate demand shifts to the left
economic activity and employment level decreases along with a decrease in price level.
Figure 3: Impact of a decrease in export
Answer d
An increase capital stock of an economy increase availability of capital to produce more
output. This increase aggregate supply in the economy. There will be rightward shift of the
aggregate supply curve causing an expansion of economic activity and employment. The price
level in the economy would fall.

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Figure 4: Impact of an increase in capital stock
Question 10
Question a
Fiscal policy undertaken through adjustment in government expenditure or tax rate aims
to achieve a certain level of output and employment. There are however some problems
associated with fiscal policy in achieving the targeted objective of economic expansion (Heijdra,
2017) The problems are as follows
 Fiscal policy involves significant time lags which reduces effectiveness of the policy
 The second problem associated with fiscal policy is crowding out effect. Because of
crowding out of private investment the given increase in expenditure fails to make
targeted increase in GDP.

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 Expansionary fiscal policy taken through increase in government expenditure or a cut in
tax increase debt burden of the nation.
Question b
The frictional unemployment in an economy is inevitable because of changing dynamic
of an economy. In the process of economic evaluation some sectors contract while other
expands. The imperfect information about the specific job requirement and zero job searching
time, there is a transition phase from one job to another. This creates frictional unemployment.
Question c
Structural unemployment resulted from lack of skills is a long term phenomenon. This
makes people unemployed for a long period and hence, should be a matter of concern for the
policymakers.
Structural unemployment is different from cyclical unemployment following the
difference in root cause of unemployment (Goodwin et al., 2015). Structural unemployment
results structural mismatch in workers’ skill while cyclical unemployment results from a decline
in demand for labor due to fluctuation in business cycle phases.

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Question 11
Question a
Inflation arising from a gradual rise in the aggregate demand in generally termed as
demand-full inflation. Demand can be increased for a change in any of the four components of
aggregate demand.
Figure 5: Demand pull inflation
Cost-push inflation in contrast is a supply side phenomenon (Agenor & Montiel, 2015)
The gradual increase in price due to an increase in production cost is termed as cost-push
inflation.

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Figure 6: Cost-push inflation
Question b
Two causes of demand pull inflation
Economic growth: In times of economic expansion people experience a higher average income.
Higher income cause people to demand more resulting in demand-pull inflation.
Money supply: A sudden increase in money supply means large sum of money available to spend
on limited goods and services. This pushes up demand and price level.
Two causes of cost push inflation
Higher wage: An increase wage means a larger cost of labor. This increases production cost,
reduces supply and results in a higher price level.
Depreciation: In times of currency depreciation, cost of imported goods increases (Iyengar,
2014). As cost of imported input increases, cost of production increases causing price level to
increase.

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Question 14
Question a
The demand for Australian dollar come from both Australian resident and foreign
resident especially the trading partners such as United State, Germany, Japan and other countries
(Mankiw, 2014). Domestic residents demand dollar to make payment abroad while foreign
residents demand dollar to purchase goods and services from Australia or making direct or
indirect investment.
Question b
With the objective of maintaining liquidity in money market Reserve Bank of Australia
supplies Australian dollar.
Question c
Figure 7: Market equilibrium

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From the intersection of demand and supply exchange rate at the equilibrium is obtained
as 80.
Question d
Figure 8: Impact of increased demand for dollar and decreased supply
In response to increase demand for Australian dollar the demand curve shifts to the right.
The lower supply shifts the supply curve to the left. The joint forces of demand and supply move
the exchange rate upward. As exchange rate increases, Japan has to spend more yen to have one
unit of Australian dollar.
Question e
The exchange rate has depreciated. The Australian dollar has appreciated.

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References
Agenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton University
Press.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson
Education.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan
International Higher Education.
Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in
context. Routledge.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Hill, C., & Schiller, B. (2015). The Micro Economy Today. McGraw-Hill Higher Education.
Iyengar, M. (2014). Money matters: Macroeconomics and financial markets. International
Journal on Global Business Management and Research, 117.
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
Maurice, S. C., & Thomas, C. (2015). Managerial Economics. McGraw-Hill Higher Education.
Mochrie, R. (2015). Intermediate microeconomics. Macmillan International Higher Education.
Sloman, J., & Jones, E. (2017). Essential Economics for Business. Pearson.
Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton University
Press.