Analyzing Market Equilibrium and Elasticity of Demand

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Desklib provides past papers and solved assignments for students. This report covers various economic concepts.
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Business Economics
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Table of Contents
Introduction......................................................................................................................................4
Question 1........................................................................................................................................5
A) Describe the effect on the following variables by increasing the prices of oil.......................5
B) Define the effect of the external benefits and external cost on resources for allocation?.......6
C) Explain why the private market doesn't produce goods for the public in sufficient quantity?
......................................................................................................................................................6
Question 2........................................................................................................................................7
A) Define why society and individual incur an opportunity cost when there is a scarcity?........7
B) Explain the value of the ‘free car’ which is provided by the chocolate bar manufacturer for
promoting its product?.................................................................................................................7
C) Explain the reason why production possibility frontier bowed outwards?.............................7
Question 4........................................................................................................................................8
(A) Show the impact on the work of cabinet's maker work and pre-recorded music compact
disk due to the recession which has an adverse impact on consumer's income by 10 %?...........8
B) Provide the basis of evaluating that MP3 music players and pre-recorded music compact
are in competition?.......................................................................................................................8
C) What is Income elasticity of Demand? Also, provide whether the goods are normal or
inferior?........................................................................................................................................9
Question 5......................................................................................................................................11
A) Define statement “In the real world there is no industry which conforms the perfect
competition model?....................................................................................................................11
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B) Explain the short-run perfectively competition equilibrium for individual and industry?...12
C) Defines the long-run perfectly competition equilibrium for the firm?.................................13
Question 6......................................................................................................................................15
A) Mention some of the fixed and variable inputs which can be used in operation a coffee
shop?..........................................................................................................................................15
B) Calculate the average fixed cost, variable cost and total cost of the total output of the
hammers?...................................................................................................................................15
C) Explain the circumstances where labour will be treated as variable cost as well as fixed
cost?...........................................................................................................................................16
Conclusion.....................................................................................................................................17
References......................................................................................................................................18
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Introduction
The report briefly discusses the various concept of economics in the business. The supply,
demand, cross-price demand elasticity, opportunity cost and many more are some of the concepts
which are discussed in this report. The long-run and short-run level of equilibrium in perfect
competition market has been shown in a graphical representation and analysis has been made for
the same. The report discusses the concept of the fixed and variable nature of the labour cost and
also discusses the list of the variable and fixed expenses of a coffee shop.
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Question 1
A) Describe the effect on the following variables by increasing the prices of oil.
The complementary products are those items which can be used with some specific product.
Using one product is correlated with another product use. These products have a negative effect
on the cross elasticity demand which explains that there is a negative connection between the one
product price and other product quantity demand.
The substitute products are those items that are used for the same reason and deliberate as an
alternative for each another. The demand for one good gets affected by the price of other goods.
The demand for one good get affected by another goods price. The substitute products show a
positive cross elasticity demand, which explains a positive connection between the quantity of
one good and price of other goods.
The quantity demand of the automobile will reduce if oil price increases as the
automobile and oil are perfectly complementary products and the demand elasticity
between both the goods are negative.
The demand of the house insulation will rise as it can be used as the alternative basis of
oil-based products used for the insulation. The house insulation and oil are substitute
goods and thus greater the price of the oil causes greater demand for house insulation as
the consumer shift from the oil towards house insulation.
The demand for coal also rises as the coal and oil are both perfectly substitute for both
the goods. The consumer will move towards the coal if prices of oil are greater than coal
prices.
The demand of the tyres will decreases because the oil and tyres are reflected as a
complementary product. However, the oil price and the tyre's demand are not directly
connected if the price of the oil rises then it causes the reduction in demand of
automobiles that affects the tyre demand.
The demand of the cycle will also rise. The oil and the cycle doesn't relates, however,
cycle and automobile can be taken as a substitute for each other therefore price of the oil
rises causes to higher demand of the substitute goods which is a cycle.
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B) Define the effect of the external benefits and external cost on resources for allocation?
The allocation of resources is a process in which the products and services which allocate for the
use of production. The products and services have the ability to give satisfaction to the customer.
The distribution of resources gets affected by the external factors and they can be negative as
well as positive. The externalities cause the cost and benefits to those who don't want to incur the
benefits and cost. The external issues which directly affects the allocation of the resources
because external cost causes over-allocation of the resources and the external benefits causes
under allocation of the resources.
C) Explain why the private market doesn't produce goods for the public in sufficient
quantity?
The core objective of the private market is to make profits instead of just making social welfare.
If a company produces insufficient quantity for the consumer then it generates artificial demand
and causes a rise in the price which helps the private company to earn more profit.
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Question 2
A) Define why society and individual incur an opportunity cost when there is a scarcity?
The resources are limited to fulfil all the needs of the peoples. The individuals and the society
can make production only to a limited amount as they have limited resources. This is the reason,
they use opportunity cost to make a selection between resources that are required to be used and
the product that is required to be produced. Basically, opportunity cost means the cost which can
be used for the best alternative use of the resources because the individuals and the society are
unable to produce all the required products, so they use opportunity cost to select the products.
Let's say – a person is having $2000 which can be used for making an investment or for
purchasing clothes. If that person purchases the clothes, then there is no opportunity cost for
investing or vice-versa.
B) Explain the value of the ‘free car’ which is provided by the chocolate bar manufacturer
for promoting its product?
The producer is promoting the goods by advertising it and the consumer will purchase to
increase their possibilities for winning the ‘free car'. Thus all the consumer are purchasing more
and more chocolate which enhance the chances to win the car hence the worth of the car for a
consumer is related to the price of the number chocolates that consumer has bought and it is not
considered as zero.
C) Explain the reason why production possibility frontier bowed outwards?
The production possibility curve represents the maximum chances of outcome from the available
set of resources and various inputs. The curve bowed towards outward because of the law of
increasing opportunity cost as an increase in product quantity will decrease the other product
resources and causes opportunity cost for the selected product.
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Question 4
(A) Show the impact on the work of cabinet’s maker work and pre-recorded music
compact disk due to the recession which has an adverse impact on consumer's income by
10 %?
Income elasticity of demand:-
It describes the relationship between the number of goods demanded and income of consumers.
Generally, there is an adverse relationship between demand and price. Higher the price, lower
the demand and vice versa.
Income Elasticity of demand can be computed by using the following formula:-
= (% change in quantity demanded / % change in income)
The following information is given:
Income elasticity with respect to pre-recorded music disks = +ve7
Income elasticity with respect to cabinet maker’s work = +ve0.7
Impact on quantity demanded is assessed as below:
Pre-recorded music disk = (7 * 10/100) = % change in quantity demanded i.e. 70 %.
Cabinet maker’s work = (0.7 * 10/100) = % change in demand i.e. 7%.
B) Provide the basis of evaluating that MP3 music players and pre-recorded music
compact are in competition?
Cross Price Elasticity of demand forms the basis of evaluating that MP3 music players and pre-
recorded music compact are in competition with each other. Cross elasticity of demand can be
positive and negative. If there is a positive cross elasticity then both the products are considered
as a substitute for each other and affect the demand of each other.
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C) What is Income elasticity of Demand? Also, provide whether the goods are normal or
inferior?
Normal Goods: - There is a positive relationship between the income and demand for normal
goods. Higher the income, higher will be the demand for such kind of goods.
Inferior Goods: - There is a negative relationship between income and demand for inferior
goods. Higher the income, lower is the demand for inferior goods.
(i) YED = +ve0.8, this shows that both the income and quantity demanded has a positive
relationship. As the consumer shifts from inferior goods to the normal or superior quality of
goods, it can be inferred that these goods are Normal Goods.
(ii) YED = -ve2.4, this shows that both the income and quantity demanded has a negative
relationship. It goes to show that the goods are Inferior goods as the consumer will reduce the
demand for these goods if his income increases.
D) Explain the Cross- Price elasticity of demand along with the relationship between
goods?
It can be defined as the relationship between the price and demand for related goods. Related
goods can be either substitute goods or complementary goods.
(i) XED = +ve0.85, this shows that there is a positive relationship between the price of one
product and quantity of another. As the price of one product increases, the demand of the other
product rises. So these goods are Substitute Goods.
(ii) XED = -4.5 this shows that there is a negative relationship between the price of one product
and quantity of another. As it shows a negative relationship hence these goods are classified as
Complementary Goods.
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Figure 1: Cross Price elasticity of complementary goods
Figure 2: Cross Price Elasticity of Substitute Goods
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Question 5
A) Define statement “In the real world there is no industry which conforms the perfect
competition model?
In a challenging economic construction, there are different types of seller and buyer in the
market and it defines the activity of sold product by the seller. Product price is measured by the
help of its demand and supply.
Properties of perfect competitions market are as follows:
No barriers of transaction cost.
There are obstacles to get enter in market and exit from the market.
Similar product manufacture by every single corporation.
A large number of seller and purchaser of the manufactured goods.
The potential product is transacted in the marketplace.
Perfect competition industry is hard to exist as all the important feature of perfect
In instance goods consume zero discrepancies then there is an opportunity that manufacturers
system of oligopoly. The opposition is not available in a particular business. In the actual world,
the item for consumption has some diverse article and they are not identical. There are certain
situations of the huddle to enter and exits from the trade. In the future, the perception of perfect
competition has a very small amount of useful price.
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