Business Economics: Micro and Macroeconomic Analysis

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Business Economics
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Contents
Introduction......................................................................................................................................3
Question1.........................................................................................................................................4
Question2.........................................................................................................................................7
Question 3........................................................................................................................................9
Question 5......................................................................................................................................15
Question 7......................................................................................................................................19
Conclusion.....................................................................................................................................20
References......................................................................................................................................21
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Introduction
The assignment discusses briefly the various concept of business economics in an organisation.
The assignment demonstrates the concept of microeconomics in which supply, demand, cross-
price elasticity demand, opportunity cost etc. will be discussed. The assignment gives an analysis
of long run and short run equilibrium level for the perfect competition market which has been
shown graphically and analysis has been presented. It will demonstrate the concept of oligopoly
with the related terms. The assignment contains the various aspects of congestion charges and
how it plays an important role in defining the prices of the product.
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Question1.
(a) Define the demand effect of below-mentioned variables due to increase in prices of the
oil?
Law of demand defines that price and demand for the product has a negative relation if other
thing remains constant. If the price of the product increases, then demand the product is
decreases and vice- versa. Law of demand applies to related goods as well. Complementary
goods and substitute goods are considered as related goods. The extent of their relationship can
be evaluated by the concept of cross-price elasticity of demand where the demand for one
product is affected by the price of other product.
Complementary goods have negative cross elasticity of demand which means if the price of one
product increases then the demand of its complementary product will decreases. Those goods are
used together to satisfy the demand objective of the customer. Those can be considered as
interrelated goods.
Topic: (Presentation of complementary goods)
Substitute goods have positive elasticity of demand which shows the price of one product
increase then demand of its related product will also increase and if the price decreases then the
demand of the related product is also decreased. The reason behind positive cross elasticity is the
alternative use of the products.
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Topic: (Presentation of substitute goods)
Effects of oil prices on the different variables are as follows:
 The demand for automobiles: Automobiles and oil are perfectly complementary goods.
They have negative cross elasticity of demand which means demand of the automobiles
will decrease due to the increase in the oil prices.
 The demand for home insulation: Oil and home insulation are alternatives to each other
hence they fall in the category of substitute goods. The demand for home insulation will
increase with the increase in oil prices.
 Demand for coals: coals and oil prices have positive cross elasticity which shows higher
demand for coals with higher prices of oil. They are the perfect substitute for each other.
 The demand for tyres: Tyres and oil are not related goods however tyres and automobiles
are related goods and so does automobiles and oil. Though the demand for tyres is not
directly affected by the price of oil it can be influenced by the relationship between
automobiles and oil. Increase in oil prices leads to leads to decrease in demand of the
automobiles and which eventually reduce the demand of the tyres.
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 The demand for bicycle: Higher oil prices leads to a decrease in demand for automobiles.
Bicycle and automobiles are related products and they are a perfect substitute to each
other hence the demand for a bicycle will increase.
(b) How resources allocation is affected by external benefits and external cost?
Optimum production process requires an optimum level of resources allocation. A resource such
as goods and services allocated on the basis of internal and external factors. External factors are
generally beyond the control of the individual business though they have a considerable impact
on the business. External cost defines as negative external factors which result in increased
resources allocation and external benefits help to increase in efficiency of the production and
leads to reduced resource allocation for the same level of production.
(c) What are the reasons for not producing sufficient quantities of public goods by the
private markets?
Profit making is one of the objectives of private business markets. Lower supply and higher
demand results in an increase in the prices of the product. To growth of business and enhance the
profitability of the company those private market creates artificial demand for the product and
increase the profitability by charging increase prices for the product. Hence the main reason for
not producing enough quantity of public goods is generating enormous profit.
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Question2.
(a) Describe how scarcity forces individual and society to incur opportunity cost?
Individual and society have the unlimited desire and very limited resources to fulfill all the
desired objectives. Due to lack of enough economic resources people have to make choices
between two desires and that is where the concept of opportunity cost arises. Opportunity cost
can be said as the next best alternative use of the available resources. If an individual want to
consume one good or services, then he has to sacrifice the other goods and services due to the
scarcity of resources.
Example: If a consumer wants both services and goods then he has to make choices between
both of them as resources (Money) are limited to buy both goods and services.
Figure: (Graph showing opportunity cost between goods and services)
One first level consumer opted for 22 units of goods and 21 units of services however if the
consumer wants to increase the consumption of services he has to reduce the consumption of
goods by a certain amount as the money is limited and the consumer cannot purchase both prior
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levels of goods units and increase level of service units. The consumer can increase the service
by 6 units only if he reduces consumption of goods by 4 units.
(b) What is the price of the free car given by the manufacturer to promote and advertise
for its business?
Promoting and advertisement of the product is one of the functions of the business to enhance the
sales volume of the product. In the given scenario a chocolate manufacturer is promoting its
product by giving customers an opportunity to win a car. Promoting triggers, the incremental
sales volume and more customers will buy the product. The manufacturer will not pay for this
car from its own pocket there is a hidden charge involve in every purchase of the chocolate bar.
It can be said that when a consumer buys the product they eventually contribute to the car fund
for advertisement. Hence it can be concluded that the price of the car is not zero.
(C) Define why the production possibility curve is bowed outward?
Production possibility curve or frontier is the graphical presentation of a different combination of
two goods which can produce with a constant level of resources. The different combination can
be achieved by shifting resources from producing one product to other as resources are scared
and production of all the products cannot be done. The reason for outward bowed of production
possibility curve is the law of increasing opportunity cost. Every factor of production is not able
to produce both the product in the same efficient way. More resources are needed for the
production of one product by sacrificing other product as the efficiency level is reduced. This
will result in higher scarifies of resources allocated to the previous product for the same level of
production of the proposed product.
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Question 3
(a) Illustrate with a diagram and explain the congestion charges in an example of the price
system at work.
Congestion charges is a sum of money that a citizen pays for the particular day to drive into a
city centre to reduce the traffic. It is practiced in some countries to reduce the traffic and to
reduce the chances of an accident in that area.
Congestion pricing
It is a vibrant pricing strategy to control the demand by raising the prices without increasing the
supply in the market. The congestion pricing is mainly used in the shipping and transportation
sector, but now it is also used in the utilities and the service where demand changes from time to
time like telecommunication and electricity providing industries.
There are following reason for the increase in the congested roads few of them have been
discussed below –
 The real cost of driving has reduced as the motor vehicle and fuel becomes cheaper if
taking inflation rate is being used.
 The public transportation is being used as inferior goods, which leads to a rise in income,
the consumer is moving away from inferior goods.
 The roads in a nation are used as a common mean of resources with minimum
restrictions for the consumers.
 The purchasing power of the consumer to purchase a motor vehicle, including the
insurance, taxes, and depreciation of the motor vehicle, which encourages the owner of
the motor vehicle to use it as frequently as possible.
 The relevant information for the city driving also fails to provide adequate data. As the
consumer doesn't grasp the impact of their driving on others, even if they have some
knowledge, they try not to take it into consideration.
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The road-space resource is scarce in nature, which indicates that there is a more individual user
that uses their private vehicles and there is less space available for the other users. By making a
road-space concept, the policymakers are analysing some points which were considered
previously for the public products as a private product which is chargeable. There are various
new technologies such as GPRS which can be used for system creation which can be used for
charging the road-space. There are some other external costs for the congestion which is extra
time in travelling, increase in the business cost, some of the emergency services like ambulances,
fire engines, police cars, find more difficult to work effectively, increase in the pollution like
noise pollution and air pollution, increase in the chances of accident, and this creates more stress
for the cyclist, pedestrians, passengers, and drivers.
The main cause of the congestion is –
 If assuming the demand for the road-space falls then the prices rises, this is because of
substitution and income effects of a higher price.
Figure (Presentation of the relationship between price, supply, and demand)
The MSB diagram = MSC, which displays congestion for an external cost of
consumption can be used for illustrating the Net Welfare Loss for excess driving.
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Remedies for the congestion
1 The reduce in the demand for the road-space
 The decrease in the road-space demand can be two ways, by reducing the motor vehicle
ownership or by reducing the usage of the motor vehicle.
Figure (Presentation change in demand at a constant price)
Various steps can be included –
1. Increasing the taxes on fuel and on the car.
2. Raising the fees of the driving license.
3. Providing better public transport by creating bus lanes and no parking routes.
4. Functioning the ride and park policies for the motor vehicles.
5. Rising the fees of the parking
6. Making restriction for the aged drivers.
7. Establishing restrictions on the passengers that can travel in a motor vehicle.
Various steps against it are –
1. The implementation of the cost.
2. Making the preference for the motor vehicle
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