Economic Principles and Decision Making: Modules 1-4 Assignment

This document presents a comprehensive solution to an economics assignment, addressing key concepts from modules 1-4. The assignment explores topics such as supply and demand, including how changes in income affect demand and the impact on market equilibrium. It delves into the production possibility frontier, explaining opportunity costs and efficient resource allocation. The solution further examines cost analysis, differentiating between explicit and implicit costs and calculating accounting and economic profit. It also analyzes externalities, specifically focusing on the negative externalities of old vehicles and the need for government intervention. The assignment then investigates the First Home Owner Grant (FHOG) and its effects on the housing market, using a supply-demand diagram to illustrate who benefits. Finally, it discusses the inverse relationship between unemployment and GDP, exploring potential fiscal and monetary policies to stimulate the economy. The solution provides detailed explanations, diagrams, and real-world examples to illustrate these economic principles. This assignment is contributed by a student to be published on the website Desklib, a platform which provides all the necessary AI based study tools for students.

Running head: ECONOMIC PRINCIPLE AND DECISION MAKING
Economic Principle and Decision Making
Name of Student:
Name of University:
Author Note:

1ECONOMIC PRINCIPLE AND DECISION MAKING
Table of Contents
Answer to Module: 1- Part: 1..........................................................................................................2
Answer to Module: 1- Part: 2..........................................................................................................3
Answer to Module: 2- Part: 1..........................................................................................................5
Answer to Module: 2- Part:2...........................................................................................................6
Answer to Module: 3-Part: 1...........................................................................................................9
Answer to Module: 4- Part: 1........................................................................................................10
Reference List................................................................................................................................12

2ECONOMIC PRINCIPLE AND DECISION MAKING
Answer to Module: 1- Part 1
For an individual who earns $250 per week, cheaper food options could be noodles. A
normal good is one where the demand for the product is rising due to an increase in income of
the person. There is positive relationship between demands for the good with rise in income of
the consumer. However, it is already mentioned that the individual considers noodles as a cheap
option for food (Allcott, Mullainathan & Taubinsky, 2014). Then noodles would not be
considered as a normal good and rather be an inferior good where demand goes down due to a
fall in demand of the good. The demand for noodles will go down and the demand curve will
show a rightward shift from its initial level.
Price S0
D1 D0
Q1 Q0 Quantity
Figure 1: Effect of change in demand of the individual due to an increase in income
Source: (Gillespie, 2014)

3ECONOMIC PRINCIPLE AND DECISION MAKING
The demand of the individual will change that would not have any impact on the market
demand (Pratt, 2016). Supply curve is upward sloping because the quantity supplied and price
are positively related (Varian, 2014). Initially the demand and supply curve is D0 and S0
respectively. When demand goes down, the individual demand curve shift leftwards and comes
to D1 that has no effect on the price and quantity in the market. The equilibrium quantity
demanded by the individual will decrease. The supply will remain as it is in S0 position. The
quantity demanded will go down from level Q0 to Q1 (Pigou, 2017).
Answer to Module: 1- Part 2
The production possibility frontier (PPF) gives a clear understanding of the amount of
two goods that is produced in a country. It is a curve mostly used in the analysis of a business
where there are fixed availability of resources and the increase in production of one good leads to
a decrease in the production of other good within a specific time frame. Opportunity cost is
defined as the best alternative that has to be chosen among the available options in order to
utilize the resources efficiently (Png, 2013).
The slope is bowed out which is related to the law of increasing opportunity costs. When
the economy produces more of the same type of product by devoting its resources to the same
kind, the efficiency level of the economy decreases. The PPF shows the highest level of output
produced in an economy, company or firm when all the input resources are efficiently allocated
which depends on the choice and decision of the consumer according to opportunity cost. The
point on the PPF denote efficient allocation of resources. Any point inside it, denotes inefficient
usage of available resources and supply needs to be increased by using the unused resources or to
allocate them efficiently.

4ECONOMIC PRINCIPLE AND DECISION MAKING
Table 1: Table depicting the choice for roadsters and convertibles each day
Source: As created by the author
From the above table it is evident, as the level production of roadster goes up the level of
convertibles production goes down. The assumption can be drawn that there is a car company
that can either produce roadster (a two seater top-open car) and convertibles (a car that has
detachable or folding rooftop). As the company raise production of roadster, the resources are
sourced from the roadster section to convertible sector (Demir et al., 2015).
0 100 200 300 400 500 600 700 800 900
0
100
200
300
400
500
600
700
0
400
500
575600
Production Possibility Frontier
Roadsters per day
Convertibles prer day
Figure 2: Production Possibility Frontier of Roadsters and Convertibles

5ECONOMIC PRINCIPLE AND DECISION MAKING
Source: As created by author
When the company uses all its resources into making convertibles, 700 convertibles are
produced without any roadsters. Similarly, when resources are used in roadster section, no
convertibles were produced (Mankiw, 2014). Thus, production of both the goods cannot be
increased at a time. Increased production of one good lowers the production of other goods. Only
in cases of technological advancement, output of both the good increases as they can be
produced in lesser time which raises the productivity per person. The curve of the PPF shows an
outward shift such that the economy has raised its production capacity with same amount of
resources.
Answer to Module: 2- Part 1
Given below, is the level of implicit and explicit cost generated by a firm.
Total Revenue (TR)= A$ 150,000.
Accounting profit is calculated by the subtraction of total explicit cost from the total
revenue earned by the firm. Whereas, economic profit is the basic profit of the firm calculated
by taking away both the explicit and implicit costs from total revenue.

6ECONOMIC PRINCIPLE AND DECISION MAKING
Table 2: The explicit and implicit costs rendered by the firms
Source: As created by author
Accounting profit= Total revenue- Explicit cost =A$ (150,000 – (20000+ 50,000+ 10,000+
5000+ 25000))=A $40,000
Economic Profit= Total revenue-(Explicit cost+Implicit cost)
= (Total revenue- Explicit cost)-Implicit Cost
= Accounting profit-Implicit cost= A$(40,000–(50000+5000+25000))
= A$ -40,000
Explicit costs are the real costs of payments in the mode of wages, rent, purchasing
capital assets, depreciation, interest, taxes and utilities made for operating a business. Accounting
profit is the total earning of the firm in monetary terms. Whereas economic profit also includes
implicit costs which are opportunity costs that is incurred by the firms while choosing the best
alternative. Economic profits can be zero, negative or positive. The economic profit of the given
firm is negative. This establishes the fact that the firm should have been better off and earned

7ECONOMIC PRINCIPLE AND DECISION MAKING
positive economic profit by choosing other alternative. Thus, the firm is not technically sound
and it has to choose other alternatives which will render them with positive economic profits
otherwise they have to exit from the market and shut down their firm.
Answer to Module: 2- Part 2
The Roads and Maritime Services (RMS) in the New South Wales has insisted old
vehicles to be taken for inspection before the registration gets renewed for the upcoming year.
RMS is an agency of the government who is assigned with the task of licensing the drivers, road
infrastructure and renewal of registration of motor vehicles each year. The aim of the RMS is to
ensure road safety and check whether vehicles are road worthy. The vehicles which are a
minimum of 7 years old needs to be renewed because these cars have a high degree of externality
that has negative impacts on the society.
An externality is the benefit or damage caused by an external agent due to usage of a
good which has no direct relation with the consumption and production of that good. These are
the activities that make markets inefficient due to additional social cost generated from the good
that leads to market failures. Externalities renders both costs and benefits, depending on which
the type of the externality is understood, be it positive or negative (Mishan, 2015).
A negative externality is the opposite of positive externality where the social cost curve
lies above the private cost curve. Old cars are highly inefficient because they are old and cannot
run efficiently like the new cars. These cars consume a lot of oil or energy and emit poisonous
and hazardous gases like the carbon monoxide, carbon dioxide, creating air pollution. They form
smog in the air that gives rise to cardiovascular, respiratory diseases and breathing problems.
These affects the health of people leading to huge treatment cost. These emissions damage

8ECONOMIC PRINCIPLE AND DECISION MAKING
buildings and depletes the ozone layer. The fueling system is not properly channeled and
consumes huge amount of energy leading to a loss of fossil fuels. These environmental pollution
leads to global warming from increased emission of greenhouse gages which heat up the earth’s
atmosphere.
Figure 3: The negative externality arising from usage of old cars
Source: (Mishan, 2015)
The above diagram represents the negative externality on using old cars in New South
Wales. Demand curve is known as the marginal social benefit curve (MSB) as consumers
consider the amount of benefit acquired from the good. The supply curve is upward sloping
because firms can produce more when the price goes up which has been named as the marginal
private costs (MPB) curve. The social cost curve lies above the MPC and is represented by MSC
(Marginal Social Cost) and the equilibrium price must rise to P1. However, the drivers do not
consider this costs. These cars take away significant amount of space leading to road congestion
and traffics.

9ECONOMIC PRINCIPLE AND DECISION MAKING
Accidents are also likely to increase when more people drives car. People inclined
towards driving can sometimes be effected with obesity due to lack of walkability. More number
of cars signify huge level of noise pollution. These negativities hamper the economic growth and
development. There is need of government intervention to come in the market and regulate such
practices to make the marker efficient. That is why policy has been made to inspect the cars
which are 7 years old and to check if they have an efficient performance. If the government
cancels the registration after inspection, the cars would not be able to operate which will
ultimately lower the usage. As a result, the level of pollution, congestion, traffic will go down
eventually making markets efficient.
Answer to Module: 3-Part: 1
First Home Owner Grant (FHOG) is the subsidy given to the people who are buying
home for the first time. The value of the property has to be under $600,000 and the grant to be
given, amounts to about $10,000. It is a policy taken by the Australian State Government to
support the people who are looking for buying a new house for the first time, depending on
certain eligibility criteria.

10ECONOMIC PRINCIPLE AND DECISION MAKING
D1
D2
S
P2
P1
Q Quantity
Price
Figure 4: Effect of rising demand
Source: As created by the author
When the new home buyers get a grant of 10,000 dollars, they are interested to buy more
units of the good. The demand for purchasing the new house goes up. This effect can be reflected
from a demand-supply diagram where initially the demand is down-ward sloping D1 and supply
is S (Vahid, Reza & Nasirizadeh, 2013). The vertical supply curve determines that housing has a
fixed supply and cannot be changed in the short-run.
The aggregate demand curve shifts rightward from D1 to D2 due to which equilibrium
price goes up from P1 to P2. The grant which has been provided by the government has no effect
on the consumers as the high price neutralizes the effect. The sellers are benefitted from the
policy as they receive the higher price for the rising demand. Thus, the buyers had a benefit
initially. However, as price went up, the consumers are worse-off if the increase in price in more
than the grant. They might continue to benefit from it only if the rise in price is lower than the
grant provided by the state government.

11ECONOMIC PRINCIPLE AND DECISION MAKING
Answer to Module: 4- Part: 1
Unemployment and GDP has an inverse relationship between them. Higher rate of
unemployment, determines that the GDP level has gone down which arises due to the fall in
aggregate demand for goods and services. When consumers has little money to spend they
reduce their level of expenditure among themselves. In order to increase the aggregate
expenditure the Australian government mist opt for either fiscal or monetary policy. Monetary
policy acts by cutting down the interest rate, so that people does not deposit money in banks and
boost up the aggregate demand of goods. Fiscal policy works by cutting down the taxes and
letting consumers to have more money supply in their hands for spending (Gillespie, 2014).
Government needs to understand the cause of unemployment and its types. In case of
structural unemployment, government must give training and education to the unemployed
labors so as to make them skilled to use the new technologies. If the unemployment is of
frictional type, the government must create job in terms of the requirement and area of interest of
the people. To make the correct sourcing policies so that managers are able to find the desired
candidates easily (Salvatore, 2015). Reducing the minimum wage is another effective policy of
the government to lower the rate of unemployment to 4.5 percent from 5.2 percent. When the
minimum wage is kept at a high rate, only the skilled labors get a high wage and the rest are
overturned from the firms. A low minimum wage allows workers to stay employed with a basic
pay scale. Thus, the government must resort to monetary, fiscal policy, low minimum wage rate,
flexible labor markets screening and training them to acquire the markets.

12ECONOMIC PRINCIPLE AND DECISION MAKING
Reference List
Allcott, H., Mullainathan, S., & Taubinsky, D. (2014). Energy policy with externalities and
internalities. Journal of Public Economics, 112, 72-88.
Chava, S. (2014). Environmental externalities and cost of capital. Management Science, 60(9),
2223-2247.
Demir, E., Huang, Y., Scholts, S., & Van Woensel, T. (2015). A selected review on the negative
externalities of the freight transportation: Modeling and pricing. Transportation research
part E: Logistics and transportation review, 77, 95-114.
Gillespie, A. (2014). Foundations of economics. Oxford University Press, USA.
Mankiw, N. G. (2014). Principles of economics. Cengage Learning.
Mishan, E. J. (2015). Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.
Pigou, A. (2017). The economics of welfare. Routledge.
Png, I. (2013). Managerial economics. Routledge.

13ECONOMIC PRINCIPLE AND DECISION MAKING
Pratt, J. (2016). Financial accounting in an economic context. John Wiley & Sons.
Salvatore, D. (2015). Managerial economics in a global economy. OUP Catalogue.
Vahid, N., Reza Dehghanpour, M., & Nasirizadeh, H. (2013). Comparison between accounting
profit and economic profit and its effect on optimal point of production. European Online
Journal of Natural and Social Sciences, 2(3 (s)), pp-493.
Varian, H. R. (2014). Intermediate microeconomics with calculus: a modern approach. WW
Norton & Company.