Economic Principles Assignment Solutions - [University Name]

This document presents solutions to an economic principles assignment, covering key concepts in microeconomics and macroeconomics. The assignment addresses topics such as profit maximization in different market structures (perfect competition and monopoly), market efficiency, the impact of network effects, characteristics of oligopolistic markets, productive and allocative efficiency, the role of government regulations, the comparison between private and public sectors in Australia, the concept of externalities and their correction, and the factors influencing aggregate spending. The solutions provide concise explanations and address each question with relevant economic principles, illustrating real-world examples and demonstrating the application of economic theory to practical scenarios. This resource is valuable for students seeking to understand and excel in their economics coursework.

Running Head: ECONOMIC PRINCIPLES
Economic Principles
Name of the Student
Name of the University
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1ECONOMIC PRINCIPLES
Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................2
Answer 3..........................................................................................................................................2
Answer 4..........................................................................................................................................2
Answer 5..........................................................................................................................................3
Answer 6..........................................................................................................................................3
Answer 7..........................................................................................................................................3
Answer 8..........................................................................................................................................3
Answer 9..........................................................................................................................................4
Answer 10........................................................................................................................................4

2ECONOMIC PRINCIPLES
Answer 1
Profit is defined as revenue less cost. In the short run firms can enjoy a supernormal
profit. In the long term, firms may attempt to maintain profitability by switching production to
more demanding goods. However, in a competitive environment other firms follow the same
strategy and end up with earing revenue just enough to recover cost in the long-term. Additional
profitability then requires large-scale production.
Answer 2
The monopoly power in the market is derived because of the existence of a single seller
in the market. The factors determining monopoly power in the market are barriers to entry of
new firms, exclusive ownership over a strategic input, huge sunk cost, realization of scale
economics and others. The barriers to entry of other firms is the most impactful as lesser the
competitors more is the monopoly power.
Answer 3
In perfectly competitive market the working of invisible hand, ensure allocative
efficiency. The equilibrium in the competitive market is at a point where price equals unit
production cost and hence resource allocation is Pareto efficiency. Because of the existence of
monopoly power, the monopolist always earn a greater profit by setting high price at a low level
of output and leads to economic inefficiency.
Answer 4
Network effect describes a positive externality that generates an additional value for the
user of particular good and services. In the presence of network effect, the product value

3ECONOMIC PRINCIPLES
increases depending on how many other using it. Now social network like Facebook provides
business a wider platform and increases value as more people get in touch there.
Answer 5
Oligopolistic market form characterizes supermarket industry in Australia. The industry
is highly competitive and concentrated. The large-scale production, Cost advantages and
competitive edge of some players over other allow them to dominate the market. The strategic
interdependence and resulted price war to undercut market share of rivals provide important
game theoretic insights exits among the large firms.
Answer 6
Productive Efficiency refers to carry out production without wasting resource and hence
the chosen production point is on the PPF. Allocative efficiency describes a socially preferred
production points. In competitive market buyers, face price equals to marginal production cost.
The marginal production cost reflects not only firm’s cost but also social cost in a broader aspect.
Answer 7
Business has to comply rules and regulation imposed by the government. The regulatory
and economic policy of the government affect profitability and competitiveness of the business.
The business should have well knowledge of policies implemented by the state, federal or local
government. Business tax, licensing procedures and political stability affects business operation.
Answer 8
The private sector runs by profit motive is more efficient than public organization.
Therefore, private sector is thought of more reliable in meeting market needs. However, the

4ECONOMIC PRINCIPLES
scenario is different in Australia. In Australia, private firms often find it difficult to sustain
because of high price. The influence of Australian government is greater than private sectors.
Answer 9
Externality refers to the cost or benefit that a third party incurs from an economic activity
and the agents do not consider this cost or benefit in their pricing strategy. The presence of
externality leads to market failure and government intervention is needed to correct the
externality. In times of negative externality government taxed and with positive externality
government subsidized to achieve social optimal.
Answer 10
The aggregate spending depends on consumption expenditure, government expenditure,
investment expenditure and net export for an open economy. In times of recession, there is a
downturn in economic activity leads to unemployment and therefore reducing consumption and
investment spending. Inflation slows down during this time. In the recovery phase, the economy
expands with expansion of government and investment expenditure creating upward pressure in
price and reduces unemployment.