Economics Assignment: Micro and Macro Analysis and Applications

This economics assignment provides detailed answers to various economic questions, covering topics from microeconomics and macroeconomics. It discusses the impact of price elasticity on revenue, the difference between change in demand and quantity demanded, and economies and diseconomies of scale. The assignment also explores the effects of expansionary fiscal policies, disguised unemployment, and GDP calculation. Furthermore, it delves into structural and cyclical unemployment, pricing strategies based on elasticity, internal and external economies of scale, and the difference between accounting and economic profit. Finally, the assignment explains the business cycle, demand-pull and cost-push inflation, and the concept of externalities. Desklib offers this solution and many more to aid students in their studies.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
Name of the Student
Name of the University
Author Note

1ECONOMICS ASSIGNMENT
Table of Contents
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................2
Answer 3:.........................................................................................................................................3
Answer 4:.........................................................................................................................................4
Answer 5:.........................................................................................................................................5
Answer 6:.........................................................................................................................................5
Answer 7:.........................................................................................................................................6
Answer 8:.........................................................................................................................................6
Answer 9:.........................................................................................................................................7
Answer 10:.......................................................................................................................................8
Answer 11:.......................................................................................................................................8
Answer12:......................................................................................................................................10
Answer 13:.....................................................................................................................................10
References......................................................................................................................................12

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Answer 1:
The total revenue of a company is affected by the price elasticity of its product in the
sense that the latter determines whether an increase in price will increase or decrease the revenue
of the company. If the demand for the commodity is price inelastic then a price increase may
increase the total revenue, while in presence of highly elastic demand, a hike in price can
actually decrease the revenue by decreasing the demand substantially [1].
Example: Considering a chocolate company selling 100 chocolates at $2 each, thereby earning
$200 as total revenue, if the company increases the price to $3 and if the demand is inelastic,
decreasing only to 95, then the total revenue increases to $285. However, if the demand is highly
elastic, decreasing to 60, then the revenue becomes $180.
Answer 2:
When other factors remaining same, the price of a commodity changes, then the quantity
demanded of the same changes accordingly, thereby moving along the same demand curve. This
is known as the change in the quantity demanded. On the other hand, if keeping the price same,
other factors like income or preference change, then there occurs a shift of the demand curve
itself, which is known as change in demand.

3ECONOMICS ASSIGNMENT
(Source: As created by the author)
An increase in demand can take place due to increase in the income, increase in the price
of substitute commodities, change in taste and preference and others.
Answer 3:
If in a production process, with the increase in the output produced, the long run average
cost of per unit production decreases, then the production process is said to experience
economies of scale or increasing returns to scale. This can happen due to the greater-than-
proportional increase in output with respect to the input increase. On the other hand, if with the
increase in production, the average cost of per unit production increases, then it is said to
experienced diseconomies of scale. If however, the increase in output is proportional to the
increase in input, then the production is said to experience economies of scale. These can be
shown with the help of the long run average cost curve:

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Figure 3: Economies of scale, Constant returns to scale and Diseconomies of scale
(Source: As created by the author)
Answer 4:
Expansionary fiscal policies like tax reduction and others help in increasing the
disposable income in the hands of people, thereby helping in increasing the aggregate demand in
the economy, which in turn increases the production and adds to the Real GDP of the country.
Increased economic activities due to increase in production also creates job scopes in the
country, thereby reducing the unemployment in the economy [4]. However, due to the increase
in disposable income and more employment, clubbed with the aggregate demand increase,
expansionary fiscal policy often leads to inflation pressure in the economy.

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Answer 5:
The phenomenon of “Disguised Unemployment” or “Hidden Unemployment” occurs in
an economy when there remains surplus labor force and too many people are assigned to too few
works. In this situation, the marginal productivity of these surplus labors remains very close to
zero or becomes zero absolutely. This in turn indicates towards the fact that, even if the disguised
unemployed labors are removed from their present works, the total production of output remains
the same. The phenomenon of disguised or hidden unemployment is hugely prevalent in the
developing countries where the numbers of eligible labors are high but the scopes of employment
generation are low.
Answer 6:
The GDP of Australia can be calculated using the expenditure method of GDP
calculation. Under this method, the total consumption expenditure, the total investment
expenditure, the total spending of the government and the net exports of the country (Exports-
Imports) are calculated in monetary terms and these four factors are added to find out the GDP of
the country [3].
The transactions, which are not included in the calculation of GDP, are as follows:
 Transfer payments
 The value of intermediate goods and services
 The sales of second hand or used commodities
 The value of the goods which are produced outside the domestic boundaries of the
concerned countries
 Illegal transactions or transactions in the black market of the economy

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Answer 7:
Structural unemployment mainly occurs in an economy, when there occurs a mismatch in
the demand and supply in the labor market of the economy, thereby making it difficult for the
economy to provide jobs for all the eligible people in the work force. This mainly happens due to
the discrepancies between the skill, which the unemployed job seekers have, and the skill, which
is required to get a job. Structural unemployment is a long-term phenomenon and often leads to
discouragement among the job seekers, making their skills obsolete. The magnitude and long
tenure of such unemployment makes structural unemployment a matter of concern for the
economic policy makers.
Structural unemployment differs from cyclical unemployment in the sense that while the
latter is usually a short term phenomenon, the former is a long-term one having the
characteristics of prolonged and repetitive cycle unemployment in the economy.
Answer 8:
The pricing strategies of the companies considerably depend considerably on the price
elasticity of the commodities or services of the companies. If the price elasticity of demand is
comparatively inelastic, then a price increase does not decrease the demand considerably.
However, if the price elasticity is high, then a small increase in price may lead to a considerable
decrease in the demand for their commodities or services [2].
Example: Considering a cloth company selling shirts at an initial price of $5 and increasing the
price to $7, if the elasticity is high, then the demand may fall from say 100 to 50, thereby
decreasing the revenue of the company. However, if the demand is inelastic, the demand may fall
from 100 to only 90, thereby increasing the revenue of the company.

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Thus, the pricing decisions of the companies depend to a considerable extent on the price
elasticity of their products.
Answer 9:
Economies of scale, refers to the phenomenon of more than proportional increase in the
output due to a proportionate increase in the input, thereby leading to a decrease in the average
cost of production. The economies of scale can be broadly divided into two types- Internal and
External Economies of scale. The external economies of scale refer to those economies in
production, which occur to a firm due to the economies occurring in the industry itself under the
domain of which the concerned firm is operating. The internal economies of scale refer to those
economies, which the firm itself increases, subjective to its own expansion of production
activities.
The internal economies of scale can be divided into the following types:
a) Technical Economies- This type of economies arise out of the mechanical advantages which
the firms enjoy due to the expansion in their production operations which indicate towards the
usage of large and cost efficient machines [4].
b) Managerial Economies- The economies which occur due to the building of increasingly
effective and cost efficient management framework, which enhances the production capabilities
considerably.
c) Financial Economies- This economies of scale arise in an expanding firm due to the
availability of better credit facilities to them.

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Answer 10:
Accounting Profit- The accounting profit of a firm is the general profit, which the firm earns,
which is calculated by deducting the total of production of the firm from the total revenue
generated by selling the goods and services by the concerned firms. The costs, which are
deducted from the revenue of the firm, are of explicit types. Thus,
Accounting Profit= Total Revenue- Total Costs (Explicit Costs)
Economic Profit- There remains several implicit costs of production, which are not taken into
account while calculating the accounting profit of the firms. This primarily includes the
opportunity cost of production, which refers to the cost of sacrificing the next best alternative,
which could have been produced with the same amount of resources. These are included in the
calculation of economic profit [5]. Thus,
Economic Profit= Accounting Profit-Implicit Costs
Answer 11:
The term “Business Cycle” refers to the series of the alternate expansions and
contractions, which are experienced by the economies of the countries over time. There are four
phases in general, in the business cycle of the countries, which are explained with the help of the
following figure:

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Figure 4: Business Cycle in an economy
(Source: As created by the author)
Recession- In this phase the economy moves from a state of prosperity to a state of decrease in
the economic activities and repression.
Depression- Here, the economy experiences even acute contraction and stagnation.
Recovery- The economy gets out of depression and moves towards prosperity.
Boom- In this place the economy experiences a state of boom or expansion in the economic
activities.

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Answer12:
Inflation, defined as the overall increase in the average price level of a country can be
broadly classified into two types, which are as follows:
Demand Pull Inflation- The inflation that is caused due to an increase in the price levels
following an increase in the aggregate demand in an economy is known as the demand pull
inflation [6].
Cost Push Inflation- The inflation caused by the increase in the overall cost of production, due to
the increase in the price of resources, is known as the cost push inflation.
Answer 13:
In economics, the term “Spillover” or externality refers to the positive or negative
implications, arising out of any transaction between the parties choosing to incur the costs or
benefits of the same, on the third parties, which are not directly involved in the transaction. The
positive implications are known as spillover benefits while the negative ones are known as
spillover costs.
Example:
Spillover benefits:
 New technologies or discoveries which increases welfare of all people living in the
society automatically also increases the welfare of those who have not paid for the
discovery.
 Decrease in pollution helps in increasing the welfare of people as a whole.
 More educated workforce benefits the population who are around them.

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Spillover costs:
 Increase in the pollution generating production processes may benefit the firms but have
negative implications on the society as a whole.
 Manmade disasters including wars increases the spillover costs of the general people, as a
whole, who are not directly involved in the warfare.

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References
1 Aeaweb.org. American Economic Association. Aeaweb.org.
2018.https://www.aeaweb.org/journals/mic (accessed 19 Feb 2018).
2 Empgens.com. Price Knowledge and Elasticity. Empgens.com.
2018.https://www.empgens.com/wp-content/uploads/2009/06/EMPGENS-12-2.pdf (accessed 19
Feb 2018).
3 Landefeld J, Seskin E, Fraumeni B. Taking the Pulse of the Economy: Measuring GDP. 2018.
4 Open.lib.umn.edu. 8.2 Production Choices and Costs: The Long Run | Principles of
Economics. Open.lib.umn.edu. 2018.https://open.lib.umn.edu/principleseconomics/chapter/8-2-
production-choices-and-costs-the-long-run/ (accessed 19 Feb 2018).
5 Scholarworks.sjsu.edu. The Persistence of Accounting versus Economic Profit.
Scholarworks.sjsu.edu. 2018.http://scholarworks.sjsu.edu/cgi/viewcontent.cgi?
article=1038&context=econ_pub (accessed 19 Feb 2018).
6 Adb.org. Inflation in Developing Asia: Demand-Pull or Cost-Push?. Adb.org.
2018.https://www.adb.org/sites/default/files/publication/28222/wp121.pdf (accessed 19 Feb
2018).