Economics for Business: Decision Making Assignment, University Name

This economics assignment solution covers fundamental concepts in business economics, including the production possibility frontier and its concave shape, explaining opportunity cost. It defines scarcity in economic terms and its implications. The solution analyzes supply and demand dynamics, equilibrium price and quantity, consumer and producer surplus, and the impact of shifts in demand. It examines price floors, their effects on market equilibrium, and the potential for excess supply. Furthermore, the assignment calculates price elasticity using the midpoint method and assesses demand elasticity in different scenarios, like peak seasons. Finally, it explores cost analysis, including total, fixed, variable, and marginal costs, and determines the profit-maximizing production level in a competitive market, relating price to marginal cost. The assignment utilizes figures and tables to illustrate key concepts.

Running head: ECONOMICS FOR DECISION MAKING
Economics for Decision Making
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................6
Answer 4..........................................................................................................................................8
Answer 5........................................................................................................................................10
References......................................................................................................................................12

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Answer 1
a) Production possibility Frontier represents feasible combination of goods and services that can
be produced within the economy given its technology and resources (Jones 2016). Concave
shape of the production possibility curve is explained by the fact that the economy has to give up
some good to obtain more of some other good. A country become less and less efficient more it
devotes its resources to one good. This is because the resources in the economy are not
completely mobile within different industries in the economy. Therefore, for every units of good
the extent of sacrifice increases. The increasing opportunity cost is reflected in the shape of PPC.
The bow out shape of the PPC captures the law of increasing opportunity cost.
Figure 1: Production Possibility Curve
(Source: as created by Author)

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As the economy moves from A to C, with increasing production of X the opportunity cost
of production increases.
b) The word Scarcity means lack of something. In an economy, scarcity means lack of available
resources to meet unlimited wants of the people. Every time people face tradeoff between
alternative (Barnett and Morse 2013). The high paying job in the international hotel solves the
monetary problem or problems of Jane arising from the lack of money. However, being an
economic agent Jane will not be free from scarcity problem.
c) All the production, consumption or distribution in the economy comes under the purview of
economic system. Economic decision needs to taken properly to optimize the resource use.
Different economy has different system of managing resources. Economic system in a planned
economy is different from that of a market economy. In a planned economic system there is ca
central power taking major economic decision. The economy in north Korea and Cuba are
examples of planned economic system. North Korea faces problems in different economic
aspects. There is a problem of industrial stagnation and very low national output. The economy
also suffers from lack of basic economic needs like shortage of food and others (Park 2014).
Therefore, strong government has to come forward to face the economic challenge divert its
economic resource to fulfill basic wants of people as well as industrial progress. Korean
government sets its target to become a prosperous economy.

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Answer 2
a)
Price of an ice cream
($)
Quantity Demanded
('000)
Quantity Supplied
('000)
0 19 0
0.5 16 0
1 13 1
1.5 10 4
2 7 7
2.5 4 10
3 1 13
i)
0 2 4 6 8 10 12 14 16 18 20
0
0.5
1
1.5
2
2.5
3
3.5
Quantity Demanded ('000)
Quantity Supplied ('000)
Quantity
Price
Figure 2: Demand and Supply curve of ice cream

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ii) When, price is $2 then quantity demanded of ice cream matches with the quantity supplied.
Therefore, $ 2 is the equilibrium price and at this price 7 ice cream will be supplied which is the
equilibrium quantity.
iii) Consumer surplus is calculated by subtracting equilibrium price from consumers’ willingness
to pay (Wadman 2016)
Consumer Surplus ( CS )= ( 2.5−2 )+ ( 3−2 )
¿ 0.5+1
¿ 1.5
Producer surplus is equilibrium price less the minimum price at which the product can be
supplied.
Producer Surplus ( PS )= ( 2−1.5 )+ (2−1 )
¿ 0.5+1
¿ 1.5
iv)

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Figure 3: Demand and Supply of ice cream in winter
If the demand curve obtained above shows the demand for ice cream in summer then in
the winter the demand curve is expected to shift leftward. In winter people do not it prefer ice
cream much. Change in taste and preference causes a change in the demand as shown by the
inward shift of the demand curve. The new equilibrium will be established at a low price and
corresponding low quantity.
v) In the new equilibrium, consumer and producer surpluses will be reduced. Consumer surplus
decreases because of lower willingness to pay and producer surplus decreases because of low
equilibrium price.
Answer 3
i)Price floor is a policy when the government fixes price above the equilibrium price by
regulation (Carranza, Clark and Houde 2015). The effect of such regulatory price is explained in
the following figure

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Figure 4: Price floor in the milk market
(Source: as created by Author)
The free market demand and supply situation is expressed by DD and SS curve
respectively. Before price regulation, demand and supply forces work independently to set the
price and quantity in the market. Pf is the price after setting the price floor. Because of high price
consumer surpluses now decreases shown by the smaller triangle. Consumers in the market
lower their demand and dairy farmers increase their supply. The market faces the problem of
excess supply.
ii) Increased price can raise the income of the dairy farmers once they are able to sell all the
supplied quantity at the new high price. Revenue not only depends on the price but also depends
on the quantity sold (Chapman and Leonard 2013). With increase in price, demand reduces more

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than the price increase. Lower sales hurt revenue of the sellers. Therefore, by only introducing
price floor farmers cannot be assured with higher income unless the government undertakes
some additional policy.
iii) The extent of increased demand in the market is shown as (Qd - Qf). In the free market
situation, this excess supply tends to decrease prices. Therefore, government again needs to
intervene and purchase excess supply quantity. However, it helps the farmers to get rid of excess
supply situation and facing loss. A significant portion of government revenue has to be spent to
absorb the excess supplied quantity. In most of the time, government destroys the excess quantity
to maintain the high price in the market (Ciliberto, Murry and Tamer 2016). This indicates
inefficiency of the market and thus wastage of resource.
Answer 4
a)Elasticity computation by mid point method
Price(
P)
Quantity
(Q)
d
P
(P1+P2
)/2
% change in
price
d
Q
(Q1+Q2
)/2
% change in
quantity
Elastici
ty
2 10
3 8 1 2.5 40.00 2 9 22.22 0.56
4 6 1 3.5 28.57 2 7 28.57 1
5 4 1 4.5 22.22 2 5 40 1.80

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Price
($)
Quantity
demanded
Total
revenue
($)
Percent
change in
price
Percentage
change in
quantity
demanded
Elasticity Assessment of
Elasticity
2 10 20
3 8 24 40 22.22 0.56 Inelastic
demand
4 6 24 28.57 28.57 1 Unitary elastic
demand
5 4 20 22.22 40 1.80 Relatively
elastic
demand.
b) The holiday time are considered as peak season for the travel business. The demand becomes
much more sensitive to low price offers. People who generally do not travel by air book airline
tickets. In this season a reduction in ticket prices can incases the demand much more as
compared to that in the off season. Therefore, demand for airline tickets is more elastic as
compared to off season.

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Answer 5
a)
Quantity
of gardens
Total
Fixed
Cost
Total
Variable
Cost
Total
Cost
Margin
al Cost
Average
Fixed Cost
Average
Variable
Cost
Average
Total Cost
0 10 0 10 0.00 0 0.00
4
1 10 4 14 10.00 4 14.00
8
2 10 12 22 5.00 6 11.00
12
3 10 24 34 3.33 8 11.33
16
4 10 40 50 2.50 10 12.50
20
5 10 60 70 2.00 12 14.00
24
6 10 84 94 1.67 14 15.67
28
7 10 112 122 1.43 16 17.43
32
8 10 144 154 1.25 18 19.25
b) Profit maximization condition in the competitive market suggests price should be equal to
marginal cost (Kirzner 2015). Given price in the market is $20, optimal production point is
obtained from equating price with marginal cost. Marginal cost equals $20 when quantity of
garden is 5. Therefore, to maximize profit the company should chose to produce 5 gardens.

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c)
Figure 5: Average total cost, Average variable cost and Marginal cost curves
Figure 6: Marginal revenue curve
0 1 2 3 4 5 6 7 8 9
0
5
10
15
20
25
30
35
average variable cost
Average toital cost
Marginal cost
Output
Cost

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(Source: as created by the Author)
References
Barnett, H.J. and Morse, C., 2013. Scarcity and growth: The economics of natural resource
availability (Vol. 3). Routledge.
Carranza, J.E., Clark, R. and Houde, J.F., 2015. Price controls and market structure: Evidence
from gasoline retail markets. The Journal of Industrial Economics, 63(1), pp.152-198.
Chapman, D. and Leonard, D.H., Advanced Pricing Logic, Inc., 2013. Inventory pricing based
on price elasticity demand from movement trends. U.S. Patent Application 13/922,040.
Ciliberto, F., Murry, C. and Tamer, E.T., 2016. Market structure and competition in airline
markets.
Jones, C.I., 2016. The facts of economic growth. Handbook of Macroeconomics, 2, pp.3-69.
Kirzner, I.M., 2015. Competition and entrepreneurship. University of Chicago press.
Park, Y.S., 2014. Policies and Ideologies of the Kim Jong-un Regime in North Korea:
Theoretical Implications. Asian Studies Review, 38(1), pp.1-14.
Wadman, W.M., 2016. Variable Quality in Consumer Theory: Towards a Dynamic
Microeconomic Theory of the Consumer. Routledge.

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