ECO500 Assignment: Economics, Demand, and Market Analysis Report

This economics assignment, ECO500, delves into fundamental economic principles and their application in a managerial context. The assignment begins with an exploration of the three basic economic questions and the role of managers in resource allocation. It then proceeds to analyze demand ...Read More

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Student ID

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Table of Contents
Question 1..................................................................................................................................2
Question 1.1...........................................................................................................................2
Question 1.2...........................................................................................................................2
Question 2..................................................................................................................................7
Question 2.1...........................................................................................................................7
Question 2.2...........................................................................................................................7
Question 2.3.........................................................................................................................10
Question 3................................................................................................................................12
Question 3.1.........................................................................................................................12
Question 3.2.........................................................................................................................13
Question 4................................................................................................................................14
Question 4.1.........................................................................................................................14
Question 4.2.........................................................................................................................14
Question 5................................................................................................................................15
References................................................................................................................................17

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Question 1
Question 1.1
The three basic questions of economies are what to produce, how to produce and for
whom to produce. Considering from the view point of a firm, question 1 is related to the
decision of firm in related to production of particular good or service. Firm often has to
decide whether to produce a different or new good or stop producing a particular good or
service.
The second question is related to selection of particular technology of production.
This also involves managing production activities. The decision involves hiring of
appropriate worker, employment of raw material like capital equipment and others (Fine
2016). A firm need to carefully chose whether to adapt capital-intensive technology or labor
intensive technology such that output can be maximized given the resources.
The third question is related to decision of the firm regarding market segmentation.
Here the firm needs to decide what particular market segment the firm should focus on and
who are the targeted group of customers. The right decision at this stage helps the firm to
maximize revenue.
Mangers play an important role in decision making process of firm. It is responsibility
of the manger to allocate scarce resource efficiently. Manger monitors and guides people in
an organization.
Question 1.2
Demand and supply condition are given as
Qd =2400−8 P
QS =−1000+8 P

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Q: Number of business that need services
P: Monthly fee in rands
Total cost per month in rands in the short run
TC=30000+70 Q
1.2.1
2400−8 P=0
¿ , 8 P=2400
¿ , P= 2400
8
¿ , P=300
At average monthly fee of 300 rands would demand equal zero.
1.2.2
−1000+8 P=0
¿ , 8 P=1000
¿ , P= 1000
8
¿ , P=125
At average fee of 125 rands monthly supply would equal to zero.
1.2.3
At equilibrium,
Demand=Supply

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¿ , 2400−8 P=−1000+8 P
¿ , 8 P+8 P=2400+1000
¿ , 16 P=3400
¿ , P= 3400
16
¿ , P=212.5
Q=2400−8 P
¿ 2400− ( 8 ×212.5 )
¿ 2400−1700
¿ 700
Equilibrium price in the market is 212.5 rands. Equilibrium output level in the market
is 700.
1.2.4
Qd =2400−8 P
Slope of the demand curve is given as
dQ
dP =−8
Point elasticity of demand= Percentage change ∈quanity demanded
Percentage change∈ price
dQ
dP × P
Q
¿−8 × 212.5
700

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¿−8 ×0.3036
¿−2.4288
At equilibrium price elasticity of demand -2.43. The measures elasticity suggests that
demand is relatively elastic in nature. A relatively elastic demand suggests that when there
occurs a change in price, proportionate change in quantity demanded is relatively greater than
price change (Baumol and Blinder 2015). If the firm decides to increase price, there will be a
greater proportionate decline in quantity demanded. This cause sales volume to decline
largely leading to a decline in revenue of the firm.
1.2.5
Figure 1: Demand, supply and equilibrium
1.2.6
The firm’s fixed cost is 30,000 rands.

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1.2.7
Profit=Total Revenue−Total Cost
Total Revenue=Price× Quantity
¿ 212.5 ×700
¿ 148750
Total Cost =30000+70 Q
¿ 30000+ ( 70 ×700 )
¿ 30000+ 49000
¿ 79000
Profit=Total Revenue−Total Cost
¿ 148750−79000
¿ 69750
1.2.8
The firm earns economic profit. The firm earns economic profit as total revenue
exceeds total cost (Kreps 2019). That means price exceeds average cost yielding economic
profit to firm.

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Question 2
Question 2.1
During a decline in economic activities spending, there is a decrease in expenditure on
food restaurant. In order to save money, people tend to increase their expenditure on food at
home.
Income elasticity of demand measures percentage change in quantity demanded due
to a unit change in income. Income elasticity can either be positive or be negative. If demand
changes more than income, then demand is considered as relatively elastic. When demand
changes less than income then demand is considered as relatively inelastic (Cowell 2018).
For restaurants’ food income elasticity of demand is relatively more income elastic. During
decline in economic activities people experience a decline in income. Because of higher
income elasticity of restaurants’ food, there is a greater proportionate decline in demand.
Question 2.2
2.2.1
The demand equation is given as
Qd =100−10 P+0.5 Y
The above equation states that demand is a function of both price and income. The
equation suggests that demand is inversely related to price. That is demand of the good
decreases as price increases. Demand is positively related with income. This implies demand
increases with increase in income.
2.2.2
Qd =100−10 P+0.5 Y

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¿ 100− ( 10 × 9 ) +(0.5× 100)
¿ 100−90+50
¿ 100−40
¿ 60
Slope of the demand function
d Qd
dP =−10
At price = 9 and income = 100, the demand can be determined as
Qd =100−10 P+0.5 Y
¿ 100− ( 10 × 9 ) +(0.5× 100)
¿ 100−90+50
¿ 100−40
¿ 60
Price elasticity of demand= Percentage change∈quanity demanded
Percentage change∈ price
dQ
dP × P
Q
¿−10 × 9
60
¿−10 ×0.15
¿−1.5
2.2.3

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Income elasticity of demand= Change∈quantity demanded
Change∈income
¿ dQ
dY × Y
Q
¿ 0.5 × 100
60
¿ 0.5 ×1.6667
¿ 0.83
2.2.4
At income = 120 and P = 12,
Qd =100−10 P+0.5 Y
¿ 100− (10 × 12 )+ ( 0.5× 120 )
¿ 100−120+60
¿ 80
Price elasticity of demand= Percentage change∈quanity demanded
Percentage change∈ price
¿ dQ
dP × P
Q
¿−10 × 12
80
¿−10 ×0.15
¿−1.5

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Question 2.3
2.3.1
Q=20−2 P
Figure 2: Graphical presentation of the demand curve
Table 2: Point elasticity of demand at various point
Point P
Deman
d P/Q
Elasticit
y
A 0 20 0.000 0.00
B 1 18 0.056 -0.11
C 2 16 0.125 -0.25
D 3 14 0.214 -0.43
E 4 12 0.333 -0.67
F 5 10 0.500 -1.00
G 6 8 0.750 -1.50
H 7 6 1.167 -2.33
I 8 4 2.000 -4.00
J 9 2 4.500 -9.00
K 10 0 ∞

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Figure 3: Elasticity at different point on the demand curve
From the above table it is seen that measured elasticity differs at various point on the
linear demand curve. At the mid-point F, the measured elasticity is 1. Above F measured
elasticity increases decrease and demand becomes relatively less elastic. At point D, elasticity
is 0.214. The elasticity falls to 0 at point A. Below F, measured value of elasticity increases
and demand become more elastic. At I, elasticity value is 4.5. Corresponding to point K,
measured value of elasticity is infinity.
2.3.2
At P = 5
Q=20−2 P
¿ 20− ( 2× 5 )
¿ 20−10
¿ 10
At P = 6,

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Q=20−2 P
¿ 20− ( 2× 6 )
¿ 20−12
¿ 8
Arc elasticity of demand= Percentage change∈quantity demanded
Percentage change∈ price
¿ Q2−Q1
P2−P1
× Average Price
Average Quantity
¿ 8−10
6−5 × 5.5
9
¿−2× 0.6111
¿−1.22
2.3.3
At a price of 5, a change in price and quantity results in approximately no change in
total revenue. At this price, price elasticity of demand equals unity. That means proportionate
change in demand for a change in price is almost same (Cowen and Tabarrok 2015). As a
result, any change in price offset by the equal proportionate change in demand keeping the
revenue same.
Question 3
Question 3.1
The obtained demand equation represents quantity demand as a function of own price,
price of substitutes and income. The coefficient of own price is -80. Negative coefficient
indicates that own price of the cement is negatively related with demand. That means as

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cement price increases, there is a decrease in demand for cement. Magnitude of the
coefficient of price suggests for 1-unit increase in price demand decreases by 80 units. For
price of substitute, the coefficient the obtained coefficient 25. Positive coefficient of the
equation suggests demand of cement is positively related price of its substitute clay bricks.
Particularly, per unit increase in price of clay bricks increases demand for cement bricks by
25 units. The company therefore should keep the price of cement brick lower relative to the
price of clay brick in order to attract more customers (Nicholson and Snyder 2014). Finally,
coefficient of income is 50. This shows income again has a positive impact on demand for
cement brick. As income increase by 1 unit, there is an increase in demand for cement brick
by 50 units.
Question 3.2
Overall explanatory power of the model can be understood from the obtained value of
R square. This is also termed as coefficient of determination. The estimated value of adjusted
R square is 0.56. That means own price, price of substitutes and income together account for
56 percent variation in the demand for cement brick suggesting a moderately good fit model.
The ‘rule of 2’ is a rule of thumb in statistics indicting for large sample if the obtained
value of t is greater than 2, then the null hypothesis can be rejected. The respective t value for
own price, price of substitutes and income are 2.7, 1.6 and 3.3. For own price and income t
value exceeds 2 suggesting rejection of null hypothesis of no significant relation of the two
factors with price. Therefore, own price and income are statistically significant determinant
of demand of cement bricks. However, for price of substitutes t value is less than 2 meaning
that the variable is statistically insignificant.

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Question 4
Question 4.1
Table 1: Economies of scale for Tech World
Scale of economies depend on long run cost associated with per unit of output termed
as long run average cost. A firm is said to enjoy an economies of scale when long run average
cost decreases with per unit of output. For tech world, the long run average cost decreases
steadily till the capacity level of F. Therefore, production from capacity A to capacity F can
be categorized as economies of scale. Production is said to constitute constant return to scale
when long run average cost remain constant per unit of output. After reaching the capacity
level of G, long run average cost remain cost. Production at capacity level G therefore can be
classified as constant return to scale (Pindyck and Rubinfeld 2014). After the capacity level
G, long run average cost started to increase for per unit of output. The production capacity
from I to J can be categorized as to constitute diseconomies of scale.
Question 4.2
Minimum efficient scale of a firm refers to point where the plant produces output
associated with minimum of long run average cost. From the table, it is observed that the

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long run minimum average cost is 2.210. This corresponds to the output level of 120,000
produced with capacity G. This indicates minimum efficient scale for the company. The
output associated with maximum efficient scale is reached at the point before the production
is set for diseconomies for scale (Mahanty 2014). From the table, diseconomies of scale
began after the output level of 145, 0000. Therefore, maximum efficient scale of output is
145, 000.
Question 5
Figure 3: Demand curve of Drake’s management
Paul Sweezy developed the kinked demand curve model to explain the behavior of
firms in an oligopoly market. Oligopolistic firms face a kinked demand curve because of
different elasticity in two different part of the demand curve. Given the scenario that the
market is in equilibrium at point E. Below this point Drake faces the industry demand curve
DIND while above E the firm face its own demand curve DDT. Own demand curve is flatter
than the industry demand curve because of large number of available substitutes. If the
management decides to lower the price below E, other competitors in the market follow the
same strategy. Below this point, the market demand curve is relatively inelastic (Cowell
2015). This suggests that lowering price will not be beneficial for the firm as demand will not

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increase much. This is because as all firms lower their price simultaneously. Simultaneous
reduction in price by all firms in the industry might trigger a price war. Therefore, 12 percent
reduction in price will lead to a decline in revenue by not increasing sales as per the
expectation.

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan
International Higher Education.
Fine, B., 2016. Microeconomics. University of Chicago Press Economics Books.
Kreps, D.M., 2019. Microeconomics for managers. Princeton University Press.
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Nicholson, W. and Snyder, C.M., 2014. Intermediate microeconomics and its application.
Nelson Education.
Pindyck, R. and Rubinfeld, D., 2014. Microeconomics GE. Pearson Australia Pty Limited.
Rees, D.G., 2018. Essential statistics. Chapman and Hall/CRC.