Business Economics Report: Economic Analysis of Sri Lanka's Economy

This comprehensive business economics report delves into various key economic concepts. It begins with an analysis of Production Possibility Curves (PPC) using data from China and the United States, calculating opportunity costs to determine comparative advantages in producing rice and computers. The report then examines inflation, differentiating between demand-pull and cost-push inflation, supported by relevant graphs and examples. Furthermore, it explores different market structures, including perfect competition, monopolistic competition, pure monopoly, and oligopoly, outlining their characteristics, advantages, and disadvantages. Finally, the report discusses international trade, covering absolute and comparative advantage theories, and analyzes the economic situation in Sri Lanka, including its exports, imports, trade barriers, and the importance of international trade.

Table of Contents
Acknowledgement.......................................................................................................................................
Executive Summary.....................................................................................................................................
PPC Curves..................................................................................................................................................
Opportunity cost..........................................................................................................................................
Curves........................................................................................................................................................
ATC Curve.................................................................................................................................................
AVC Curve................................................................................................................................................
AFC Curve.................................................................................................................................................
MC Curve..................................................................................................................................................
Inflation......................................................................................................................................................
Demand- pull inflation...............................................................................................................................
Cost- push inflation....................................................................................................................................
Market Structure........................................................................................................................................
Market models...........................................................................................................................................
Perfect Competition...............................................................................................................................
Monopolistic Competition.....................................................................................................................
Pure Monopoly.......................................................................................................................................
Oligopoly...............................................................................................................................................
International trade......................................................................................................................................
Absolute advantage thread.....................................................................................................................
Comparative advantage thread...............................................................................................................
Economy situation in srilanka...................................................................................................................
Exports and imports...................................................................................................................................
Importance of international trade...............................................................................................................
Trade barriers.............................................................................................................................................
Conclusion.................................................................................................................................................
References..................................................................................................................................................
Table of Figures
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Figure 1: PPC of China ...................................................................................................................
7
Figure 2: PPC of USA.................................................................................................................... 8
Figure 3: ATC Curve .................................................................................................................... 10
Figure 4: AVC Curve ....................................................................................................................
11
Figure 5: AFC Curve .................................................................................................................... 12
Figure 6: MC Curve ......................................................................................................................
13
Figure 7: Demand- Pull inflation ..................................................................................................
15
Figure 8: Cost- Push inflation .......................................................................................................
16
Figure 9: Exports........................................................................................................................... 25
Figure 10: Imports......................................................................................................................... 25
Table 1 ............................................................................................................................................ 7
Table 2: opportunity cost 1 ............................................................................................................. 8
Table 3: opportunity cost 2 ............................................................................................................. 9
Table 4 .......................................................................................................................................... 10
Table 5: Advantages and disadvantages of perfect competition ...................................................
18
Table 6: Advantages and disadvantages of monopolistic competition .........................................
20
Table 7: Advantages and disadvantages of pure monopoly.......................................................... 21
Table 8: Advantages and disadvantages of Oligopoly ..................................................................
22
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Acknowledgement
I would like to express my sincere gratitude and appreciation to all those who always guided me
and gave me the possibility to complete this business economics report. I take this opportunity to
express my utmost regards to our respected lecturers Mrs. Harshani chathurika whose
unparalleled knowledge, moral fiber and judgment along with their know-how, was an immense
support in completing this assignment report in a highly successful manner.
I would also like to acknowledge with much appreciate the crucial role of the staff of library and
computer laboratory, who gave me the permission to use all required machinery and refer the
books. Many people, especially my classmates have made valuable comments for my report. I
also specially thanks for my parents that who encouraged me and about strengthening me at all
the time.
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Executive Summary
The purpose of this report is to provide a comprehensive knowledge of the current economy.
According this assignment improve the economic knowledge and learn calculate. In this
Assignment has economic theory.
According to PPC curve, this review the data of both rice and computers products in china and
the United States, calculate the opportunity cost and thereby derive the production feasibility
curve. Also by calculating the opportunity cost, we can identify the country which has the
comparative advantage of producing rice.
Based on the Inflation, Inflation is a quantitative measure of the rate at which the average price
level of a basket of selected goods and services in an economy increases over a period of time.
Inflation can discuss with two categories. It is demand pull and cost push with the relevant
graphs.
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Next the market structure discussed with main relevant four market models. Those are Perfect
Competition, Monopolistic Competition, Pure Monopoly, and Oligopoly. Based on these market
structures perfect competition refer market structure defined by a large number of small firms
competing against each other. Monopolistic competition almost a blend between perfect
competition and monopoly, in which products are very similar, but the small differences between
them are the basis of how their makers sell and advertise the products and pure monopoly models
are where a single product or maker controls the market.at last oligopoly dominated by only a
small number of firms. That results in a state of limited competition.
For the last international thread International Trade refers to the exchange of products and
services from one country to another.in economics there are two main theories. Absolute
advantage theory and comparative advantage theory.srilankan international trade is a
combination of trade barriers, exports and imports, importance and characteristics.
Q 1
A)
Good Country
Computers USA China
3000
3000/5
=500
1000
1000/5
=200
Rice 3000/2
=1500
1000/1
=1000
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Table 1
Figure 1: PPC of China
PPC Curves
Figure 2: PPC of USA
b)
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Opportunity cost
Country Opportunity cost
Computer Rice
USA 1500/500
= 3
500/1500
=1/3
China
1000/200
= 5
200/1000
=1/5
Table 2: opportunity cost 1
Computers Rice
USA 1: 1500/500 : 3 1: 500/1500 :1/3
China
1: 1000/200 : 5 1: 200/1000 :1/5
Table 3: opportunity cost 2
The opportunity cost of producing rice
USA: 1/3
China: 1/5
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So the USA has to concentrate 1/3 computers to produce to one unit of rice.
There after china has to concentrate 1/5 computers to produce to one unit of rice.
According to the given results china has the comparative advantage in producing rice
= 1/5
Q2.
Table 4
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Output Fixed
Cost
Total cost ATC AVC AFC MC
0 12 24 0 0 0 0
1 12 33 33 21 12 9
2 12 41 20.5 14.5 6 8
3 12 48 16 12 4 7
4 12 54 13.5 10.5 3 6
5 12 61 12.2 9.8 2.4 7

Curves
ATC Curve
Figure 3: ATC Curve
AVC Curve
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Figure 4: AVC Curve
AFC Curve
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Figure 5: AFC Curve
MC Curve
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Figure 6: MC Curve
Q3.
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Inflation
Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over a period of time. It is the constant rise
in the general level of prices where a unit of currency buys less than it did in prior periods. Often
expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation’s
currency.
In inflation there are two main theories in inflation. Those are,
• Demand pull inflation
• Cost push inflation
Demand- pull inflation
Results from an excess of aggregate demand relative to aggregate supply. For example, consider
a popular product where demand for the product outstrips supply. The price of the product would
increase. The theory in demand-pull inflation is if aggregate demand exceeds aggregate supply,
prices will increase economy-wide.
Causes of demand-pull inflation
• Economic Growth and increased consumption
• Expectation of inflation in the near future
• Government spending
• Exchange rate
• Monetary policy
Examples for Demand- pull inflation
Say the economy is in a boom period, and the unemployment rate falls to a new low. Interest
rates are at a low point, too. The federal government, seeking to get more gas-guzzling cars off
the road, initiates a special tax credit for buyers of fuel-efficient cars. The big auto companies are
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thrilled, although they didn't anticipate such a confluence of upbeat factors all at once. (CHEN,
2019)
Figure 7: Demand- Pull inflation
Cost- push inflation
Cost push inflation is inflation caused by an increase in prices of inputs like labour, raw material,
etc. The increased price of the factors of production leads to a decreased supply of these goods.
While the demand remains constant, the prices of commodities increase causing a rise in the
overall price level. This is in essence cost push inflation.
Causes of cost- Push inflation
• Monopoly
• Wage inflation
• Government Regulation and Taxation
• Exchange Rates
• Natural Disasters
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Examples for cost- push inflation
A famous example of cost-push inflation occurred in the 1970s oil market. The price of oil is
controlled by an intergovernmental body known as OPEC—the Organization of Petroleum
Exporting Countries. In the Seventies, OPEC imposed higher prices on the oil market; however,
demand had not increased. While the increased oil prices produced strong profit margins for
producers in the short run, it increased production costs in all sectors of the economy that relied
on oil. This impacted many elements of the economy are touched by the oil market, from
transportation to construction to plastics, resulting in inflationary pressure on the prices of goods
and services as a result of OPEC’s decision. (MasterClass, 2019)
Figure 8: Cost- Push inflation
Q4.
Market Structure
A market is a set of buyers and sellers, commonly referred to as agents, who through their
interaction, both real and potential, determine the price of a good or a set of goods. The concept
of a market structure is therefore understood as those characteristics of a market that influence
the behavior and results of the firms working in that market.
The main aspects that determine market structures are: the number of agents in the market, both
sellers and buyers; their relative negotiation strength, in terms of ability to set prices; the degree
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of concentration among them; the degree of differentiation and uniqueness of products; and the
ease, or not, of entering and Exiting the market.
Market models
Perfect Competition
Pure or perfect competition is a market structure defined by a large number of small firms
competing against each other. A single firm doesn’t have significant marketing power, and as a
result, the industry produces an optimal level of output because firms don’t have the ability to
influence market prices. Supply and demand determine the amount of goods and services
produced, along with the market prices set by the companies in the market. Products are identical
to competitors’ products, and there are no significant barriers to entering and exiting the market.
The pure competition market structure is rare in the real world. This is a theoretical model that is
helpful when looking at industries with similar characteristics. In other words, it’s a good
reference point for other market structures. The best examples of pure competition market
structures are stock, agricultural and craft markets.
Example for perfect competition
For example we can include agricultural markets. Like a large number of farmers producing
similar crops say wheat or mango.
Another example may include street food vendors. Various vendors (sellers) exist who are selling
almost identical products.
E.g. burgers
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Characteristics of Perfect Competition market model
• A large number of small firms
• identical products sold by all firms
• perfect resource mobility or the freedom of entry into and exit out of the industry
• Perfect knowledge of prices and technology.
Advantages and disadvantages of Perfect competition
Advantages Disadvantages
Optimal allocation of resources Insufficient profits for investment
competition encourages efficiency Unequal distribution of goods and service
consumers charged a lower price Lack of competition over product design
and specification
responsive to consumer wishes: Change in
demand, leads extra supply
No scope for economies of scale because
of the high number of firms in there.
Table 5: Advantages and disadvantages of perfect competition
Monopolistic Competition
Monopolistic competition is almost a blend between perfect competition and monopoly, in which
products are very similar, but the small differences between them are the basis of how their
makers sell and advertise the products.
Consider a Samsung smartphone versus iPhone. They are mostly the same in what they
accomplish for the end user they receive calls, take photos, surf the web, allow for other
communications and are a computational device. And yet, vast sums are spent in marketing the
two as being worlds apart, which is based on camera traits, feel, operating systems and other
qualities that dictate brand loyalty.
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When one producer creates a successful product or enterprise, it attracts others in search of the
same profits. From smartphones to beauty salons, there is little theoretical difference in what
most products or services offer, but the differences are enough to build brand identity around.
IPhone is a great example of a company that had a near monopoly based on creating a
completely new standard of technology. But their success inspired others, like Samsung, to invest
more in developing their own competitive products.
Examples of monopolistic competition can be found in every high street.
Monopolistically competitive firms are most common in industries where differentiation is
possible, such as:
• The restaurant business
• Hotels and pubs
• General specialist retailing
• Consumer services, such as hairdressing
Characteristics of Monopolistic Competition
• large number of small firms
• similar but not identical products sold by the firms
• relative freedom of entry into and exit out of the industry
• Extensive knowledge of prices and technology.
Advantages and disadvantages Monopolistic competition
Advantages Disadvantages
The Promotion of Competition (lack of
Barriers to Entry)
Allocatively Inefficient
Differentiation Brings Greater Consumer
Choice and Variety
Higher Prices
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Product and Service Quality–
Development
Informed Consumers
Consumers Become More Knowledgeable
of Products
Differentiated Products
Table 6: Advantages and disadvantages of monopolistic competition
Pure Monopoly
Pure monopoly models are where a single product or maker controls the market. There are no
competitors, and the provider can theoretically drive up prices as they like. Examples of pure
monopolies include entities like utility companies and government-run liquor stores.
Naturallyoccurring monopolies are ones which happen because their industry is so cost-
prohibitive to enter that they are the lone player. Railways, for instance, are monopolistic
because laying new track and establishing new routes is so unfeasible for newcomers to the
industry.
Characteristics of a pure Monopoly
• Profit maximizer:
• Price maker
• High barriers to entry
• Single seller
• Price discrimination
Advantages and disadvantages of pure monopoly
Advantages Disadvantages
Stability of prices Exploitation of consumers
Source of revenue for the government Price discrimination
Monopoly firms offer some services Inferior goods and services
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effectively and efficiently
Massive profits Dissatisfied consumers
Table 7: Advantages and disadvantages of pure monopoly
Oligopoly
An oligopoly describes a market structure that is dominated by only a small number of firms.
That results in a state of limited competition. The firms can either complete against each other or
collaborate. By doing so, they can use their collective market power to drive up prices and earn
more profit.
Examples for oligopoly
• National mass media and news outlets are a prime example of an oligopoly, with 90% of
U.S. media outlets owned by six corporations: Walt Disney (DIS), Time Warner (TWX),
CBS Corporation (CBS), Viacom (VIAB), NBC Universal, and News Corporation
(NWSA).
• Operating systems for smartphones and computers provide excellent examples of
oligopolies. Apple iOS and Google Android dominate smartphone operating systems,
while computer operating systems are overshadowed by Apple and Windows.
• Automobile manufacturing another example of an oligopoly, with the leading auto
manufacturers in the United States being Ford (F), GMC, and Chrysler.
Characteristic of oligopoly
• Few firms
• Barriers to Entry
• Non-Price Competition.
• Interdependence
• Nature of the Product
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• Selling Costs
• No unique pattern of pricing behavior.
• Indeterminateness of the Demand Curve
Advantages and disadvantages of Oligopoly
Advantages Disadvantages
Oligopolies can offer more information
to their consumers
Higher concentration levels
reduce consumer choice
It allows for more product refinement to
occur
Collusion is possible in this structure to
further reduce competition
An oligopoly can adopt a competitive
strategy.
It can lead to decision-making bias and
irrational behavior
The extra profits earned from an
oligopoly can go into research and
development.
Deliberate barriers to entry can occur
with an oligopoly.
Table 8: Advantages and disadvantages of Oligopoly
Q5.
International trade
International Trade refers to the exchange of products and services from one country to another,
it means the export and import of goods and services.
There are main two theories explain the base of International trade
• Absolute advantage thread
• Comparative advantage thread
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Absolute advantage thread
Absolute advantage refers to the ability of a country to produce a good more efficiently than other
countries. In other words, a country that has an absolute advantage can produce a good with
lower marginal cost.
Comparative advantage thread
Comparative advantage refers to the ability of a party to produce a particular good or service at a
lower marginal and opportunity cost over another. Even if one country is more efficient in the
production of all goods than another, both countries will still gain by trading with each other.
More specifically, countries should import goods if the opportunity cost of importing is lower
than the cost of producing them locally.
Economy situation in srilanka
In mainly srilanka economy is developing by largely on agriculture, services, and light industry,
Agriculture accounts for approximately 21% of gross domestic product (GDP) and employs 38%
of the workforce. Agricultural output is divided into two categories, cash crops from plantation
agriculture and food crops from subsistence agriculture. Cash crop like tea, rubber, and coconuts
are largely grown on plantations. Rice is the principal food crop and staple food for over 70% of
srilanka’s rural population. Manufacturing industries includes textiles, ceramics, petroleum
products, vegetable oils, fertilizers and cement. Manufacturing industries accounts for
approximately 19% of the GDP and employ about 17% of the workface. This service sector
which consist tourism, banking, finance, and retail of is the largest of the srilanka economy,
employing 45% of the workforce and contributing roughly 60%.
Because of srilanka is a developing country, some citizens who are in below the poverty level try
to live with many financial difficulties. Over 45% of the population depends on benefits under
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the income supplement programs initiated by the government like “samurdi”. The balance of
payments problem remains unresolved. The persistent trade deficit has led to increased reliance
on foreign aid to meet the country’s important requirements, leading to an inevitably mounting
foreign debt.
Exports and imports
Exports
Exports from Sri Lanka fell 0.1 percent year-on-year to USD 979 million in November 2019, due
to lower sales of agricultural products (-0.2 percent), particularly rubber (-48.2 percent).
Figure 9: Exports
Imports
Imports to Sri Lanka dropped 1.3 percent year-on-year to USD 1,741 million in November 2019,
dragged by lower purchases of non-food consumer goods (-9.0 percent) and intermediate goods
(7.6 percent). In contrast, imports of food & beverages (26.7 percent) and investment goods (15.9
percent) increased.
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Figure 10: Imports
Sri Lanka imports petroleum, textile fabrics, foodstuffs and machinery and transportation
equipment. Main import partners are India, China, Iran and Singapore.
Importance of international trade
• Make use of abundant raw materials
• Comparative advantage
• Greater choice for consumers
• Specialization and economies of scale – greater efficiency
• Service sector trade
• Global growth and economic development
Trade barriers
More compelling is the dramatic upturn in GDP growth rates in India and China after they turned
strongly towards dismantling trade barriers in the early 1990s. In both countries, the decision to
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reverse protectionist policies was not the only reform undertaken, but it was an important
component.
In the developed countries, trade liberalization, which started earlier in the post-war period, was
accompanied by other forms of economic opportunities for example, a return to currency
convertibility, resulting in rapid GDP growth.
Moreover, the argument that historical experience supports the case for protectionism is now
flawed. The economic historian Douglas Irwin has challenged the argument that 19th-century
protectionist policy aided the growth of infant industries in the United States. Nor should the
promoters of free trade worry that trade openness results in no additional growth for some
developing countries. Trade is only a facilitating device. If a country’s infrastructure is bad, or
have domestic policies that prevent investors from responding to market opportunities such as
licensing restrictions, very little progress can be achieved.
Critics of free trade also argue that trade-driven growth benefits only the rich and not the poor. In
India, however, after the economic and education reforms, nearly 200 million people have come
out of poverty. In China, which grew faster, it is estimated that more than 300 million people
have moved above the poverty line since the reforms were initiated.
Moreover, trade agreements open new markets for businesses, so competition increases. To
withstand the competition, businesses are forced to build more quality into their products.
Superior product quality means improved satisfaction for consumers. In addition, local
consumers have access to a wider variety of products and services.
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Conclusion
As an overall conclusion I would say that, this report Explained the production possibility curve,
opportunity cost, inflation, market structure, international trade, srilanka current economy, export
and import of srilanka international trade, importance, characteristic and trade barriers using with
relevant examples and graphs. they can be find as the important part of learning economics to
take over business the way of finding comparative and then the nation’s trade in export and
import. As well as learning market modules and inflation problems. May take us to lead a
business or will make as knowledge about economic theory.
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References
agarwal, p., 2020. https://www.intelligenteconomist.com/absolute-advantage/. [Online].
AMADEO, K., 2019. https://www.thebalance.com/what-is-cost-push-inflation-3306096.
[Online].
CHEN, J., 2019. https://www.investopedia.com/terms/d/demandpullinflation.asp. [Online].
keynes, j. m., 2007. economic. In: The General Theory of employement, Intrest and Money.
united kingdom: palgrave macmilian, p. 472.
MasterClass, 2019. https://www.masterclass.com/articles/what-is-cost-push-inflation-
learnabout-cost-push-inflation-in-economics-with-examples#what-causes-costpush-inflation.
[Online].
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