Microeconomics and Macroeconomics Assignment - Economics Module

This economics assignment explores fundamental microeconomic and macroeconomic concepts. It begins by differentiating between explicit and implicit costs, and then explaining the difference between economic and accounting profit. The assignment proceeds to determine the profit-maximizing output for a firm using marginal revenue and marginal cost analysis. It then examines the characteristics of perfect competition, including entry and exit dynamics in the long run. The assignment also covers the components of Gross Domestic Product (GDP) and concludes with an analysis of the business cycle, discussing recession and boom phases, and the role of expansionary monetary and fiscal policies in stabilizing the economy. The document provides a comprehensive understanding of core economic principles.

Running head: MICROECONOMICS AND MACROENONOMICS
Microeconomics and Macroeconomics
Name of the Student
Name of the University
Student ID

1MICROECONOMICS AND MACROENONOMICS
Table of Contents
Answer 1..........................................................................................................................................2
Answer 3..........................................................................................................................................3
Answer 4..........................................................................................................................................4
Answer 5..........................................................................................................................................4
Answer 7..........................................................................................................................................5
Reference.........................................................................................................................................7

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Answer 1
(a) Explicit cost is any cost accrued by a firm to run its business successfully. It is the direct cost
a firm need to as employee wages, cost of raw material and rental payments. Alternatively,
implicit cost is the cost where no monetary transaction takes place. A firm accrues the
opportunity cost when it sacrifices one venture over another (Dottori et al., 2016). This
opportunity cost is called the implicit cost. For example, if a firm has factors using which it can
either produce rice or wheat. However, if it chooses to produce wheat sacrificing rice the return it
could have earned by producing rice is the implicit cost of the firm when it produces wheat.
(b) The profit which is given by the difference between firm’s total revenue generated by sales of
entire output and cost accrued due to use of all inputs and opportunity cost is called economic
profit. For example, if a company with total revenue of $100, explicit cost of $30 and implicit
cost of $20 operates in an industry then economic profit of the company is given as
Economic Profit=Total Revenue−Explict Cost −Implicit cost
¿ , Economic Profit=Total Revenue−Explict Cost −Implicit cost
¿ , Economic Profit=100−30−20
¿ , Economic Profit=$ 50
A profit of a firm which is given by the difference between the total revenue earned by
the firm by sales of all goods produced and the cost accrued by it to use inputs is called financial
(accounting profit). For example, if a firm earns total revenue of $200 by selling mobile phones
and the direct or input cost of the firm is $120 then accounting profit of the firm is given by
Accountong Profit=Total Revenue−Explict Cost

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¿ , Accountong Profit=200−120
¿ , Accountong Profit=$ 80
Therefore, the difference between economic profit and accounting profit is that in the case of
former implicit cost is considered but not considered in the case of latter.
Answer 3
A firm maximizes its profit where marginal revenue (MR) equals marginal cost (MC).
Therefore, MR is given as
TR=100Q−4 Q2
¿ , dTR
dQ = d ( 100 Q−4 Q2 )
dQ
¿ , MR=100−8 Q
Similarly, MC is given by
TC =300+ 40Q+2 Q2
¿ , dTC
dQ = d (300+ 40Q+ 2Q2 )
dQ
¿ , MC=40+4 Q
Solving for profit maximizing output of the firm:
MR=MC
¿ , 100−8Q=40+4 Q
¿ , 12Q=60

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¿ , Q=5
Therefore, profit maximizing output of the firm is 5 units.
Answer 4
In perfectly competitive market, there is no restrcitions to exit and entry. It is the only
reason due to which firms are able to freely move in the market. A firm has fixed cost in short
run but the cost is not present in the long run. Operating in the long run is thus easier for firms as
for breakeven they just need to recover the variable cost (Pasinetti, 2020). In the long run, if
there is any scope of super normal profit generates new firms enter the industry since entry is not
restricted. The entry to the market will keep on occurring until the price lowers and equals with
average variable cost. At the lowest point of long run average cost curve lies the short run cost
curves and at this level the firms have no incentive of leaving the industry. However, if the price
is below the long run average cost then the firms will leave the market until the price becomes
equal to long run average cost and makes breakeven. Therefore, under perfect competition firms
make normal profit.
Answer 5
Gross Domestic Product (GDP) is the value of total volume of final goods and services
produced in a geographical area of a country within a specified period of time. That calculation
of GDP is based on its four basic components. The components are investment (I), consumption
(C), net exports (NX) and government expenditure (G). Consumption is the total expenses made
by the people of a country in the given period in which the GDP is to be calculated. Investment is
the total amount of funding made in every sector in a country (Chang & Li, 2018). On the other
hand, net exports is the difference between total exports (E) and total imports (M). Total exports

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are positive for a country because cash inflow occurs due to sales of domestic goods in the
foreign country. On the other hand, total imports are negative as buying of foreign goods by
domestic people are outflow of cash from the country. It should be noted that all the other
components are positive for the GDP of the country. Therefore, GDP can calculated by adding
all the components and is given by
GDP=C+ I +G+( E−M)
¿ , GDP=C +I + G+NX
Answer 7
Business cycle is the representation of fluctuations in an economy. It means that a
business cycle depicts the recession phase to boom phase. Recession phase in business cycle
shows the slowing down of an economy (Ashley & Verbrugge, 2019). On the other hand, boom
phase of business cycle indicates the full employment level of GDP of the country. The graphical
illustration of the theory is given below.
Figure 1: Business
Cycle

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Source: (Created by the Author)
In figure 1, Q2 is the amount of GDP generated by a country under recession phase and
P2 is the corresponding price level. At this level of output, the country operates below full
employment level. Additionally, full employment level of output Q1 occurs only when business
cycle is at boom. The government takes expansionary monetary and fiscal policy to rescue the
economy from recession or a trough. Under expansionary monetary policy, the central bank of
the country would lower the interest rate and boost investment in the economy. Under
expansionary fiscal policy by cutting down tax rate, the government increases disposable income
of people and thereby the consumption and aggregate demand increases. This boost in
consumption increases the GDP of the country. Therefore, aforesaid monetary and fiscal policy
are the policies that government uses to bring out the economy of the country from economic
slowdown.

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Reference
Ashley, R. A., & Verbrugge, R. (2019). Variation in the Phillips Curve Relation across Three
Phases of the Business Cycle.
Chang, A. C., & Li, P. (2018). Measurement error in macroeconomic data and economics
research: Data revisions, gross domestic product, and gross domestic income. Economic
Inquiry, 56(3), 1846-1869.
Dottori, F., Figueiredo, R., Martina, M. L., Molinari, D., & Scorzini, A. (2016). INSYDE: a
synthetic, probabilistic flood damage model based on explicit cost analysis.
Pasinetti, L. L. (2020). Economic theory and institutions. Structural Change and Economic
Dynamics.