Economics

Question 1

The supply curve slopes upward mainly because of the diminishing marginal returns. As production increases, its related costs also increase. For this reason, firms would demand for higher prices to justify the expanding output levels. Furthermore, a high price is a source of incentive for firms to produce more.

A change in supply is simply a shift of supply curve caused mainly by changes in producer’s costs. Conversely, a change in quantity supplied is a movement along a supply curve mainly due to changing market price, holding other factors constant. The diagram below illustrates the two differences.

Quantity

The arrow “B” illustrates a move along supply curve So hence is a change of magnitude supplied.

The arrow “A” illustrates a shift in demand curve from So to S1 at the same price level of P1.

Question 2

The price is usually determined by the intersection of demand and supply curve while value is determined by a person’s willingness to pay certain amount of money for a commodity. An example of value is a consumer who values a radio at \$2. If the market price is \$1, it therefore means that the consumer is willing to pay anything less than \$2. The diagram below illustrates these differences.

Quantity

Along the demand curve given by arrow “A” value obtained by customer exceeds price they have to pay while arrow “B” indicates that value obtained is less than price they have to pay.

The paradox of value attempts to explain why a vital item such as water is inexpensive whereas diamond, which has relatively little importance to a society is expensive. Total utility from water is large but the price is determined by marginal utility curve. This high total utility is explained by the fact that too much water is used. Total utility from diamond is small but since few diamonds are bought, its marginal utility is high hence the price.

Question 3

Income elasticity of demand is simply the responsiveness of quantity demanded following changes in consumers after tax income. In the case of agricultural product, demand is income inelasticity simply because proportion of income spent on food declines with an increasing income. As income increases, people prefer to purchase other goods such as electronics. This argument is supported by the law of diminishing marginal utility for agricultural product.

Price elasticity of demand indicates the percentage change in quantity demanded of say agricultural product following percentage change in the price of that product. Agricultural products are also price inelastic. Consumers usually consume a fixed amount of food thus any reduction in price cannot motivate consumers into purchasing more goods since it can lead to lower or negative marginal utility. The other factor that makes agricultural products to be price inelastic is lack of substitutes and low price of agricultural products.

Question 4

The two methods that can be used by government to encourage consumption of influenza vaccine are Subsidy on consumption and production. A diagram to illustrate a subsidy on consumption is as follows.

Quantity

A subsidy would shift the demand curve upward by the amount of that subsidy. This indicates an increase in quantity of influenza vaccine demanded from Qo to Q1. The producer’s price is represented by Pc while consumer’s price is given by Pc.

he second approach is to subsidize on production. T

From the diagram, government subsidy on production increases supply to the market while the price is substantially reduced. The cost to the government is equivalent to deadweight loss owing to overproduction. This is represented by area “X” on the figure above.

Question 5

Diminishing marginal returns: Holding other factors of production constant, there is a point beyond which any additional unit of variable input leads to diminishing returns.

Marginal product

Any additional unit of input would eventually result in diminishing marginal product.

On the contrary, a diseconomy of scale takes place when the cost per unit of output increases with an increasing scale of production. Some of the factors that cause diseconomies of scale are management problems, alienation of workers, and complex industrial relations.

Average Costs

Quantity of Output

X represents economies of scale where average costs are falling as output increases in the end. Y is the lowest average total cost output where productive efficiency is achieved. Beyond point Y diseconomies of scale occur.

Question 6

To achieve economic efficiency, three conditions should be fulfilled. These are:

• consumers to achieve same marginal costs

• suppliers should be operating at the same marginal cost

• consumer’s marginal benefit = supplier’s marginal cost

Monopoly price is usually higher than marginal and average costs, which then loose allocative efficiency and subsequent failure of market efficiency. The diagram does not meet the conditions for economic efficiencies. Apparently, the Price do not equate MR and MC. Deficiency of competition gives a monopolist less incentive to invest in new invention and innovation.

onsumers reflects factor cost of resources used in producing the good. Perfect competition displays high levels of economic efficiency. This is because the price is equal to marginal cost in both long and short run thus the price paid by c

Question 7

Public goods are the goods or services that society is in need of but the private sector cannot provide. This good has the characteristic that it can be consumed at the same time by everyone. In this case, the good is nondepletable and nonexclusable. It is vital for government to allocate sufficient input for the provision of public goods. The problem of free rider makes private organization to avoid provision of public goods. It is possible that consumers fail to contribute sufficiently to production of a public good thus, incentive might not be enough for a private organization to continue producing a good.

The government can intervene through a variety of approaches. The first one is “public sector production” where the government collects taxes for providing a public good e. g national defence. In the same vein, a government can nationalize industries with an intension of preventing monopoly. The other approach is use of antitrust laws, which limits formation of monopolies and further prevents imperfect competition. This antitrust legislation is in form of price fixing and geographic market allocation. Moreover, the government can use regulations where businesses are required to behave in a specific manner. An example is beer manufacturer required to put health-warning labels on the bottle.

Question 8

Market for carpenters will reduce overtime as workers that are more qualified enter the market. This is because the carpenter market is subject to diminishing marginal returns such that with an additional qualified labour, the marginal revenue diminishes at some point. The carpenter market can only absorb certain units of labour beyond which, additional unit would result in losses. In the same vein, market for carpenters would prefer qualified individual against those on apprenticeship simply because of related cost of training.