ECONOMIC FOR MANAGEMENT DECISION

Assignment

Question 1

Any production process require the use of resources such as land, labor and capital, which more often than not are limited in their availability, to satisfy human wants which are often unlimited. The society is therefore faced with a scarcity problem satisfying these wants with the limited resources. Society therefore must make choices on what to produce, how to produce it and in what levels in order to satisfy these human wants. The production choices are therefore graphically represented in the production possibility frontier (PPF). The PPF shows all possible combinations of any two goods or services that an economy can produce given the available resources. The PPF represent the production levels when the resources are efficiently being used. Each point on the PPF therefore represents a production level where the society’s level are satisfied using the resource level

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PPF Curve

Suppose an economy can only produce cotton and wheat with all available resources. Then the PPF for this economy will be:

The curve shows all production choices of wheat and cotton that can be produced in this economy with all available resources

Question 1b

The economic system of a country reflects how the country is organized in terms of where the resources are centralized and who makes the decision of the allocation of resources. Each country therefore has a different economic system base on these two factors. The economic organization of a country is also influenced by a number of various factors, amongst which are the available resources in the country, the political organization of the country, the history of the country and governance of the country, it is also these factors coupled with other determinants that set out the Australian economy apart from the Chinese economy. Traditionally, the Chinese economy has been planned socialist that is currently moving towards the market capitalism structure. Ownership is centrally between the government and the private companies following privatization decisions taken by the Chinese government over the years. The Australian economy on the other hand is one that is market capitalist. The Australian economy relies more on the private enterprise with limited government interference in terms of regulative and allocative roles they play.

Question 2

ECONOMIC FOR MANAGEMENT DECISION 4
The conventional cars and the solar powered cars can be said to be substitutes and one car can be used in place of the other. When the costs of production for the solar powered cars is reduced by the new developments, the supply for the cars will be increased which implies that the equilibrium price of the solar powered car will increase (as shown in graph A) significantly. If the price of the solar powered cars increases above the prevailing price of the conventional cars, then consumers demand will increase for the conventional cars. Those that are currently using the solar powered cars will also shift to the conventional cars. The demand for conventional cars will increase thereby increasing the equilibrium price for the conventional cars (as shown in Graph B). The demand and supply shifts for both types of cars will be as follows:

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ECONOMIC FOR MANAGEMENT DECISION 12Supply 2

ECONOMIC FOR MANAGEMENT DECISION 13Supply 1

ECONOMIC FOR MANAGEMENT DECISION 14Supply

ECONOMIC FOR MANAGEMENT DECISION 15Graph B

ECONOMIC FOR MANAGEMENT DECISION 16Graph A

.

ECONOMIC FOR MANAGEMENT DECISION 17ECONOMIC FOR MANAGEMENT DECISION 18

ECONOMIC FOR MANAGEMENT DECISION 19

ECONOMIC FOR MANAGEMENT DECISION 20Demand 2

ECONOMIC FOR MANAGEMENT DECISION 21

ECONOMIC FOR MANAGEMENT DECISION 22Demand 1

ECONOMIC FOR MANAGEMENT DECISION 23ECONOMIC FOR MANAGEMENT DECISION 24

Quantity

Quantity

Question 2b

When the government sets a price ceiling below the market price for the solar powered cars then the market equilibrium for solar powered cars will be distorted. When the market clears, there exist equilibrium and hence a price ceiling below the market price will result in a shortage.

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ECONOMIC FOR MANAGEMENT DECISION 34Supply

ECONOMIC FOR MANAGEMENT DECISION 35

ECONOMIC FOR MANAGEMENT DECISION 36Demand

If the price is set at the ‘ceiling level’ then the quantity that is being demanded at this price is less than the quantity that producers are willing to supply at that price resulting in a shortage. The immediate impact will be queening where consumers are made to wait for the purchase. The extreme impact will be that the producers will otherwise supply the product to only those who are willing to pay extra. Therefore instead of the use of the solar powered cars increasing, there will not be much of these cars available to use to begin with.

Question 3

Suppose the market for radios is in equilibrium at the prevailing price and the government decides to charge a tax on each radio that is being sold. A tax on the seller will likely to increase the price the producer will charge on the consumer for the radio. The producer will however take a share in the tax and hence an increase in the producers price. The relationship between the consumer’s price and the producer’s price can be summarized asECONOMIC FOR MANAGEMENT DECISION 37.

ECONOMIC FOR MANAGEMENT DECISION 38

ECONOMIC FOR MANAGEMENT DECISION 39ECONOMIC FOR MANAGEMENT DECISION 40

ECONOMIC FOR MANAGEMENT DECISION 41

ECONOMIC FOR MANAGEMENT DECISION 42

The buyers will therefore be paying higher than the initial price for the radio while the producers will be faced with a price lower than the initial price for the radio. The overall impact of a tax will be a deadweight loss comprising of a loss in consumer and producer surplus. Consumer surplus is the gain for a consumer when they pay less than the amount they are willing to pay. In this case, the price of the consumer after that tax is way above the amount they are willing to pay at the equilibrium price. The producer also experiences a loss in their surplus because they are supplying the product at a price below that which they it is costing them to produce it which is equivalent to the equilibrium price. Producer surplus exists when the producer sells a product for a price higher than the amount it cost them to produce it. The loss in consumer and producer surplus represents a deadweight loss in the economy. This loss represents the burden of tax upon the market and economic inefficiency as a result of the tax. Deadweight loss ids therefore the total loss to the society as a result of the inefficiency caused by taxation.

Question 4

  1. The percentage change in price for both groups is 10% equal to the discount allowed. The percentage quantity change for both group A and group B is given by:

Group A:
ECONOMIC FOR MANAGEMENT DECISION 43

Group B:
ECONOMIC FOR MANAGEMENT DECISION 44

Therefore the price elasticities for the groups are:

Group A:ECONOMIC FOR MANAGEMENT DECISION 45

Group B:
ECONOMIC FOR MANAGEMENT DECISION 46

  1. If the discount is effect, both groups will experience change in revenues. Since group A as price elasticity of 0.625 (inelastic) then the total revenue for the group is likely to be low. Group B has a price elasticity of 1.25 (elastic), the consumer are more sensitive to changes in prices hence a greater revenue levels.

  2. If the company wishes to increase the total revenue, then it should impose the discount policy only on Group B since its price elasticity suggests that it will increase the revenue levels. Putting the discount on group A will instead reduce the revenue levels.

  3. When another cinema opens up in the area, the local cinema is likely to be engaged in a price competition with the new cinema. The demand elasticity is therefore bound to increase as the buyer will have increase choices to choose from. The presence of a substitute in the market (new cinema) will increase the responsiveness the consumer will have on any price changes hence a higher price elasticity of demand. This is because the consumers can easily switch from one cinema to the other should there be even the slightest change in price.

Question 5

  1. The Cost schedule

Total Product

Total Fixed Cost (TFC)

Total Variable Cost (TVC)

Total Cost (TC)

Marginal Cost (MC)

Average fixed cost

Average variable cost

Average total cost

0

0

  1. For a firm that is producing in a perfect market, then the firm is the price taker and reacts to the market force. For such a firm in the perfect market, the profit maximization level of production is that level of production for which the Marginal revenue is equal to the marginal cost of the firm. The marginal revenue is the additional revenue the firm enjoys for selling an extra unit of the product. A perfect competitive market shows that MR is equal to the equilibrium price. Therefore at the profit maximization level, the MC should be equal to Price. Therefore if the price charged by the firm is $35, then the level of production equal to this amount is approximately 7units (from the table above).

  2. ECONOMIC FOR MANAGEMENT DECISION 47