Managerial Economics Essay Example

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    Business
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    Assignment
  • Level:
    College
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ECONOMICS 7

Managerial Economics

Managerial Economics: Assessment 1

  1. In the past decade, advancement in information technology and computers has witnessed increased consumption of technology products such as laptops. Indeed, the ability and the willingness to purchase laptops have been overtaken by the rate of technological improvements in the sector. With increase in the levels of technology, the production costs of laptops reduce as demand for the items increase. This implies that manufacturers are producing more laptops at a cheaper cost. As a result, the demand for the laptops increases and the equilibrium price point on the demand curve shifts to the right and downwards.

Managerial Economics

As shown in the figure above, technological improvement in computer technology leads to more quantities of laptops produced at a cheaper price. The price falls as the quantity of the laptops increases. The unit price falls from P1 to P2 as the quantity increases from Q1 to Q2. On the other hand, the equilibrium price point changes from point X to Y which is a shift outwards and downwards.

  1. Changes in prices of similar goods triggers a certain responsiveness to demand governed by the price elasticity of demand. In periods of economic growth, consumer incomes generally increase leading to greater consumption of certain items or shift in consumption to superior goods. A good is income inelastic if its income elasticity of demand is between 0 and 1 (>0 good X<1). Given that good X has income elasticity of demand at 0.89 it shows that it is a normal necessity. When there is a 1 percent change in income, there is a corresponding 1 percent change in demand of the good. Increase in income of consumers will have a substantial change in consumer consumption since consumers tend to buy more quantities of the item (good X). As a result, the market responds by shifting the equilibrium price upwards and outwards to the right.

Managerial Economics 1

As shown in the graph above, rise in income will increase the prices of good X from P1 to P2 due to increase in the quantity of demand for the product. Consequently, demand shifts from D1 to D2 as equilibrium price point O shifts outwards to the right and upwards to a new point P.

  1. Minimum wage, when capped in the labor market, increases income to families especially among the low-wage earners. While most of the low wage families may earn income just above the poverty line, most of the low wage jobs become redundant. As a result, income of many of the workers will fall and many more will be out of employment. In the overall employment, there will be a slight fall in the number of low wage workers who will be employed.

Managerial Economics 2

As shown in the figure above, the point of intersection R is determined by competitive wage (Wc) and employment (Ec). However, when minimum wage is set at Wm, employment is reduced to point Em. This contraction in employment by distance XY as opposed to YZ which could have resulted in increased employment rate. Setting a minimum wage is likely to draw more people into available jobs just to earn wages that will elevate them from the poverty threshold. However, employers will deem the higher wages as additional costs that eats into their profits and will likely reduce working hours or job opportunities. On the other hand, higher wages may mean increased cost of producing items which will trickle down to the consumers. Therefore, setting a minimum wage above the competitive market wage rate will contract employment by reducing the number of available job opportunities.

  1. Costs at different levels of output

Total cost

Fixed cost

Average Fixed Cost

Variable cost

Average variable cost

Average total cost

Where: AFC=FC/O; VC=TC-FC; AVC=VC/O; ATC=AFC+AVC; MC=ΔTC/1 unit

Total cost

Marginal Cost

At output level of 5 units the marginal cost is = 700

  1. Recession happen when financial market undergo a period of crises. During this period, customers of certain normal goods suddenly warm up to its lower substitutes in order to maintain consumption levels. It is true that customers during recession buy low priced food such as instant potatoes, rice and beans, pancake mixes and Spam instead of their normal organic alternatives. Moreover, there is a fall in the level of incomes which means that, for inelastic goods, the substitutes remains inelastic too. Recession increases consumption of normal inferior goods whose income elasticity of demand is greater than 0 but less than 1.

Managerial Economics 3

During recession, product A, which is usually expensive compared to its close substitutes, product B, are foregone by rational customers in favor of the latter. As a result, more consumers to switch from product A which is a combination of expensive food to product B which is a combination of instant potatoes, rice and beans, pancake mixes and Spam. As the quantity demanded of product B increases, the producers will produce more and in return make more sales.

6. Total revenue increases when prices of items rise if demand is inelastic. Consumers will continue buying as long as it has not close substitute. For example, if the bus monopolizes road transport from Abu Dhabi to Dubai, then commuters have no alternative but to accept the increased bus fare. In this case, increases in price of passenger commuting between the two locations will have a minimal effect on the demand for bus service.

Managerial Economics 4

As shown in the graph above, the bus service is price inelastic which means that as prices rise, there is a minimal change in quantity demanded. The existing customers will still keep the business rolling even after a few who opt to seek substitutes or competitors. As the price point changes from X to Y, the price effect will always be higher the quantity effect which is to the benefit of the bus service company, RTA. The price effect will lead to increase in total revenue of the bus company.