Faculty of Higher Education

Unit Code HI5003

Unit Name Economics for business

Your campus and
class/tutorial number T3
(e.g. M2)
Your Lecturer/Tutor  Dr. Sudarshan Chalise

Assignment Number 03

Is this a Group or Individual assignment

Individual Assignment?

Due Date 23rd February, 2021

Declaration

1. This assignment is my/our own work. We have NOT copied any part of it from any
other student’s work, neither from our own work in any other subject/unit, whether
at Holmes Institute or any other Educational Institution.

2. I/we have cited all sources from which data, ideas, diagrams, facts, or words
(whether quoted directly or paraphrased) were taken.

3. This assignment was prepared specifically for this unit only and has not, nor will be
used for any other unit.

4. The reference list is accurate and in Harvard referencing style and a true statement
of the sources I/we have personally read and used.

Student name/s Student number Which section(s) did

[must be correct] each person work on
Aseem GANDHI All assignment is
APS3809 completed by myself

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Table of Contents
Introduction:.........................................................................................................................................3
Answer 1..........................................................................................................................................3
The price elasticity of demand for petrol and Hyundai 7.5kW Inverter Split System Air
Conditioner...................................................................................................................................3
Is the price elasticity of demand: elastic, unit elastic or inelastic for each commodity?.......3
Explain the incidence of the tax increase for each commodity...............................................4
Answer 2..........................................................................................................................................4
Based on your calculations of accounting profit and economic profit, would you advise
James to return to his teaching job or keep his kiost job? Show your work!.........................4
Answer 3..........................................................................................................................................6
State the elasticity of the monopoly firm demand curve..........................................................6
Examine the benefits of the characteristics of the monopoly demand curve to ABC Inc.
Ltd.................................................................................................................................................6
Do you think ABC Inc. Ltd firm will earn profit in the long run? Explain your answer...........6
Examine the effects of ABC Inc. Ltd on consumers.................................................................7
Answer 4..........................................................................................................................................7
Calculate Happy Land Republic’s nominal GDP and real GDP in 2016................................7
Why does real GDP always defer from nominal GDP?...........................................................8
Answer 5..........................................................................................................................................8
Use two diagrams to explain the effects of the determinants of aggregate demand on
real GDP in a nation....................................................................................................................8
Examine the effects of the anticipated general rapid increase in price for goods and
services.......................................................................................................................................10
Answer 6.........................................................................................................................................10
Use two diagrams one for the money market and another for the goods and services
(Aggregate demand and Aggregate Supply model)..............................................................10
Conclusion:........................................................................................................................................11
References:........................................................................................................................................11

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Introduction:
The aim of this report is to understand the importance of the economics in the
organization, with the help of the in-depth knowledge about the factors which will
influence the price elasticity of the product, analysing demand and supply, and the
resources for the product. This will help business in maximum usage of the resources
not only that but the allocation will be more accurate as the decision is based on the
analysing the macro and micro economic concept of the economics. This report will
help user to analysis the need of economics understanding in the business. Another
motive behind writing this report is to analyse how business decide that which product
need to produce and how much company can earn from the market.
Answer 1
The price elasticity of demand for petrol and Hyundai 7.5kW Inverter Split System Air
Conditioner
Percentage change in quantity=

(Q 2−Q 1)
x 100
(Q 2+Q1)/ 2

Percentage change in price=

( P 2−P 1)
x 100
( P 2+ P1)/ 2

Based on the formula calculation of the price elasticity for petrol;

2450−2500
Percentage change in the quantity = x 100 = -2.02%
(2500+2450)/ 2

1.45−1.35
Percentage change in the price elasticity = x 100 = 7.14%
(1.45+1.35)/2

From the calculation the price elasticity of demand = -2.02/7.14 = -0.28%

Based on the formula below is the calculation for Hyundai 7.5kW Inverter Split
System Air Conditioner:
2000−2500
Percentage change in the quantity = x 100 = -22.22%
(2000+2500)/ 2

990−950
Percentage change in the price = / x 100 = 4.12%
(990+ 950)/2

Therefore, price elasticity for demand is equal to -22.22%/4.12% = -5.39%

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Is the price elasticity of demand: elastic, unit elastic or inelastic for each commodity?
From the calculation of the demand of petrol and Hyundai it is analysed that the
prices elasticity with the demand of petrol is inelastic, because if there is a change in
the price by 1 than there will be change in the demand of petrol by 0.28, which means
there is a slight change in the demand with the change in the price, due to which it is
stated that there is an inelasticity. on the other hand, the outcome derives from the
calculation of Hyundai suggest that there is an elasticity of the demand, because the
outcome is 5.39% which is more than one, so if there is a slight change in the price it
will impact more on the demand. Thus, in the case of Hyundai there is elastic
demand.
Explain the incidence of the tax increase for each commodity
When there is an increased in the tax it will fluctuate the prices, not only that but it will
be burden to the seller and the buyer, as the tax impact were seen in the price due to
which the consumer needs to pay more price for the product due to which there is a
change in the elasticity of the demand and this will affect the profit earning of the
seller. The supply curve will move towards left side as there is a raising in the tax rate
by the government, at the initial stage the tax raise is the burden on the seller, but
with the raise in the tax the price of the product also increased which will prove as a
burden to the consumer buying(economics.utoronto, 2021).
Following is the diagram which explains the shifting in the curves due to the increase
in the tax, and its impact to the demand of petrol and the Hyundai:

From the diagram it is been analysed that with the changes in the tax rate the
producer burden in the petrol is less on the producer but more to the consumer
burden, while on the other hand producer burden is more in the Hyundai than in than
on the consumer.

Answer 2
Based on your calculations of accounting profit and economic profit, would you advise
James to return to his teaching job or keep his kiost job? Show your work!
The calculation for the accounting profit and economic profit is below:
For calculating total revenue = Revenue- Orange section + Revenue- Beverages
Section + Mid-year revenue 

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= 250,000 + 180,000 + 100,000 

= 530000

Cost from business:

Particulars Amount

Truck expenses 80000

2 cashier expenses 40000

Milk sales assistant expenses 30000

Manager expenses 60000

Equipment expenses 50000

Motor expenses 30000

Interest expenses 3200

Total 293200

Accounting profit = 530000-293200

=236800

Opportunity cost calculation:

Particulars Amount

Tuition fees 6000

Rent 11000

Holiday money 75000

Salary 54000

Saving 50000

Interest on saving 2500

Total 198500

Economic profit = Accounting profit – Opportunity cost

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= 236800 - 198500

= 38300

From the calculation of the profit, it is analysed that there is a positive amount which
stated that economic profit is positive, hence James should keep his Kiost job.

Answer 3
State the elasticity of the monopoly firm demand curve
Based on the diagram it is observe that there is an inelasticity, because the changes
in the demand is less than one. The calculation of the demand inelasticity is
explained below:
dQ /Q
E=
dP /P
dq = demand quantity
Q = quantity
dp = demand price
= -0.5/0.833 = -0.6
Examine the benefits of the characteristics of the monopoly demand curve to ABC
Inc. Ltd
In monopoly market supplier enjoys the maximum profit, because there is no
substitute product is available in the market. company can achieve maximum profit
when the marginal cost is equal to the marginal revenue.
From the given diagram it is identified that at 15 units the average total cost is equals
to 45, where as average revenue is equals to 55. Thus, the total profit at 15 unit for
the company will be 150$, from that it is been analysed that ABC Inc. Ltd will make
supper normal profit.
From the result it can be observe than when a firm is having monopoly in the market
at that time it is easy for the company to achieve super profit, not only that but the
excessive profit can be used by the company in research and development process.
So that company will work with utmost efficiency in the market. therefore, company
who achieve monopoly in the market is having power related to the price controlling,
only government can control the firm which have monopoly in the market so that fair
price is given by the company to the product in the market(Candela, 2021).
Do you think ABC Inc. Ltd firm will earn profit in the long run? Explain your answer
The firm who has monopoly in the market able to achieve profit for a certain period of
time, once there is an entry of the other firm the monopoly of the company will no
longer exist. Though in the market monopoly cannot exist for a longer duration,
because with the increase in the profit margin of the company, other also motivated to
work on that idea or try to generate a substitute product so that they can also earn
maximum profit from the market. Hence the firm enjoy monopoly until the new market

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entry is barrier, after that the profit will be distribute and company need to work on the
strategy which will help them in growing in the market.
Examine the effects of ABC Inc. Ltd on consumers
The benefits which consumer get is of better quality of the products, not only that but
the products give them utmost satisfaction because company has done research and
development for making a product, so the quality and the effectiveness of the product
is good. The resources which are used by the company is of good quality, so the
issue related to the low-quality goods will not be a problem for the consumer. The
disadvantages of the monopoly are exploitation of the consumer, as the company is
having monopoly at that time company is the price maker so there is a chance that it
will exploit consumer for achieving abnormal profit from the market. another
disadvantage of the monopoly to the consumer is of limited option available in the
market, so consumer need to buy even if they didn’t like the product that much or the
cost of the product is higher.
Answer 4
Calculate Happy Land Republic’s nominal GDP and real GDP in 2016
Below is the calculation of the nominal GDP (Gross Domestic Product)
Formula for calculating nominal GDP = (Production in 2016 *Price of 2016)
Particulars Amount

Used car sales (6000*2500) 15000000

Factory components sales (10000*1200) 12000000

Cloth sales (14000*35) 490000

Beef sales (1800*12) 21600

Milk litres sales (6000*2.5) 15000

Computers sales (2500*800) 2000000

Printers sales (400*355) 142000

Raw materials for tractor assembling 1335000

plant sales (4450*300)
Hence the nominal gross domestic product (GDP) = 21003600

Below is the calculation of the Real Gross domestic product (GDP)

Formula for calculating Real GDP =  (Production in 2016 * Price of 2015)

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 Used car sales (6000*2000) 12000000

Factory components sales (10000*500) 5000000

Cloth sales (14000*20) 280000

Beef sales (1800*10) 18000

Milk litres sales (6000*1.3) 7800

Computers sales (2500*500) 1250000

Printers sales (400*300) 120000

Raw materials for tractor assembling plant 1112500

sales (4450*250)

Why does real GDP always defer from nominal GDP?

In nominal GDP is calculated based on the current price, the fluctuation in the prices
and the other factors which influence the prices can not be taken into consideration
due to which the figure of the nominal GDP will be more than the Real GDP. The
nominal GDP calculation is useful at the time of calculating the quarterly based
quantity and the price, not only that but the nominal GDP will be less reliable because
the factors which influence the prices is ignored. On the other side real GDP will be
more reliable, because for the calculation of the GDP the base price that is past year
price is taken into consideration which will includes all the factor which influence the
price. Due to this reason, there is a difference between nominal GDP and real GDP.
Answer 5
Use two diagrams to explain the effects of the determinants of aggregate demand on
real GDP in a nation.
The aggregate demand is affected due to the various reasons, from that the main
element which shift the aggregate demand is of the consumption of the product done
by individual. If there is an increase in the prices of the product the consumption for
that particular product will be change and it shift the demand slope. In the growth of
the gross domestic product demand plays a crucial role, if the consumption is
circulated smoothly than there will be minimum effect in the aggregated demand and
in the GDP but with the changes in the income or any other factor the consumption of
the product is influence than it will result into the changes in the aggregate demand.
Another reason behind the fluctuation in the real GDP is due to the infrastructure, the
company’s investment in the country also affects the gross domestic product, with the
increase in the investment there will be a better infrastructure, the opportunity of the

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new job, will increase which will result into increase in the income and by increasing
in the income the demand for the product will increase which will shift the aggregate
demand curve in the market below is the image which will help in understanding the
change in the long run aggregate supply with the changes in the price level of the
product in real gross domestic product(Hassan, 2018).

Following is the graph which will explain how productive capacity influence the real
gross domestic product:

With the increase in the investment the efficiency of the productivity will also increase
due to which the aggregate demand slop will fluctuated, in influence the real gross
domestic product the government is also play a essential role, for example if the tax
rate is increased on the product than the demand for the product will reduce which
will result into the fluctuation when there is a decrease in the aggregate demand
curve it will shift towards right side which will result into the expansionary policy.
When the aggregate demand curve moves from right to left at that time it is known as
contractionary policy where the real gross domestic product shows higher results.

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The other factors which affect the aggregate demand curve is net export of the
product and the uncertainty prevails in the market.
Examine the effects of the anticipated general rapid increase in price for goods and
services
When there is an increase in the production cost of the goods and service, it leads
towards the increase in the borrowing cost which will result into the rapid increase in
price for goods and services. With the increase in the inflation rate the value of
money will reduce, in that case consumer need to pay more for smaller quantity
which will leads towards hyper inflation in the country, and there are chances that rich
become richer and poor become poorer. When there is unbalanced in the inflation
government need to pull money from the market otherwise it will cost a lot to the
gross domestic product of the country.
Answer 6
Use two diagrams one for the money market and another for the goods and services
(Aggregate demand and Aggregate Supply model)
With the changes in the interest rate, there is a change in the borrowing pattern of the
consumer, which means if reserve bank will lesser the interest rate then company will
boroow more mone from the bank because the interest is very less on the amount
which is borrowed by the company and individual. This will shift the demand curve
because the demand for the loan will increased, thus due to increase in the inflation
or in the liquidity the demand will be increased, and the inflation rate from cost price
index will be in between 65 to 120. Following is the graph which shows the changes
in the aggregate demand slope:

for controlling this situation reserve bank will increase the interest rate on the
borrowed fund which will result into the balance between the growth and the inflation.
With the help of various reason government can do this, for example by purchasing
the securities from the market, by increasing in the cash reserve ratio and reverse
repo rate ratio so that the bank can not give more borrowed fund, not only that but by
increasing the interest rate given to the bank, can also helpful in controlling the

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inflation in the country. Following is the graph which shows the change in the supply
due to the change in the inflation rate;

From the diagram it is been analysis that with the changes in the interest rate there is
a change in the aggregate demand, and it will help in balancing the situation(Dean et
al., 2020).

Conclusion:
With the help of diagram presentation and the in-depth knowledge about the
aggregate demand and supply of the product it is analysed that for a company it is
very important to maintain equilibrium between the price and the demand because
these are the factors which influence the demand and supply slope, not only that but
how much change in the price will affect the change in the demand is also
understood. From the whole study I can conclude that it very essential for the
business to have in-depth analysis of the micro and macro economics so that it will
help in making accurate decision related to the product cost and price.

References:
CANDELA, L. 2021. Introduction to Monopoly. A monopoly market is characterized
by the profit maximizer, price maker, high barriers to entry, single seller, and
price discrimination.
DEAN, E., ELARDO, J., GREEN, M., WILSON, B. & BERGER, S. 2020. Building a
Model of Aggregate Demand and Aggregate Supply. Principles of Economics:
Scarcity and Social Provisioning (2nd Ed.).
ECONOMICS.UTORONTO 2021. The Incidence of Commodity Taxation. portrays
the situation for a typical commodity that might be taxed.
HASSAN, S. 2018. Long run energy demand and its determinants: A panel
cointegration analysis of the Association of Southeast Asian Nations-5.
International Journal of Energy Economics and Policy, 8, 270.

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