ECO415 - ASSIGNMENT 1 (50MARKS@30%)

Name : NUR DIANA BINTI RAMLY

Matric No. : 2021110417
Programme Code : RBA2432B

INSTRUCTION:
This assignment consists of two (2) parts. Part A is structured question and Part B is
case study. Please provide the answers in BLUE FONT, and DO NOT REMOVE the
marks allocation.

PART A (30 MARKS@20%)

The following table shows the demand and supply of Bob Pizza and the amount of
good Z demanded by residents in Arau town.

Table 1: Demand and supply of Bob Pizza

Price of pizza Quantity Quantity supplied Quantity

(RM) demanded for of pizza (unit) demanded for
pizza (unit) good Z (unit)

20 100 500 600

16 200 400 500
12 300 300 400
8 400 200 300
4 500 100 200

a. Using the data above, plot the demand and supply curve of Bob Pizza. State the
equilibrium price and quantity of Bob Pizza.
(5 marks)
Price of pizza (unit)

DD SS

20 ----------------------------

P* 12 - - - - - - - - - - - - - - - -- - E
--------

4 ----------------------------

0 Q* Quantity

b. Following the enrolment of students in UiTM Arau, the demand for pizza rises by
200 units at each price level.
Show this effect in a new diagram and determine the new equilibrium price and
quantity of Bob Pizza.
(6 marks)
PRIZE OF PIZZA (RM) QUANTITY DEMANDED QUANTITY SUPPLIED
FOR PIZZA (UNIT) OF PIZZA (UNIT)
20 300 500
16 400 400
12 500 300
8 600 200
4 700 100

c. Suppose the government imposes a price of RM4 per unit. Indicate this action on
the diagram in question (a) and name this action taken by government. What is
the effect of this action to pizza market?

The government imposed a ceiling price at RM4 per unit. So, the quantity
demanded for pizza increases which the demand curves will shift to the right.
Also, the equilibrium demand and supply will increase.
(2 marks)

d. Besides the enrolment of students, explain any other two (2) factors that can bring
about an increase in the demand for pizza.

First factors that can bring about an increase in the demand of the pizza is when
price increases, the quantity of demand for falls, that also means that when prices
drop, demand will grow. People base their purchasing decisions on price if all
other things are equal. The exact quantity bought for each price level is described
in the demand schedule. The demand for pizza play a big role in demand as they
can always determine when to supply out their goods and knows the quantity
demanded. It’s then plotted on the graph to show the demand curve. Second is
when the income of the consumer rises, the quantity demanded also increases.
 But if your income doubles, the consumer will not always buy twice as much the
good and services of the Bob Pizza.

(5 marks)

e. Calculate the price elasticity of supply if the price rises from RM16 to RM20.
Interpret you answer.

(500 – 400) / 400

------------------------------- x 100%
(20 – 18) / 16

= 100 / 400
------------ x 100%
2 / 16

= 0.25
------------ x 100%
0.125

= 200

(4 marks)

f. Calculate the cross elasticity of demand for good Z when the price of pizza
decreases from RM12 to RM8. Determine the relationship between good Z and
pizza and give example of good Z.

ε x = (300-400) /400
------------------- x 100
(RM8 – RM12) /RM12

= -0.25
---------- X 100
-0.33
= 0.75 positive cross elasticity

Therefore, the relationship between good Z and pizza are positive because of it
substitute goods.
Example of good Z is cheese.

(5 marks)
g. If the consumers’ income increased by 33% and quantity demanded for pizza
increased by 50%. Calculate the income elasticity of demand and identify the type
of good for pizza.

εy = 50%
----
33%
= 1.5

Therefore, the type of goods for pizza is luxury goods because of its good
promotional strategy and the target group will be those who belong to the higher
income bracket.

(3 marks)

PART B (20 MARKS@10%)

Why South Korean cars are cheaper than others

South Korean cars are more affordably priced than other makes due to their lower
cost of production and higher output volume, said Ahmad Ibrahim, director of Naza
Kia Sdn Bhd, the franchise holder for the Kia make in Malaysia. “The Hyundai group
has a production of 2.5 million unit annually compared with Proton. The South
Korean manufacturers have economies of scale so they are able to produce their
products not at a cheap but more competitive price.”

“With the bigger volume, the company would be able to grow its profit,” he said,
adding that Naza Kia did not see itself as a threat to Proton as its main focus was on
the multi purpose vehicle segment. It was reported that Proton’s declining vehicle
sales was partly a result of the ‘unexpected’ entry of cheaper South Korean
completely-built-up units into the local markets.

Ahmad said South Korean cars were also more affordably priced as certain models
shared the same platform, for instance, Hyundai and Kia. Some foreign carmakers
believed to have set lower prices for cars destined for the local market than for
exports elsewhere, a practise which has drawn criticism from other carmakers, who
says the practise could be stabilized car prices in the country.

Source: Adapted from The Star, Jan 28, 2004.

Questions:

1. Based on the article, explain two (2) reasons why South Korean cars are cheaper
than other car makers.

1. Economics of scale
a) Managerial Economies
 Managerial economies refer to the departmentalization and the employment
of professionals.
 Each department’s is under charge of an expert. It will sure higher productivity
and greater efficiency to increase production and lower the costs.

2. Lower cost of production

 When South Korean do a large scale of production so the cost of production
will decrease.
 Cost of production decrease can be cost the South Korea cars are cheaper
than other car makers.

(4 marks)

2. “With the bigger volume, the company would be able to grow its profits.” Explain
the above statement.

This statement just describes about determining and focusing on profitability at the
beginning, or start-up, of a company, is essential. On the other hand, growth of
market and sales is the means to achieving that initial profitability. Identifying growth
opportunities should become the next important item on any company’s goal list after
a company moves beyond the start-up phase.

Growth for a business is essentially an expansion, making the company bigger,

increasing its market, and ultimately making it more profitable. Measuring growth is
possible by looking at some pertinent statistics, such as overall sales, the number of
staff, market share, and turnover.

Though the present profitability of a company may be good, growth opportunities

should always be explored since they offer opportunities for greater overall
profitability and keeps analysts and potential, or current, investors interested in the
company.

With the bigger volume, the company would be able to grow its profit. I agree with
this statement because when the price increase, the volume will increase. The profit
margin of the company will directly be affected by the sales volume of the item. The
higher the price, the higher the volume, thus the profit of a company would able to
increase. Therefore, in order to achieve high profit margin, the volume have to
increase.

(3 marks)

3. Discuss two (2) sources / factors of economies of scale in relation to car

manufacturing.

The sources of economies of scale is the possibility of purchasing inputs in a lower

per-unit cost when they are purchased in large quantities. For example when a
company fixed cost is 1000 and produced 10 units, the cost per units is 100 but if
company produced 50 units, the cost per units is 20. South Korean cars are more
affordable priced than other makes due to their lower cost of production and higher
output volume. Monopsony power is when a company buy so much of a product that
it can lower the price of product. Fixed cost of production can be spread over a larger
number of units as the volume of units produced increase. For example, ‘with the
bigger volume, the company would be able to grow its profit’. Naza Kia main focus
was on the multipurpose vehicle segment. Cost of production will drop due to the
introduction of more firms. South Korean cars were also more affordably priced as
certain models shared the same platform, for instance, Hyundai and Kia. Any input of
resources obtained at a lower cost can help reduce marginal cost.

(5 marks)

4. Is there a limit to economies of scale? Explain and give examples.

Yes, because the economies of scale is means that to reduce costs per unit that
arise from increased total output of a product. Management technique and
technology have been focusing on limit to economies of scale for decades. Set-up
costs are lower is due to more flexible technology and equipment is priced more
closely to match production capacity. Outsourcing of functional services make costs
more similiar across business of various sizes. These functional services include
accounting, human resources, treasury, legal and information technology. For
example, Toyota can produce many different models. They produce 60 per cent of
final vehicle value added and employ 3.5 times as many worker as assembly.
Therefore, they can increase the output of car within using the low production cost as
possible. Other than that, Hyundai is the first Korean developed car to be exported.
They also entered the United States market and set a record for selling the most
automobiles in its first year of business in the United States compared with other car.
So the Hyundai group has a production of 2.5 million units annually compared with
Proton and their car is lower price than others. Lastly, if the industry of automobile
using the professional technique and technology then the production of car will
increase within using the lower of production cost.

(3 marks)

5. It was reported that Protons’ declining vehicle sales was partly a result of the
‘unexpected’ entry of cheaper South Korean completely-built-up units into the
local markets.
Price(RM)
Using a diagram, explain how this situation affects the market for Proton
vehicles.

P
0
D
1D Quantity
0 Q Q0 Proton
of
0 1 cars

Proton’s declining vehicle sales was partly a result of the “unexpected” entry of
cheaper South Korean completely-built-up units into the local market. It caused by
the change in expectations of consumers. Expectations will affect the consumers’
buying decisions.

The expectation of consumers on future events would give an impact on the current
demand. The higher the expected future price of a good, the current demand for that
good will be higher. In contrast, the lower the expected future price of a good, the
current demand for that good will be lower.

For instance, if the consumers anticipate that the price of proton cars will constant
and wouldn’t fall when the South Korean cars was cheaper in the local market, they
will choose to purchase South Korean cars at the time.

So, the current demand for proton cars is lower and demand curve shifts from D0 to
D1. Quantity demand for the proton cars also had decreased from Q0 to Q1.
(5 marks)