Running head: ECONOMICS FOR BUSINESS 1

ECONOMICS FOR BUSINESS

Name of Student

Institution Affiliation
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Question 1

a) Using the mid-point formula calculate the price elasticity of demand for petrol and

Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle). (2 Marks)

Q2−Q1
Q 1+ Q2
2
Price elasticity of demand =
P2−P1
P 1+ P 2
2

Price elasticity of demand for petrol

2450−2500
2450+2500
2
=
1.45−1.35
1.45+1.35
2

= -0.285

Price elasticity of demand for Air conditioners

2450−2500
2450+2500
2
=
990−950
990+950
2

= -5.5

b) Is the price elasticity of demand: elastic, unit elastic or inelastic for each commodity

(petrol and Hyundai 7.5kW Inverter Split System Air Conditioner (Reverse Cycle)?
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i) Petrol

Considering that petrol is a necessity good and the absolute value of the elasticity of demand is

less than one, we can conclude that price elasticity of demand is inelastic. Moreover, petrol tend

to have less substitutes.

ii) Air conditioners

In this case, Hyundai 7.5kW Inverter Split System Air Conditioner has a price elasticity of

demand absolute value calculated is greater than one. This means that the product has an elastic

price elasticity of demand considering that an air conditioner is classified as a luxurious good.

c) Suppose the government decides to increase tax for petrol and Hyundai 7.5kW Inverter

Split System Air Conditioner (Reverse Cycle). Use two diagrams to explain the

incidence of the tax increase for each commodity. (3 Marks)

Petrol
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Air conditioner

Notably, judging from the inelasticity of demand for petrol, it means that consumers of this

product consider it a necessity and thus they have to bear with a high tax burden. On the

other hand, an air conditioner can be categorized as a luxury and since its price elasticity of

demand is elastic, consumers buying this good will pay less tax compared to petrol

customers.

Question 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!
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Income Statement
Amount in Amount in
Particulars $ $2
Revenues
Orange $250,000
Beverage $180,000
Mid Year Revenue $100,000
Total $530,000

Expenses
Cashier Wages $80,000
Truck Expenses $80,000
Manager Expense $60,000
Milk Sale Assist Expense $30,000
Equipment Expense $50,000
Motorcycle Expense $30,000
Relevant Opportunity Cost (Working
notes) $147,100
Total $477,100

Net Income $52,900

Considering that James is incurring extra expenditure to start the business, he has to forego his

opportunity as being a salaried teacher. This can be explained by opportunity cost between these

alternatives. It can be calculated as shown below;

Particulars Amount in $
Relevant Revenue Foregone
Loss of Salary per month $54,000
Rental Income $11,000
Interest Income on Saving Account $2,500
Personal Savings
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Total $142,500

Additional Expenditure
Tuition Fees for 3month $3,000
Interest on loan taken from uncle $32,000
Total $4,600
Total Opportunity Cost $147,100

Question 3

i. State the elasticity of the monopoly firm demand curve. (1 Mark)

Elasticity represents the amount of sensitivity required by the monopolist to the price paid.

The elasticity tends to decline from left to right in the demand curve.

P−MC −1
=
P Ed

55−35 −1
=
55 Ed

20 −1
=
55 Ed

−1
0.36=
Ed

Ed=−2.78

Here, elasticity is greater than one and we can make an inference that demand is elastic.
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ii. Considering the figure, examine the benefits of the characteristics of the

monopoly demand curve to ABC Inc. Ltd. (3 Marks)

The monopoly demand curve is elastic but not absolutely elastic, which allows the monopoly

company to sell its goods at a fixed price level, and the monopoly company sets profits above

marginal costs. The inelastic portion of the demand curve, monopoly never succeeds. It

functions on the elastic component, which lets it charge a price above MC. The demand

curve is also the average revenue curve. MR is still less than AR from the diagram, since the

MR curve is below the AR curve, allowing it to create economic gains by charging a higher

price than MR.

iii. Suppose the demand and cost curves result in ABC Inc. Ltd earning an

economic profit. Do you think ABC Inc. Ltd firm will earn profit in the long-

run? Explain your answer. Assume all factors constant. (4 Marks)

The monopoly business gains economic benefits in the long term when the entrance of new

competitors into the market is limited and the production does not rise, so the rates continue

above the overall costs of the company and no competition contributes to abnormal profit.

Indeed, even in the long term, when market barriers remain, monopolists can gain economic

rewards. So even in the long term the monopolist would get his profits. It faces no

competitive challenge as new enterprises cannot enter the market.

iv. Examine the effects of ABC Inc. Ltd on consumers. (3 Marks)

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ABC Inc. Ltd being a monopoly aims to set prices higher than an open economy that decreases

the surplus of customers. When consumers are paying higher rates, it means that they will afford

less. This often results in insufficient redistribution, since prices are higher than marginal costs.

In the other hand, though, the company can profit from economies of scale, which in principle

can be passed on to customers, leading to lower average prices.

Question 4

i. Calculate Happy Land Republic’s nominal GDP and real GDP in 2016

(4 Marks)

(i) Nominal GDP can be calculated as follows:

Thus, the nominal GDP is $14,668,600.

Real GDP can be calculated as follows:

Thus, the real GDP is $6,675,800.

ii) Why does real GDP always defer from nominal GDP? (3 Marks)
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Real GDP corresponds to the market value, measured in constant costs, of all the final products

and services generated in an economy in an accounting year. Complete production for the current

market price is determined using GDP nominal. Since real GDP is not influenced over time by

market fluctuations, real GDP changes reflect changes in the number of goods and services that

are generated.

Inflation will lead to a rise in nominal GDP when real GDP eventually decreases. Inflation and

price trends adjust over time, adding to the disparity between actual and nominal GDP. True

GDP and nominal GDP are also distinct because the transition over time in the average price

trend. Because rates or inflation changes are the big difference between actual GDP and nominal

GDP. If the prices of goods and services had not adjusted over time, the amount of true and

nominal GDP will not be different. Inflation or market trends adjust over time, which means that

actual and nominal GDP vary.

Question 5

i. Use two diagrams to explain the effects of the determinants of aggregate demand

on real GDP in a nation. (8 Marks)

Aggregate demand is determined by consumption, purchases, net exports, and investment. In

an event that there is an increase in these determinants then there is a subsequent increase in

the aggregate demand and vise versa. Moreover, an increase in aggregate demand will trigger

an upward increase in prices and the increase in the real GDP and vise-versa. Consumption

expenditure reflects households' overall consumption budget on purchasing assorted goods

and services to meet their wants and needs. Increased C would result in a direct increase in

AD, as increased C represents an improvement in goods and services demand. It would shift
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the AD curve to the right and raise actual GDP. Investment expense reflects the use of capital

in any company investment. Money investments in the industry would lead to an increase in

demand in that company, which needs further production. This growth in jobs would

contribute to a rise in labour wages. The increased revenue from jobs and higher productivity

would increase people's total demand It means a spike in the I contribute to a rise in AD,

such that AD shifts to the right and thus raises the actual GDP. The government's budget

represents the government's procurement of goods and services. If government purchasing

goods and services rises so the overall market is clearly reflected in increased government

demand. It will move the AD to the right and lead to real GDP growth. The distinction

between exports and imports is net exports. Reduction of imports would decrease the volume

of net exports and raise the value of net exports. A rise in net exports would lead to increased

demand for foreign products and services as a result of increased consumption. It will move

the AD to the right and lead to real GDP growth.

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ii. Suppose there is an expectation of a rapid general price increase in goods and

services in Australia in January 2021. Examine the effects of the anticipated

general rapid increase in price for goods and services. (3 Marks)

If the assumption is that goods' and services' rates will rise, inflation will result and inflation

will be diminishing, and inflation will lower consumer demand by decreasing spending and

expenditure by cutting the supply of capital, which will be accomplished by higher taxes.

Question 6

Use two diagrams one for the money market and another for the goods and services

(Aggregate demand and Aggregate Supply model), to explain the policy that the Reserve

Bank can adopt in order to overcome the effect of increasing money supply on the

economy.
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As a result of the worldwide economic downturn, Covid-19 has taken expansionary monetary

and fiscal steps to resolve this adverse situation in most nations. Increased money supply and

increased spending on services in the goods industry have immediately been the result of such

measures. As the Bank of Australia reserve expects that economic inflation will be

unsustainable, so it imposes contraction monetary policy to limit credit growth or expansion of

the economy's money supply. The government also avoids subsidizing industries and companies

to control inflationary pressure in the economy. The equilibrium of the monetary market is

shown as the crossing point of demand for capital and money supply. The interest rate presently

stands at i0 and sales of 40 billion. With the COVID-19, the financial supply of an economy is

expanded, which means that the central bank adopts a currency strategy of contraction.
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In the figure above, the Reserve Bank or central bank takes the form of higher interest rates

(from 1.5% to 4%) in contractionary monetary policies that decrease the money supply to the

economy. Therefore the curve of money (Ms') supply changes to Ms and money balance

declines to 40 billion AUD. This is the impact on the money market of contractionary

monetary policy. Today, the output of businesses is adversely affected on the commodity

market because of the elimination of government subsidies. Thereby, the GDP balance sinks

to 60 billion AUD, the gradient of SRAS0 moves to the left to SRAS1. Inflationary pressure

is then applied and the economic standard of future GDP restored. In the demand for

commodities, the balance is shown as A, which is 65 and 60 in quantity. The Government is

implementing a contractionary fiscal agenda to minimize aggregate demand. At the meeting

point at which balance price and quantity decrease, the current equilibrium point is achieved.

The decrease in the price of equilibrium allows overall demand to rise.

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