NAME: FUNGAYI JOHANE MAJURIRA

STUDENT ID: 21981559

COURSE: MICROECONOMICS

COURSE CODE: BBF 231

PROGRAM: BACHELOR OF BUSINESS IN ACCOUNTING

LECTURER MR.A.SALASINI

DATE: 10 DECEMBER 2020

QUESTION 1

Define the following economic terms according to principles of economics.

a) Scarcity
Scarcity is the situation whereby the more of something is limited in supply.
Scarcity emanates from the fact that we have unlimited wants which are
insatiable since people always demand more against the finite resources. For
example, if we look at the availability of arable land it is limited in its supply this
means we have to make choices on which crop to grow due to scarcity. The
need to make choice on the right full use of resources so as to satisfy as much
needs as possible is fundamental in economics. With this scarcity is considered
as the fundamental economic problem.

b) Opportunity cost
Opportunity cost is the next best alternative forgone by committing resources to
something else. When a resource is committed to something else it will not be
available for use in the next best alternative. If, for example, you invest capital on
casino business and earn a profit of 20% on the invested amount but the next
best alternative if that capital invested somewhere else gives a profit of 15% then
the opportunity cost of the invested amount is 15% profit that it bears when
invested in the next best alternative.

c) Substitutes
A substitute is a good which can be either physical or a service which can save
the same function as another good. That is, it is a good that can work in place of
another for example margarine and peanut butter they can both be used on
bread. This means if the price of peanut butter increases with big margin then
people can use margarine as alternative. This will make the two to be substitutes
goods.

d) Inflation
 Inflation is persistent increase in prices in the economy. It is defined as sustained
increases in prices of goods and services in an economy. Inflation will result in
money to lose its value that is it will not buy the same quantity of goods it used to
buy yesterday. Thus inflation will result in the increase in cost of living.

e) Unemployment
Unemployment is defined as people who are able to work and are actively
looking for the job but they are failing to get one. It is measured by dividing the
number of unemployed people by the total number of people in the work force.

f) Economic bad
An economic bad is a good with a negative economic value to the consumer. If
we consider refuse it can be regarded as economic bad because one has to pay
for its collection to dumping site but in return the consumer will get something.

g) Capital/open market economy

This is an economy where private players own the means of production and the
government have minimum role to play. What to produce, how, when and for
whom to produce is determined by law of demand and supply rather than central
government. Companies venture into business with the view of making profit
therefore goods are sold at the highest price’s consumers are willing to pay.

h) Command economy
A command economy is where a central government makes all economic
decision regarding what to produce, how to produce, when to produce, for whom
to produce. All means of production are owned by government. The system does
not rely on law of demand and supply when allocating resources.

i) Resources
A resource is an asset or a service used to produce other goods. It can be
money, machinery or land being employed to produce other goods.
j) Capital

Capital is money or assets used to produce goods and services; it includes all
man-made resources that are used for making wealth. These resources include
machinery tools, transport, and building to mention but just few.
QUESTION THREE (2)

a) A household’s decision about the quantity of a particular output to demand

depends on?

There are various factors a house hold takes into account when deciding on quantity to
buy about a particular good. These factors include price of the commodity, price of
related goods, income for consumer, taste and preference and habits and future
expectation.

Price of the commodity- for a normal good there is an inverse relationship between price
of a good and its demand. The lower the price the higher the demand and the higher the
price the lower the demand. Thus, when we have a downward sloping demand curve.
So, when the price is low the house hold tends to buy more of that good.

Price of the related goods – there are goods which are used complementing one
another such as sugar and tea leaves. If the price of sugar goes down house hold tend
to consume more sugar and the demand for tea leaves will naturally increase.

Household income- consumers spend more of their income, when income increases the
demand of a normal good will increase, and when income decreases the demand for
normal good will decrease.

Taste, preference and habits- the demand also determined by habits, taste and
preferences. The change of these will result in change of demand. The habit-forming
products such as cigarettes they will be on demand as long as the one is still in that
habit but the moment the habit stops the demand for the product will drop in that
particular house hold.

Future expectation- house hold can have different expectation about a product. If the
house hold anticipates that the price of the commodity is going to rise they tend to buy
more today. If there is expectation of future shortage they tend to buy more today.
b) Using the graph below answer the following questions on demand

a) What causes the demand curve to shift out wards or inwards, show graphs?

When a demand curve shift to the right it denotes increase in demand and is
determined by the following:

Income of buyers-if income raises people will afford to buy more goods

Using the diagram above at price of $4000 demand curve D is showing that five million
of product says X is being consumed at the same price more will be demanded when
people’s income raise and this cause demand curve to shift to the right to D 2this means
demand has increased and is being fueled by change in income. More units are now
demanded and there are one million growths in demand. If the income shrinks people
tend to buy less this will result in demand curve to shift from DD to D 1D1and demand
drops from five million to four million.

Consumer trend- during the period of covid 19 more masks are being demanded since
people are scared from contracting novel corona virus. The demand of mask shifted to
the right showing the growth in demand. The demand curve has shifted outwards as
showing by graph above from DD to D2D2. If novel corona virus subsides the demand for
mask will decrease and the demand curve may shift from DD2 to DD.

Expectation in future price: if consumers anticipate that there is going to be a raise in

price, they tend to buy more of product at a given price even if it does not change. Using
the diagram above if consumer anticipate that price is raising from $4000 in future they
buy more and this will cause the demand curve DD to shift to D2D2 .

Price of related goods- if price of a chicken raise people will switch to beef this will
cause the demand curve for beef to increase and the curve will shift from DD to shift to
D2D2. Number of potential buyers-when new consumers join the market more of the
product in question will be bought at the same price and demand will shift from DD to
D2D2 as in the above diagram.

b) What causes demand to move along the demand curve.

Movement along the demand curve is caused by the change in price. For a normal good
decrease in price can result in increase in quantity demanded. Making use of the
diagram below when price of shares decreases from P 1 to P2 demand of shares
increase from Q1 to Q2. It must be noted that change in price does not change total
demand that is area under the demand curve.

If price of a commodity increase less of that product will be demanded that is the
upward movement along the demand curve.

c) Why does the demand curve slope downwards?

According to law of diminishing marginal utility the marginal utility (satisfaction gained
when one consumes a product) falls with increase in consumption. This implies that as
consumption increase people are prepared to pay less of that product because people
pay for that utility. Take for instance if one consumes the first drink, the utility gained is
much but as consumption increase the utility gained will be less this means one is
willing to pay less this will result in down sloping demand curve. Another instance is that
people are prepared to buy more when the price of the commodity is low and less when
the price is high. Other element of income effect will also result in down ward sloping
demand curve since fall in price will leave people with more income to purchase more.
Fall in price will also afford a chance to other individuals who were not initially affording
the product due to high price to consume the product. That explains higher demand at
low price and lower demand at high price resulting in a down ward sloping demand
curve. Substitution effect also comes into play for a down ward demand curve since
people tend to substitute expensive products with cheaper products if the products are
substitute such as beef and chicken. The extra gain buyers due to substitution will result
in down ward demand curve.
QUESTION SIX (6)

a) As an entrepreneur describe in details the four types enterprises in the

economy

Sole Proprietorship

A sole proprietorship is a very easy business entity to start; you simply choose to
be a business and you are. If you start a new business by yourself, you are by
default operating a sole proprietorship. There is no need to register the business
with the state sometimes local licenses and permits may be required depending
on the type of business you are operating. It is very common among
freelancers, service providers and consultants with a single owner. There are lots
of draw backs which include un limited liability meaning that owner is reliable for
all the business liabilities. So, if a client, vendor or anybody else sues the
business, they can also be able to take personal assets. Advantages of this
business include easy starting and operating; there is no need of registration.
There is no need to prepare financial statement for publishing, the affairs of the
business are private and there is flexibility in management.

Disadvantages of this enterprise are: the owner is reliable for all debts of the
company in case of insolvency the owner personal property will be seized. The
fact that the business is not formal and lack separation from owner this makes it
difficult for the business to get finance from financial institution. In addition, in the
event that the owner died or suffered from mental incapacitation this may result
in termination of the business in short there is no continuity of the business if the
owner died.

Partnership
A partnership is an agreement that subsist between two or more people who
come together to do business with view to make profit. The partners have to
prepare a deed document which is used to govern the affair of the organization,
and it will specify the duties and responsibility of each partner. Above all it spells
about the rate of interest on drawing and on capital and the salary to be paid to
active partner. It will also contain how conflicts are resolved and profit-sharing
ratio for sharing profits.

Advantages of this business are: the business is easy to set up since there is no
state registration required there for there is no formalities required to start this
enterprise. The fact that owners are more than two there is advantage of sharing
the risk among members.

Disadvantages are: Each owner is personally liable for the business’s debts and
other liabilities. Disputes between partners can unravel the business (though you
can plan for this with a solid partnership agreement).
It’s more difficult to get a business loan and build business credit without a
registered business entity.

Limited Company
A limited liability company is the most flexible business entity. It has a lot of the
positive features from some of the other entities and throw-outs a lot of the
negatives. It is a very popular form of business structure. There is less paperwork
that must be prepared and formal requirements than a corporation. The owners
have limited liability meaning in case of company insolvency personal property is
exonerated from being attached. The business entity registered as limited liability
company benefit of look like a more legitimate established business. These kinds
of business are very popular among small and medium sized business.

Advantages of this business include: Owners don’t have personal liability for the
business’s debts or liabilities, Tax flexibility – can be taxed as a pass-through
entity this means that there is no tax at the company level); allows you to pick
what works best for you. The enterprise is easy to set up and it has high
credibility to its partners, creditors, suppliers and vendors

Disadvantages of this enterprise include: More expensive than starting a sole

proprietorship and it does require registration with the state. This kind of
enterprise faces difficulties in raising capital of the company, they have limited
capital sources. It may be difficult to raise investment capital as a limited liability
company.

A C-corporation is an independent legal and tax business structure that is entirely

separate from the company’s owners. The owners are called shareholders and a
board of directors and the officers have control over the company affairs and are
the decision makers. It’s possible to have a single person fill all those roles and
there are businesses registered as corporations that only have one owner. This
type of entity comes with more paperwork, more registration requirements, more
expenses and more formalities. The requirements for setting up and maintaining
a corporation will vary from country to country, but in general it’s a more formal
process than other types of business entities.

Pros:

Owners don’t have personal liability for the business’s debts and liabilities.
C-corporations are eligible for more tax deductions than any other type of
business. C-corporation owners pay lower self-employment taxes. You have the
ability to offer stock options, which will help if you need to raise money in the
future.
Organization – corporations have an established structure from top to bottom
(shareholders, board of directors, officers), which gives each group defined roles
and responsibilities.
Cons:
 The process is more time consuming, expensive and involves more paperwork.
Potential for double taxation – the company pays taxes on earnings and then
shareholders pay taxes on the dividends they receive. Regulations may not
provide for as much flexibility in operations as other types of entities.

b) Fully explain why firms wish to grow and not remain the same.
There are lots of advantages that can accrue to a business when it happened to
grow in size. These advantages do include: increase profit, to reduce risk,
respond to markets demand, new markets, competition and innovation, increase
stability, attracting qualified personnel and to enjoy economies of scale. These
advantages are expounded profoundly in the following paragraphs:

Firms grow so as to increase profit so that its shareholders get higher returns. A
sole trader may invest more so as to grown bigger so that the owner can enjoy a
higher status of living through having enough capital. In economics we learnt that
individuals always want to increase satisfaction, while the firms try to increase
profit.

When a firm grows, it could be possible for it to enjoy economies of scale. For
example: purchasing economies, marketing economies, technical economies. In
purchasing economies of scale firm will earn a lot of discount due to bulk buying
this will help to keep the company at competitive edge through being price
competitive. Marketing economies will help the firm to advertise its products
cheaply since cost of advertising will be spread over number of products resulting
in the cost to be less significant.

As the firm grows, they are various ways risk is reduced. If firm grow it will be in
a position to be able to fight competition. Some means such creating barriers to
entry for other firms to enter the industry can be created. A firm also grows by
diversifying its production, so that it can reduce risks that are in the event that
other product is failing to perform it will be covered by other products that are
doing better.

In this situation, expanding into other locations, and taking on extra staff will allow
you to build on your current success. You can increase your market share, and
capitalize on your growing brand equity to potentially become market leader. You
may currently have to turn work down due to lack of capacity. This is another
good reason to consider taking on new people and growing your business.

Funding this type of expansion adequately requires careful planning to avoid

unsustainable costs or overstretched commercial capacity. Many businesses turn
to facilities such as supplier payments finance to bridge gaps in cash flow that
rapid growth can create. Many small companies fail because they do not provide
a good enough reason for a person to switch from their current supplier to the
new product or service. If you’re struggling with tight competition and an
undifferentiated proposition, then expanding into new markets may be the
answer.

Expanding into new markets can help your business establish a presence in
locations where there is a particular need for your product or service. This can
help to reduce the effect of saturation and tough competition in your existing
market. If you’re looking to stay within your existing market, a move to a larger
premises or additional locations may increase your production capacity and help
you drive away your competitors.

Growth can also take the form of innovation. Investing in the redevelopment or
enhancement of your offering can differentiate you from your competitors and
increase your chances of continued success. Growing your business helps to
establish a stronger brand identity, further helping to stave off competition.
Franchising, licensing your products and services or expanding into carefully
chosen new product areas allows you to spread your brand. As the number of
locations and products increases, your brand identity develops, and your revenue
grows.
Increase stability- As businesses grow they tend to become more stable. A one-
person business with limited streams of revenue is much less stable than a
business with multiple locations and dozens of people on staff. This stability is
also partly due to the way your business is perceived. As your business grows,
people believe that you are more likely to be around throughout the lives of their
products to supply spare parts and honor guarantees. If you grow your business
you are likely to sell more products and services to this market segment.

Being a larger business means you can take advantage of economies of scale.
Larger businesses can often get bulk discounts and better supplier credit terms,
meaning costs are driven down and profits increased. A larger turnover can also
mean a greater potential for profit. With the profit margin improvements that
economies of scale can provide, many growing businesses see their profits
increase alongside their operations. Expansion or investment is often undertaken
to combat narrowing margins or falling sales. One of the most effective ways of
boosting sales can be entering the export market, and there is plenty of
information available on government websites to help.

People - Finding the right people to help you run your business is crucial, and a
challenge for many business owners. Growing businesses tend to attract the best
people. The opportunities and challenges that a successful, growing company
can provide for their staff make them very attractive. Being a part of a growing
business is often an invigorating and professionally fulfilling experience. Also,
once your business has reached the point where you are delegating
management and operational decisions to others, the business no longer has to
depend on you. This allows you more time to dedicate to personal pursuits.
QUESTION SEVEN

1. Define frictional, structural and cyclical unemployment and provide an

example of each type of unemployment.

Frictional unemployment

Frictional unemployment, also called search unemployment, occurs when workers lose

their current job and are in the process of finding another one. There may be little that
can be done to reduce this type of unemployment, other than provide better information
to reduce the search time. This suggests that zero unemployment is impossible at any
one time because someone will be seeking for job or leaving a job.
Frictional unemployment is when workers are jobless and looking for work in a healthy
economy. It does not matter if they leave voluntarily or are fired. Others may be
returning to the labour force. It's differentiated from other types of
unemployment because it's part of normal labour turnover. Frictional unemployment is
unavoidable. The good news is that it's usually short-term. It's one of the components of
natural unemployment. It is the lowest rate of unemployment in a growing economy.
Unemployment below that level means employers can't find enough workers to keep
producing all they can. It slows economic growth.

Structural unemployment

Structural unemployment occurs when certain industries decline because of long term
changes in market conditions. It is a mismatch of skills and knowledge needed in a
workforce. An example of this might be a city where a tire plant that employs a large
workforce is shutdown. These workers might be skilled in the processes and activities of
the plant, but be unable to find other work because they might not meet the workforce
needs of current employers. Structural unemployment can keep the unemployment
rate high long after a recession is over. If ignored by policymakers, it creates a
higher natural unemployment rate.

One cause of structural unemployment is technological advances in an industry. That

often happens in manufacturing. Robots have been replacing unskilled workers. These
workers often must get training in computer operations if they want to keep working in
the same industry. Technological advances have created structural unemployment in
the newspaper industry. Web-based advertising has drawn advertisers away from
newspaper ads. Online news media has drawn customers away from physical
newspapers. Newspaper employees, such as journalists, printers, and delivery route
workers, were laid off. Farmers in emerging market economies are another example of
structural unemployment. Free trade allowed global food corporations access to their
markets. That put small-scale farmers out of business. They couldn't compete with the
lower prices of global firms.8 This structural unemployment existed until they were
retrained, perhaps in factory work.

Cyclical unemployment

Cyclical unemployment exists when individuals lose their jobs as a result of a downturn
in aggregate demand or Keynesian unemployment. Cyclical unemployment is the main
cause of high unemployment rates. Its caused by a downturn in the business cycle. It's
part of the natural rise and fall of economic growth that occurs over time. Cyclical
unemployment is temporary and depends on the length of economic contractions
caused by a recession. When consumer demand for goods and services drops, it leads
to a reduction in production. This reduction lowers the need for workers, which causes
layoffs. Consumers then have less to spend, further causing a loss of revenue; in turn,
this causes companies to lay off more workers in attempts to maintain their profit
margins. By the time cyclical unemployment starts, economies are generally already in
a recession. Businesses generally wait until they're sure the downturn is severe enough
to warrant layoffs before initiating them. Cyclical unemployment can become a self-
fuelling downward spiral. The newly unemployed have less disposable income, lowering
demand, and business revenue, thus leading to even more layoffs.

2. What are the causes of unemployment

When consumer demand for goods and services drops, it leads to a reduction in
production. This reduction lowers the need for workers, which causes layoffs.
Consumers then have less to spend, further causing a loss of revenue; in turn,
 this causes companies to lay off more workers in attempts to maintain their profit
margins.

3. Describe inflation and the causes in the economy

Inflation is persistent increase in price in the economy. It is defined as sustained
increases in prices of goods and services in an economy. Inflation will result in
money to lose its value that is it will not buy the same quantity of goods it used to
buy yesterday. Thus inflation will result in the increase in cost of living. The
purchasing power of a currency unit decreases as the commodities and services
get dearer. This also impacts the cost of living in a country. When inflation is
high, the cost of living gets higher as well, which ultimately leads to a
deceleration in economic growth. A certain level of inflation is required in the
economy to ensure that expenditure is promoted and hoarding money through
savings is demotivated.

In an economy, when the demand for a commodity exceeds its supply, then the
excess demand pushes the price up. On the other hand, when the factor prices
increase, the cost of production rises too. This leads to an increase in the price
level as well.

Increase in public spending by government is an important element of the total

spending. It is also an important determinant of aggregate demand. Usually, in
lesser developed economies, its the government. spending increases which
invariably creates inflationary pressure on the economy.

There are times when the spending of government increases beyond what taxation
can finance. Therefore, in order to incur the extra expenditure, the government
resorts to deficit financing. For example, it prints more money and spends it. This,
in turn, adds to inflationary pressure. Also when an economy is going through a
booming phase, people tend to spend money at a faster rate increasing the velocity
of circulation of money. As the population grows, it increases the total demand in
the market pilling pressure of economy..

Hoarders are people or entities who stockpile commodities and do not release them
to the market. Therefore, there is an artificially created demand excess in the
economy. This also leads to inflation. It is also possible that at certain times, the
factors of production are short in supply. This affects production. Therefore, supply
is less than the demand, leading to an increase in prices and inflation. In an
economy, the total production must fulfill the domestic as well as foreign demand. If
it fails to meet these demands, then exports create inflation in the domestic
economy. Some products require to import commodities or factors of production
from the international markets like the Britain. If these markets raise prices of these
commodities or factors of production, then the overall production cost in the
importing economies increases too. This leads to inflation in the domestic market.