Basic Concepts in Economics - Assignment Example

Economics Demand and Quantity Demanded The relationship between quantity demanded and price for a particular service and good in particular circumstances is called demand. “The quantity the buyers want to buy at a particular price is called the Quantity demanded.” (Demand 2007). Positive economics and Normative economics The branch of economics which deals with explanation and description of economic phenomena is called positive economics. (Wong 1987). Normative economics is another branch of economics which includes what particular policy actions should be recommended to attain a desirable goal or value judgments about the economy should be like. “According to Friedman, positive economics has to do with "what is," while normative economics has to do with "what ought to be." Positive economics is a social science, and as such is subject to the same checks on the basis of evidence as any science. By contrast, normative economics has a moral or ethical aspect, and as such goes beyond what a science can say.”(Positive and Normative Economics 2007). Correlation and causation Co-relation indicates the relationship between qualitative and quantitative data. It incorporates the association of the contingency of multiple classified attributes and dichotomized attributes. It is also used to indicate the relationship the relationship between measurable variates or ranks. In statistics, correlation does not imply causation which means the correlation between two variables does not imply there is a cause and effect relationship between the two. Economic model An economic model is a theoretical construct which represents economic processes by a set of variables and a set of quantitative and logical relationships between them. Scarcity of resources and productions In economics, scarcity of resources means the society does not have sufficient resources to produce enough to satisfy people requirements. Production of goods will drastically be reduced if there is scarcity of resources. Fallacy of cause and effect Confounding cause and effect is a fallacy which has the following general form. A and B regularly occur together Therefore A is the cause of B This fallacy necessitates that there is not a common cause which actually causes both A and B. Fallacy of composition A fallacy of composition occurs when someone derives that something is true of the whole from the fact that it is true of some part of whole. For instance: “This piece of metal can not be broken with a sledge hammer, therefore the machine of which it is a part can not be broken with a sledge hammer.” This is fallacious, because machines can be broken into their constituent parts without any of those parts being breakable. Ceteris Paribus “Ceteris paribus is a Latin phrase for "all else being equal." The term is most often used when isolating descriptions of events from other potential environmental variables.” (Ceteris Paribus). A statement or prediction about logical or causal connections between two states of affaires is qualified by ceteris paribus in order to recognize, and to rule out, the chances of other factors which could nullify the relationship between antecedent and the consequent. The production capability of a country in respect of its goods and services can be increased by making effective utilization of its all kinds of resources. Goods (units) 100 80 60 40 20 0 Services (units) 0 50 90 120 140 150 (i) 70 units of goods and 50 units of services Yes / No - YES. (ii) 60 units of services and 90 units of goods Yes / No – YES. (iii) 40 units of goods and 130 units of services Yes / No- NO. Because, from the Chart itself it is clear that if the units of goods and services come within the Curve, it is possible for the country to produce the aforesaid combination of goods and services. c) i) What is the opportunity cost (in terms of services) of producing 40 extra units of goods when this country is initially producing: 20 units of goods- An:- Then the goods will be of 20 uts+ 40 uts= 60 uts. Therefore, the services will be 140 uts _ 90uts= 50 uts will be the opportunity cost. (ii) What is the opportunity cost (in terms of services) of producing 20 extra units of goods when this country is initially producing: 60 units of goods- An:- Therefore, initial units 60+ 20= 80 uts Services becomes 90 and 50 uts respectively, so the opportunity costs will be 90_50 uts= 40 units. (d) “The Production- Possibility Frontier (or PPF) shows the maximum amounts of production that can be obtained by an economy, given the technical knowledge and quantity of inputs available. The PPF represents the menu of choices available to society.” (Production Possibility Frontier 2002). Therefore, it is necessary to utilize the available resources in an effective manner, to bring out the ultimate production capability. The demand and supply schedules for wheat in a free market are as follows: Price per tonne (£) 70 110 150 190 230 270 310 350 Tonnes demand per week 680 650 610 570 520 460 400 330 Tonnes supplied per week 170 210 260 320 390 460 540 630 (a) (b) The equilibrium price is 270 (c) Suppose the supply decreased by 140 tonnes at all prices. Then the new table is Price per tonne (£) 70 110 150 190 230 270 310 350 Tonnes demand per week 680 650 610 570 520 460 400 330 (Old)Tonnes supplied per week 170 210 260 320 390 460 540 630 (New)Tonnes supplied per week 30 70 120 180 250 320 400 490 (d) The original equilibrium is 270 The new equilibrium is 310 The price change is 40 Worksheet 2 Question 4: 1: The impact of a mismatch between supply and demand in the Housing Market, on the Housing Market would be that there would be a resultant shortage of housing units. The impact on the economy would be that due to excess demand, the prices of housing units would continue to rise. (Beharrel) 2. The price elasticity in the short run would the increase in “house building required to reduce the price trend is likely to be much smaller.” However, due to the action of market forces, in the long run, this would tend to stabilize. (Barker 2004) 3.The reforms that may be necessary to make the housing market more responsive to ‘price signals’ would be in the areas of planning, taxation, incentive for development and public sector of Social housing. (Barker 2004). The reforms have to be instituted after considering the local conditions like environment. Land planning etc. Question 5 (1)The market allocation of a good may be rejected by the Government under the following circumstances: (a)It is an illegal or contraband item (b) its market allocation could cause irregularities or health hazards in the market (c) Its allocation are contrary to public interests and detriment to public health and welfare. For example, the distribution of illicit liquor is considered a major health hazard and a social detriment. (2) Advantages of increased taxes on cigarettes: Source of income for Government, could actively discourage entry level and young people from cigarette smoking. Disadvantages of increased taxes is that it leads to no real effect of reducing chain smokers since smoking is linked with levels of income. Moreover, the quantum of increase of cigarette smoking has not kept pace with the general price level increase, so there is no ‘real increase’ of prices due to higher dose of taxation. The advantages of making smoking illegal is through laws which could have a long term effect of curbing public smoking and could substantially reduce the manufacturing and sale of cigarettes, but the disadvantages would lie in the fact that contraband tobacco dealings would be encouraged and also smuggling of cigarettes would gain grounds. Advantages of the increased advertising of the health effects of smoking : This would create greater awareness among the public regarding the ill effects of smoking and also discourage youngsters from developing the habit and the disadvantages would be in terms of a need for a long term advertisement campaign which may be involve huge investments outlays. Worksheet 3 Q 5 (a) Firms face a downward sloping demand curve. – Perfect Competition (b) New firms can freely enter the industry – Perfect Competition, (c) Firms produce a homogeneous product : Oligopoly, (d) Firms are price takers : Monopoly, Monopolistic competition (e) Firms will produce where MR = MC if they wish to maximize profits : Perfect Competition, (f) There is perfect knowledge on the part of consumers of price and product quality : Perfect Competition Worksheet 3 Q 7: (a)The approximate marginal cost of delivering the music track via the internet is zero. (b)The pricing policy would be affected because nobody would like to spend ₤ 3.50 for a track that could be downloaded for just 75 p. (Keegan 2003). (c) The fixed costs of producing tracks for distribution via the internet is likely to be lower than those for Conventional CDs because its track production and downloading takes lesser time and the incidence of transportation, advertising & publicity and operational costs are significantly lower Workshop 4 Question 3: a) A monopoly will always make economic profits. True b) A monopoly industry with large economies of scale (and scope) may produce more output and charge a lower price than does a perfectly competitive industry. : True c) In long-run equilibrium, a monopolistically competitive firm will produce more output than that associated with the minimum point on its average total cost curve. : d) If 2 players in a game face the same choices, there cannot be a dominant equilibrium: True e) Any good made available by the government is a public good. : True f) The private market will produce much less than the efficient quantity of pure public goods. : False g) If the production of a good involves no external cost, then marginal social cost is equal to marginal private cost. : True h) The government can enhance allocative efficiency by subsidizing the production of goods that generate external benefits and taxing the production of goods that generate external costs. : True Worksheet 4 Q 4: (a) The classification of the industry as to market type is oligopoly. (b)The five firm concentration ratio is 65% (c) The main reason for so few European firms in the automobile industry during this time is because the market was dominated by Korean Companies Q 5 Which of the following are not public goods, which are public goods and which are semi-public goods? Explain your answer! (Hint! we are not merely referring to goods or services that just happen to be provided by the public sector.) (a) Museums: Semi - public goods, used only by section of the public (b) Cross-country rail services: Public goods. (c) Motorways: Semi- public goods, used only by section of the public (e) National defense : Public goods (f) Health care : Not public, used only by section of the public (g) A lighthouse : Semi-public goods, used only by section of the public (i) Street drains : public goods Q 6: It is believed that some 4X4 vehicles produce ‘4 times more CO2 emissions’ than conventional cars. (Laurenson 2004). Again “Because big 4x4s are higher and heavier, the occupants of a vehicle hit by one are 27 times more likely to be killed (according to the US Insurance Institute for Highway Safety) than the occupants of a vehicle hit by a normal car.” (Monbiot 2004) http://politics.guardian.co.uk/green/comment/0,9236,1254819,00.html (b)The French government’s decision to impose sales tax on 4X4 vehicles is justified considering the amount of pollution and road hazards it is capable of causing the road users. (c)The Government needs to undertaken the use of alternative sources of driving fuels and also legislate the safe emission limits and penalize drivers for exceeding standard emission norms including invalidation of licenses. Worksheet 5 Question 2 (a) Consumers demand more goods that are domestically produced (but total consumption does not change). : No effect (b) People save more money in banks and building societies. Injections (c) The government reduces child benefit. : Injections (d) More tourists visit the UK. : Injections (e) The government raise tax-free thresholds: withdrawals (f) A council funds the building of new schools. : Withdrawals (g) Firms, anticipating a rise in consumer demand, borrow more money in order to build up their stocks. : withdrawals Question 3 If negative externalities exist, marginal social cost and marginal external cost are equivalent. : False 2. Externalities arise from the absence of private property rights: False 3. The inefficiency created by an external cost in the production of a good can be overcome if the government subsidizes the production of the good. : True 4. Ignoring interest income and gifts, if UK exports exceed UK imports, the United Kingdom has a current account deficit: False The inflation rate can never be negative: False 6. If two economies have the same GDP, then the standard of living is the same in each economy: False 7. If the price of good A rises much more rapidly than the prices of other goods, then good A is responsible for high inflation. : False Question 4 (a) Firms are discouraged by higher interest rates from building new factories. Fall / (b) Consumers abroad are deterred by a high price for the pound from buying imports from the UK. : Fall / Impossible to tell without more information (c) Both taxation and government expenditure are reduced. Impossible to tell without more information (d) People decide to save a smaller proportion of their income. Rise (e) Our trading partners overseas begin to recover from recession. rise Question 5 GDP may be a poor indicator of the society’s well being when viewed from the following aspects: 1. It considers only the effects of positive monetary aspects of economic activity and not the effects of negative non- monetary transactions. 2. The rebuilding of a nation after a war or national calamity gives rise to production and distribution goods and services which are accounted for GDP purposes. But this is a distorted picture, since in real effect, the GDP would remain the same, had the event not taken place and there is no real increase in the living standards of the people. 3. The long term effects of GDP cannot be judged accurately especially in cases of countries which overuse their natural resources and make heavy investments at one time to show high GDP, but later, after their resources have dried up, the GDP begins to fall. There is no consistency with regard to GDP growth, especially in the cases of oil rich countries that could have retarded GDP after oil resources have been fully exploited. Short run and long run “The short run is a period of time when there is at least one fixed factor of production i.e. some factor inputs that cannot be altered. This is usually fixed capital such as machinery and the amount of factory space available.” (Production in the Short-Run). In economics, no fixed factors of production are assumed in the long run time frame. Companies can enter or leave the market place, and the labor, cost of land, capital goods and raw materials can be assumed to vary. Normal profit and supernormal profit Profit is the difference between the selling price and the production cost. “Normal profit is the profit needed to keep a firm from switching its resources into the production of other goods and services.” (Profit). Super normal profit is any profit in excess of normal profit. When organizations enjoy super normal profit in an industry, there is a tendency and incentive for other firms to enter the industry to try to acquire some of this profit for themselves. Marginal cost and average cost “Marginal costs are defined as the change in total costs resulting from a one unit change in output. They are the variable costs associated with increasing output in the short run. A change in marginal costs might come about for example because of a change in the prices of essential raw materials or an increase in the wage rate paid to part-time employees.” (Marginal Costs of Production). on the other hand, average cost is the total expenditure divided by the number of units produced. Perfect competition and imperfect competition Perfect competition is a hypothetical economic model in which no consumer or producer has the market power to influence prices. The term imperfect competition is developed by economist John Robinson. Imperfect competition describes “a market characterized by a large number of buyers and sellers, dealing with differentiated products, and in which there are no barriers to entry or exit.” (Robinson). Works Cited Demand. (2007). [online]. Mac OS. Last accessed 23 August 2007 at: http://william-king.www.drexel.edu/top/Prin/txt/SDch/SD4A.html WONG, Stanley (1987). “Positive Economics” the New Palgrave: A Dictionary of Economics. Vol . 3. pp.20-21. Positive and Normative Economics. (2007). [online]. Mac OS. Last accessed 23 August 2007 at: http://william-king.www.drexel.edu/top/prin/txt/Intro/Eco111u.html Ceteris Paribus. [online]. ISCID. Last accessed 23 August 2007 at: http://www.iscid.org/encyclopedia/Ceteris_Paribus Production Possibility Frontier. (PPF). (2002). [online]. N.S. Parasuraman. Last accessed 23 August 2007 at: http://www.geocities.com/parasu41/PPF/ BEHARREL, Andy. News Item 3: The Housing Market: A Help or a Hindrance. Economics News Articles: March 2004. [online]. Last accessed 23 August 2007 at: http://www.booksites.net/sloman/download_files/news/Mar04.html BARKER, Kate (2004). Review of Housing Supply. Delivering development. [online]. Crawn. Last accessed 23 August 2007 at: http://news.bbc.co.uk/nol/shared/bsp/hi/pdfs/17_03_04_barker_review.pdf KEEGAN, Victor (2003). Changes of Note. [online]. Guardian Unlimited. Last accessed 23 August 2007 at: http://business.guardian.co.uk/economicdispatch/story/0,12498,1018996,00.html LAURENSON, John (2004). French Wrath Over Four Wheel Drives. [online]. bbc.co.uk. Last accessed 23 August 2007 at: http://news.bbc.co.uk/1/hi/business/3598908.stm MONBIOT, George (2004). Driving into the Abyss. [online]. Guardian Unlimited. Last accessed 23 August 2007 at: http://politics.guardian.co.uk/green/comment/0,9236,1254819,00.html Production in the Short-Run. [online]. tutor2u. Last accessed 23 August 2007 at: http://www.tutor2u.net/economics/content/topics/buseconomics/short_run.htm Profit. [online]. tiscali.reference. Last accessed 23 August 2007 at: http://www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0038141.html Marginal Costs of Production. [online]. tutor2u. Last accessed 23 August 2007 at: http://www.tutor2u.net/economics/content/topics/buseconomics/marginal_cost.htm ROBINSON, Joan. Imperfect Competition. [online]. Economy Professor. Last accessed 23 August 2007 at: http://www.economyprofessor.com/economictheories/imperfect-competition.php Read More