Price Elasticity of Demand - Assignment Example

1. A planned economy lays emphasis on the society and welfare of all individuals leaving in it. The planned economy ensures that government plays a role and ensures that there is proper health facilities, education facilities, reduction in poverty, and proper wages. This ensures that the employees are satisfied and there is no unrest in the economy which could lead towards strikes and lockouts. (Planned Economy, 2010) A comparison with the market economy shows that it this economies result in instability and no provision for education, health and other facilities for the deprived which is available in a planned economy. Also the fact that social cost is ignored in the market economy which is looked after in the planned economy results in wide difference between the economies. (Market Economy, 2010) Planned economy thereby provides more advantage compared to the market economy thereby making the economies more efficient. 2. Opportunity cost is the cost that has to be foregone to pick another option whereas accounting cost is the actual cost that is incurred. (Opportunity Cost, 2010) Opportunity cost is important than accounting cost because opportunity cost considers the cost which has to be foregone but accounting cost doesn’t consider the cost foregone. This can be understood by the following example. Suppose the cost of education for 2 years is 60,000. This is the actual cost that has to be incurred and is considered as an accounting cost. The person other than opting for the studies and can work and get 50,000 per year. Thus the opportunity cost is 1, 00,000 which has to be foregone. Thus, opportunity cost helps to compare the cost which will be foregone and could result in a change in decision but accounting cost doesn’t result in it as it considers only the out of pocket cost. 3. The law of demand proves incorrect in the following situations Giffen Goods: When the income increases the demand for giffen goods falls as people start to use other goods instead of the inferior goods. For example when the income rises barley consumption falls as people start to use other goods (Law of demand, 2010) Commodities used as status symbol: An increase in the income makes people consume more of leisure goods as the demand for those rises. For example, an increase in the income increases the sale of cars (Law of demand, 2010) Expectation about future prices: An increase in the expectation of the price makes people produce more goods at the same income and price level making them consume more of those goods. (Law of demand, 2010) 4. Price inelastic is when the demand for the goods changes less compared to the changes in price. (Price Elasticity, 2010) This is a situation where the elasticity remains below 1. A firm looking to ensure price elasticity needs to ensure that the company spends money on advertising. This will help to push sales for the product and charging a higher price due to change cost will have little effect on the goods sold. Having a strategy which looks into the advertising and pricing strategy will result in a situation where the change in price has some effect on the price of the product thereby resulting in the elasticity to be below 1. 5. Factors which affects the price elasticity of demand for higher education in England are Substitutability: The availability of different universities which provides higher education effects the price elasticity of demand for higher education as increase in the number of institutes provides an option to substitute a university in place of another. This thereby affects the price elasticity. (Funk, 2008) Necessity: The growing importance of higher education for future jobs and students looking towards it has made higher education a necessity. This is having an effect on the price elasticity as people are looking towards higher education for growth. (Funk, 2008) Cost: The price elasticity is also affected by the course fees. An increase in the fees makes students look towards alternatives which is affecting price elasticity. (Funk, 2008) Students due to increase in the fees associated with higher education are looking towards different universities and ways as the cost involved in making the elasticity for the product to be varied. 6. Normal profits are the profits which are accrued due to the opportunity cost of using entrepreneurship instead of hiring someone from outside. This forms an important aspect for business units as it helps to determine whether a person will continue operation or not. Normal profits have a lot of importance in the long run as it determines the shut down point. In the long run when a firms looks for different activities and the accounting profits is greater after deducting the normal profits which happens due to entrepreneurship determines the shut down point by shifting operations. Normal profits also determines the efforts the entrepreneur gets for his services and business which earns normal profits continue their operations as it guarantees certain income which is included in the price of the profits thereby generating some return for the business. (Normal Profit, 2010) 7. Goods exhibit negative income elasticity in the short run because an increase in income makes people shift their consumption pattern. For example suppose the income of B increases. He uses train for commuting but increase in the income shifts his pattern towards airways. This shows a negative connotation in the short run because the increase in income reduces the demand for train travel. Opposite happens in the long run as it leads towards a situation where the person who has started using airways has a positive relationship as the growth in income eases out and it becomes a normal income. This results in a positive relationship as the increase in the long run has little effect on the demand pattern. (Price Elasticity, 2010) 8. Factors other than real wage rate which affects the labour force in the market and has an effect on the income leisure choice are as follows Income Effect: When the income level of the employees raises then their basic necessities of the activity can be met with less money. This means that the employee needs to work for fewer hours. This increases the leisure activity and decreases the labour force. (Riley, 2006) The rise in the income level thereby has an effect on the labour market as the employees prefer to work for fewer hours and relax more. Substitution Effect: The substitution effect also has an effect on the supply of labour. When an incentive to work increases labour reduces their leisure activity. This is because the labour receives more benefit from working over time. This makes the employees to look towards increased working hours thereby reducing the leisure activity and has an effect on the supply of labour. (Riley, 2006) 9. A market where there is minimum efficient scale exhibit monopolistic competition due to the characteristic exhibited by monopolistic markets. This type of markets acts as a monopoly in the short run due but in the long run they convert into perfect competition. Minimum efficient scale allows such a market to exist because the such markets tend to have high profits in the short run but in the long run the profits tends to dwindle increase in competition. This highlights the fact that in a minimum efficient scale market the business units are able to mould the situation in a manner in which it yields maximum benefits and matches with the characteristics of the monopolistic competitive market. (Monopolistic Competition, 2010) 10. Economist persists with maximizing profits for business units because maximizing profits ensures that the business is able to tap the resources which are scarce. Managerial theories on the other hand looks into maximization of returns for the stakeholders and ensuring that the business is able to mould the depleting resources towards the benefit of mankind. Looking into profit maximization ensures that the business in able to make use of the resources efficiently. This ensures that the incentive to work and continuing with the operations increases as it provides the business units an opportunity to tap the market and ensure maximum return for the entrepreneur. (Ashey, 2008) References Ashey C, 2008, “Maximization of profits”, The Canadian Journal of Economics and Political Science, Volume 27, Number 1, page 91 Funk H, 2008, “Price elasticity of demand for education at a private university”, Journal of Educational Research, Volume 66, Number 3 Law of demand, 2010, “Law of demand”, AmosWEB Opportunity Cost, 2010, “Opportunity Cost”, retrieved on November 9, 2010 from http://www.netmba.com Planned Economy, 2010, “Planned Economies”, Screen Bean Arts, Bit Bitter Corporation Price Elasticity, 2010, “what is price elasticity of demand”, Wise geek, Conjuncture Corporation Price Elasticity, 2010, “Price Elasticity of Demand”, AS Market and market systems, http://www.tutor2u.com Market Economy, 2010, “Market Economy”, Economy, Investment & Financial Reports, Economy Watch Monopolistic Competition, 2010, “Monopolistic Competition”, AmosWEB Normal Profit, 2010, “Normal Profit”, AmosWEB Riley G, 2006, “Supply of labour to markets”, Market & Market Systems, Eton College Read More