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Economics is a discipline

Using information from the Internet and economics textbooks write a section of your report to business people that contains:

a) A definition of economics that includes the problems of scarcity and choice.

b) A explanation of what is meant b the concept of opportunity cost.

c) An explanation of the difference between micro and macro economics.

A)

Economics is a discipline which studies how scarce economic resources are used to maximize production for a society. The subject economics is being divided into two main sections : microeconomics, this is concerned with individuals and businesses, the other section is macroeconomics, which is concerned about the economy as whole. Scarcity means limited resources to satisfy the wants of the people. For Example oil is a limited resource and it is an international issue. The four main resources identified by economists are Land,Labour,Capital and Entrepreneurship.

Land - Land is also known as Natural Resources. Land includes the seas and rivers, forests and deserts, all manners of minerals from the ground, and chemicals and gases from the air and earth's crust.

Labour - Labour means human efforts of all types. Manual and non-manual, skilled and unskilled. The size and ability of an economy's labour force are very important in determining the quantity and quality of goods and services that can be produced. The better the workers are educated and talented the better the production of goods would be.

Capital - To make the production task easier man had invented many tools such as computers, calculators, screwdrivers, spanners etc. These man-made resources which help to produce many goods and services are known as Capital.

Entrepreneur - The person who undertakes the responsibilities and risks of employing land, labour and capital, and who decides how these resources are to be used, is described as an Entrepreneur.

Choice means having to select the best product depending on the income of an individual and the resources available.

B) Opportunity Cost is the next best alternative foregone. For instance if an individual has to choose between Product A and Product B and selects product B then the opportunity cost is product A.

Eg- If a person has to choose between buying petrol and buying a meal and purchases petrol then his opportunity cost is the meal that he had to forgo.

Capital Goods

At the position A the economy is producing 250 units of capital goods and is producing 150 units of consumer goods, and at the position B the economy is producing 150 units of capital and is producing 225 units of consumer goods. While at position A if the economy chooses to move to position B they will have to forego 100 units of capital goods in order to increase the production 225 units of consumer goods. The foregone 100 units of capital goods is the opportunity cost of producing an extra 75 units of consumer goods. Opportunity Cost = 100/75 = 1.33

C) Microeconomics

The distinction between microeconomics and macroeconomics can be described in terms of small-scale vs. large-scale or in terms of partial vs. general equilibrium. Perhaps the most important distinction, however, is in terms of the role of equilibrium. While issues in microeconomics seldom challenge the notion of a naturally occurring equilibrium, the existence of business cycles and, especially, unemployment suggests to many observers that macroeconomics raises issues of a different character.

Macroeconomics

Is concerned with the economy as a whole. Because the things are scarce, societies are concerned that their resources should be used as fully as possible, and that over time their national output should grow. Macroeconomics studies the determination of national output and its growth overtime. It also studies the problem of recession, unemployment, inflation. The balance of international payments and cyclical instability , and the policies adopted by governments to deal with these problem

Task 2 - 23 Marks

In your economics report:

a) Show how an individual demand curve (schedule) is derived and how market demand is derived.

b) Using diagrams provide a clear explanation of what is a firm's output decision in the short-run.

c) Using diagrams provide a clear explanation of what is a firm's output decision in the long-run.

(Words count approximately 600 words).

A) It has been assumed that demand refers to a demand for a product in a whole market (Market Demand). However it is possible to construct individual demand curves and derive the market demand curves from them. Individual demand curve is the demand curve of an individual buyer. It could be from a consumer, government or a firm. So individual demand can be defined as the demand for an individual consumer or a firm or any other economic unit. Market demand is a sum of all individual demand curves.

Price

Demand For Firm A

Demand For Firm B

Demand For Firm C

Market Demand

5

200

300

500

1000

10

100

250

200

550

Assumption- Market consists of 3 firms only.

B) Under Perfect competitive market structure the firm is a Price taker therefore the firm is powerless to change the price so the firm would get a horizontal line at the ruling price or the demand is perfectly elastic. (The MR curve and AR curve will be the demand curve for perfectly competitive firms). However the industry's market demand and supply curves will be of the normal shape.

At the profit maximizing level of output (where MR=MC) AR would be at the point A and AC would be at the point B. Abnormal profits (AR>AC) is from A to B therefore the firm would earn abnormal profits in the short run.

One producer cannot control his output and influence the price of the product because there are a very large number of sellers and one producer is producing only a smaller proportion out of the total market output.

Short run Equilibrium of a monopoly

Abnormal Profit

As the monopoly is a sole supplier of a good or service they are price makers while there are barriers to entry. They earn abnormal profits in the short run. They can control the output of the market and they produce at the profit maximizing output (MR=MC). They can also discriminate prices.

Short run equilibrium of an oligopoly

As an oligopoly occurs only when a few firms dominate a market, the actions of one of them can have a significant effect on the behavior of the others. There is no one price and output in oligopoly. Firms are independent and firms behavior will depend on what it thinks the others are going to do. There is price rigidity (if the price is increased, demand is price elastic and if the price is cut demand is price inelastic so the firm leaves price unchanged).

In some industries firms collude that is work together and act like a profit maximizing monopolist. They fix a profit maximizing price and output and give each other quotas.

Industry Firm

Short run monopolistic competition

Monopolistic competition involves many sellers with differentiated products. In the short run firms can make abnormal profit. Monopolistic competition is a combination of both perfect competition and monopoly. They carry out non price competition and are price makers therefore they control the output of its own supplier.

In a Contestable Market an entrant has access to all production techniques available (there is freedom to entry and exist) and there are few sunk cost. The number of firms competing will vary, it may be a monopoly and then there may be many other firms competing at other times. Firms compete rather than collude. They earn abnormal profits in the short run.

C) Long run equilibrium of perfect competition

As firms are making abnormal profits in the short run lots of new firms would enter into the industry, this would shift the original market supply curve outwards and force down the demand of the firm's output , the equilibrium price, average revenue and marginal revenue. This would lead to a situation where each firm is making normal profits only (AR=AC).

Long run equilibrium of monopoly Price

In the long run also monopolies abnormal profits and as sole suppliers control the output of the market and sometimes act as price discriminators. (i.e. they charge different prices from different types of consumers).

Long run equilibrium of oligopoly

In an oligopoly there is price rigidity in the long run also and as only few firms dominate the market each will have its own price and output solution. In some industries firms collude and act as a monopolist and give each other quotas on their output and fix a profit maximizing price.

Long run monopolistic competition

In the monopolistic market structure, in the long run they earn normal profits this is due to increased supply of the industry as there is an incentive for new firms to enter the market (abnormal profits) therefore the demand for the firms product falls. They earn normal profits in the long run.

A perfectly contestable market is one in which the cost of entry and exist are 0. In this situation there is a high degree of pressure on firms to act competitively. Abnormal profits will act as an incentive to bring in new firms. Entry is likely to lead to lower prices and higher output therefore they earn normal profits in the long run.

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