basic economics

Topics: Supply and demand, Costs, Microeconomics Pages: 12 (2519 words) Published: December 2, 2013
ASSIGNMENT 1 DIPECO03
Basic Economics

Question 1

Flow of Goods and Services
Flow of Cash

EXAMPLES OF TRANSACTIONS ON MARKET FOR GOODS AND SERVICES
Question 1(a) and 1(c)

EXAMPLES OF TRANSACTIONS ON MARKET FOR FACTOR OF PRODUCTION
Question 1(b) and 1(d)

Question 2
Consider the market for minivans. For each of the events listed here, identify which of the determinants of demand or supply are affected. Also indicate whether demand or supply increases or decreases. Then draw a diagram to show the effect on the price and quantity of minivans.

An example of a supply & demand graph
(a)People decide to have more children.
This indicates there is an increase in the number of buyers, therefore increase in its demand.

(b)A strike by steelworkers raises steel price
Steel prices increases due to workers’ strike, the cost of input increase, so the supply decreases

(c)Engineers develop new automated machinery for the production of minivans Advances in technology allow more output production with the same amount of resources resulting in increase of supply.

(d)The price of sport utility vehicles rises
The rise in price of sport utility will increase the demand for minivans because the sport utility van serves as a substitute in the industry and therefore will positively affect the demand curve for minivans.

(e) A stock-market crash lower people’s wealth
The reduction in peoples' wealth caused by a stock-market crash reduces their income, leading to a reduction in the demand for minivans.

Question 3
If demand is inelastic how will an increase in price change the total revenue? Answer:
What do we know about Price Elasticity of Demand and how does it affect the price change of a production? Basically, the price elasticity of demand is a platform to measure the sensitivity or the responsiveness of buyers to the change of price. There are two categories in such that whether it is elastic or inelastic. Elastic is where the responsiveness is positive or more than one and the percentage in quantity demanded is greater than the percentage in price change. On the other hand, inelastic is where the responsiveness is negative. The percentage change in quantity demand is lesser than the percentage in price change. There is a general formula to determine the elasticity of demand. Below are the formulae and the examples of elasticity demand graphs.

or

Today, we are going to relate how the price change will affect the revenue. Total revenue has its own general formula to calculate and they are all inter-dependable. A change in either each of the variables will change the value of the whole equation. For example,

Therefore if the elasticity demand is inelastic, the price change will immediately affect the revenue. If price(P) increase, the total revenue automatically will increase as well. The relationship between the price and total revenue can actually be explained using the price elasticity demand graph.

The relationship between price and total revenue in the inelastic graph shows a positive relationship while it is negative in an elastic graph. How do we prove these two relationships right? In the graphs below, we can clearly see the relationship. As the wise man once said, picture speaks a thousand words

INELASTIC DEMAND ELASTIC DEMAND TR’ = 15(90) TR’ = 15(120) = 1350 = 1800 TR” = 20(80)...
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