Economics Portfolio

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Economics for Business (EC1022/N)

Individual portfolio

Name : Daniella Kopova

ID number 11036088

Tutor : Cat Sergiou

Spring semester 2011/12

Word count 2152

Question 1

a) Calculate average and marginal cost, average and marginal revenue.

Marginal cost (MC) = ∆TC / ∆Q

Average cost (AC) = TC / Q

Average revenue (AR) = TR / Q = Price

Marginal revenue (MR) = ∆TR / ∆Q (Stephen Ison, 2007)

|Output/Sales Volume |Total costs |Total Revenue |Average Cost |Marginal Cost |Marginal Revenue |Average Revenue | |0 |1 |0 | | |0 |0 | |1 |13 |27 |13 |12 |27 |27 | |2 |24 |53 |12 |11 |26 |26,5 | |3 |33 |78 |11 |9 |25 |26 | |4 |40 |102 |10 |7 |24 |25,5 | |5 |50 |125 |10 |10 |23 |25 | |6 |66 |147 |11 |16 |22 |24,5 | |7 |84 |168 |12 |18 |21 |24 | |8 |104 |188 |13 |20 |20 |23,5 | |9 |126 |207 |14 |22 |19 |23 | |10 |150 |225 |15 |24 |18 |22,5 |

b) Graphical interpretation of MC, AC, MR, AR and the profit maximising level of Q & P

[pic]

c) How much profit is being made at this combination of price and input?

Profits are maximised where MC = MR. According to the graph, this happens when Q = 8 and after deduction of the average cost, price = 10.

Therefore, TR = P * Q = 10 * 8 = 80 (John Sloman, 2009)

d) What sort of market structure is this firm operating in?

It is a monopolistic competition. This refers to market structure in which a large number of small firms are competing with each other, producing and services only slightly differentiated from competitors. Although the firm is a price maker (P > MC), there is relative freedom of entry into the industry and the demand curve is downward sloping.

In short run, with given costs and profit maximising level of output Qm , P > MR = MC. According to graph and calculations, Qm = 8, 23 > 20 = 20 and the firm can therefore achieve profit > 0.

Due to low barriers of entry, the higher price is motivation for other firms to get into industry and secure demand, therefore the price and profit of our firm and will decrease.

The moment the price reaches 20, the firm stops gaining profit and only costs will be covered.

(Stephen Ison, 2007)

Question 2

a) What economic factors appeal to have contributed the most recent (2008/2009) recession in the UK economy?

The initial factor of recession in Europe was collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies. Furthermore, other weaknesses in the global financial system have surfaced. (Shah,...
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