BUSINESS ECONOMICS

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 5 (930 words) Published: January 4, 2014

1A)What is the definition of opportunity cost?
The best alternative that we forgo, or give up, when we make a choice or a decision is called the opportunity cost of that decision. 1B)Eason wants to spend $15 to buy a pack of sandwiches or a bowl of fish-ball noodles form a street hawker. Explain the effect on Eason’s opportunity cost of buying the sandwiches if a cockroach is found inside the noodle soup. Eason’s opportunity cost of buying the sandwiches is a bowl of fish-ball noodles, however, there is a cockroach found inside the noodle soup, therefore his opportunity cost would decrease due to the value of the fish-ball noodles would decrease because of a cockroach found. 2A)(i)Distinguish between change in demand and change in quantity demanded. 1. Change in demand means a shift of demand curve. i.e. the change is caused by factors other than change in price.

2. Change in quantity demanded is the movement along demand curve. i.e. the change is caused by change in price.

2A)(ii)Discuss any four factors which would affect the shift in demand. Change in demand can be due to below main categories other than the price of product as below: Price of substitutes: Increase in price for substitute goods will increase the demand for this good as people will switch from substitutes. For example, if the price of Coke goes up, the demand for Pesi would rise as people switch from one to the other. Price of complementary goods: Complementary goods are consumed together. Therefore, higher price of complementary good will lower the demand for this good. For example, increase in price of VCD would cause decrease in demand of VCD players. Consumer income: As consumer income rises, the demand for most goods would rise. As people become richer, they demand higher quality goods and thereby demand for cheaper goods decreases. Fashion and taste: People tend to buy desirable products. Demand for highly advertised product is likely to rise.

2B)(i)Fewer passengers use bus services from Central to Tsuen Wan due to a rise in its bus fare.

Fig.1 shown that due to a rise in bus fare from P1 to P2, the demand of bus services decrease from Q1 to Q2.

2B)(ii)More passengers use MTR services from Central to Tsuen Wan due to a rise in the bus fare.

Fig.2 shown that due to the bus fare goes up, the demand for MTR services rise as people switch from one to the other, the demand of MTR services increase from D1 to D2.

2C)“Demand for Samsong GS4 decreases, causing price of Samsong GS4 to fall. However, lower price of Samsong GS4 causes demand to rise”

As Fig.1 shows, the decline in demand from Q1 to Q2 would reduce the market price from P1 to P2. In turn, as the resulting lower price would take the profit our of the production and reduce the quantity of GS4 supplied. Demand shifts to the left, and the equilibrium price falls from a to b. However, due to the decrease in price of GS4 from P1 to P2 causes an increase in quantity demand from Q1 to Q2 as shown in Fig.2.

3A)Distinguish between elastic and inelastic demand in words, diagrams and formulae. Elastic demand is a type of demand that will rise or fall depending on the price of the good. Inelastic demand is the opposite. People will buy goods with an inelastic demand no matter what the price is.

As (a) the diagram of Inelastic demand curve shows that when the price change from P1 to P2, there is less effect on quantity demanded as Q1 to Q2. Furthermore, (b) the diagram of Elastic demand curve shows that a change in price from P1 to P2 has a large effect on quantity demanded as Q1 to Q2. The formula for calculating elasticity of demand:

1. An answer of between zero and one indicates that demand for the product is inelastic. 2. An answer of greater than one but less than infinity indicates that the demand for the product is elastic.

3B)Some of the “Bubble Tea” shops reduce their retail price to $10 per drink and afterwards it is found that revenue...
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