Diploma of Business (DoB) DB 106 Economic Principles - Economics Assessment Answers

November 26, 2017
Author : Julia Miles

Solution Code: 1GGC

Question:

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This assignment is intended to enable you to demonstrate effective use of some of the fundamental methods and tools of microeconomics and macroeconomics concepts and apply elementary principles and models in the respective context of the questions. You are expected to critically analyse and communicate effectively using appropriate economics terminology and models, in the form of diagrams which should be incorporated into your assignment.

PART A - Microeconomics

Question 1

  1. a) Explain the difference between a change in demand and a change in quantity demanded using a graph.

  1. b) Read the following excerpt from media and provide answers to the questions below.

Lift predicted for live sheep trade

  • Meat and Livestock Australia market information manager Ben Thomas said much of the demand would continue to come from the Middle East with key destinations being Kuwait, Qatar and Jordan.
  • For regions such as the Middle East and Northern Africa (MENA) this could mean these destinations look elsewhere for product. Mr Thomas said lamb traders in the MENA could be very sensitive to price movements, particularly at the cheaper end of the product range.
  • "Sharp spikes in price will cause them to look for other sources of lamb or mutton," he said.
  • "Qatar will be hosting the 2022 FIFA World Cup. There will also be an increase in demand for protein for the large numbers of construction workers expected for these projects."
  • Even though demand is expected to remain high, the ability of Australian producers to supply product will be reduced by tightening production.

Source Bailey, K. (2015). Lift predicted for live sheep trade. Retrieved 11 10, 2015, from

https://www.farmonline.com.au/news/agriculture/sheep/meat/lift-predicted-for- live-sheep-trade/2722671.aspx

  1. According to the above media excerpt identify the factors affecting on demand/quantity demanded and supply/quantity supplied of Australian lamb products.

  1. Using clearly labelled demand and supply diagrams, explain the outcomes of the above factors you have identified in parts i. on the market for Australian lamb products.

Question 2

Consider the following data related to a hypothetical market for residential apartments in a major city.

Rental Price (per week)

Quantity Demanded

Quantity Supplied

$150 38 2 $200 35 5 $250 32 8 $300 29 11 $350 26 14

$400 23 17 $450 20 20 $500 17 23 $550 14 26

$600 11 29 $650 8 32

  1. a) Draw demand and supply curves for the market for residential apartments. Clearly labelled the curves and axis.

  1. b) What is the equilibrium price and equilibrium quantity?
  2. c) Assume that the price of an apartment increases to $550. What would be the impact on residential apartment market due to this price change? Does it create surplus or shortage? How much is the surplus or shortage?

  1. d) Now suppose that the price of an apartment dropped to $300. What would be the impact on residential apartment market due to this price change? Does it create surplus or shortage? How much is the surplus or shortage?

Question 3

  1. a) Microheat Pvt Ltd is producing microwave ovens. Consider the following cost schedule for Microheat Pvt Ltd and answer the questions.

Quantity of Microwave ovens

  1. Complete the cost schedule calculating Total Fixed Cost (TFC), Total Variable Cost (TVC), Average Fixed Cost (AFC), Average Variable Cost (AVC), Average Total Cost (ATC) and Marginal Cost (MC).

  1. Draw AFC, AVC, ATC and MC curves and clearly labelled the curves and axis.

Question 4

  1. a) Explain the three characteristics for a market to be: (i) perfectively competitive and (ii) monopoly.
  2. b) In graphs indicate a perfectly competitive firm earning profit and a monopoly firm earning profit.
  3. c) Using diagrams for monopoly market and perfectively competitive markets explain why Monopoly will always be a less efficient market structure compared to perfect competition.

PART B - Macroeconomics

Question 5

  1. a) Discuss the consequences of unemployment.
  2. b) Explain four types of unemployment with an example for each type.
  3. c) Consider the following information extracted from Australian Bureau of Statistics.

Source:

https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6202.0Main%20Features1Mar%202016?op

endocument&tabname=Summary&prodno=6202.0&issue=Mar%202016&num=&view=

  1. Calculate the unemployment rate for February and March 2016
  2. Assume civilian labour force aged above 15 years (in ‘000) are 18310.8 in Feb 2016 and 18,323.0 in Mar 2016. Calculate the labour force participation rate for February and March 2016

Question 6

  1. a) Discuss the main component of aggregate demand.
  2. b) Explain using diagrams the effect of the following factors on aggregate demand curve.
  3. Consumers’ confident increases. Therefore, they increase their spending.
  4. Price level increase.

iii. A neighbouring country reduces the demand for exports due to a recession.

  1. Government decreases its spending on infrastructure facilities.

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Solution: Diploma of Business (DoB) DB 106 Economic Principles

Part A: microeconomics

Question 1:

  1. difference between change in demand and change in  quantity demanded

Change in quantity demanded is the increase or decrease in the quantity demanded of a commodity as a response to a change in it price. It is the effect of law of demand. When price of a commodity increases, the quantity demanded of a commodity decreases and vice versa, other things remaining constant; whereas change in demand refers to the increase or decrease in demand of a commodity due to a change in the other things – prices of other related commodities, tastes and preferences of the consumer and income of the consumer (William Baumol, 2012).

Change in quantity demanded is a movement along the demand curve, whereas change in demand is the shift in the demand curve. In the figure below a movement along the demand curve DD1 from point A to point B happens due to a change in price and this is referred to as change in quantity demanded. And the change in demand is represented through shift in demand curve when there is a increase in demand, the demand curve shifts from DD1 to DD2 and when there is a decrease in demand, the demand curve shifts from DD1 to DD3

difference between change in demand and change in quantity demanded

  1. (i) The factors affecting the quantity demanded is the price of the commodity which might result in decrease in quantity demanded from MENA countries. The factor that might result in increase in demand (rightward shift in  demand curve) is the increase in the demand of lamb due to higher demand for protein by the construction workers in Qatar who are engaged in the building the stadium for FIFA world cup. The factor that might affect the change in supply ( leftward shift of SS curve) is the tightening of production.

(ii) Hence there is a rightward shift in demand and leftward shift in SS as shown in the figure below and these results in higher prices.

quantiy of lamb

When there is higher demand for lamb due to want of protein, it results in the change of preferences towards lamb which shifts the demand curve rightward to DD2 and similarly when the Australian producers tighten the production, there is a leftward shift in the supply to SS2 and hence the higher price for the lamb is at P2 and the equilibrium quantity increases to Q2 as shown in the figure above.

Question 2:

residential apartments market

b)The equilibrium price is at $ 450 and equilibrium quantity is at 20 where demand is equal to supply.

  1. When price increases to $550 there would be a surplus in the residential apartments market as the quantity supplied is at 26 and the quantity demand is at 14 and the surplus is equal to (26 – 14 ) = 12
  2. When price of the apartment dropped to $300, there would be a shortage in the market as the demand now is at 29 and the supply is very low at 11 and hence the shortage is at (29-11)=  18

Question 3:

  1. The calculations of TFC, TVC, AFC, AVC, ATC, MC is calculated using the following formulas (Samuelson & Marks, 2008).

TFC is at 180.

TVC = TC- TFC

AFC = TFC / Q

AVC = TVC /Q

ATC= TC /Q

MC = (TCn- TCn-1)

Qty TC TFC TVC AFC AVC ATC MC
0 180 180 0        
1 310 180 130 180 130 310 130
2 380 180 200 90 100 190 70
3 450 180 270 60 90 150 70
4 540 180 360 45 90 135 90
5 650 180 470 36 94 130 110
6 780 180 600 30 100 130 130
7 930 180 750 25.71 107.14 132.86 150
8 1100 180 920 22.5 115 137.5 170

The cost curves – AFC, AVC, ATC and MC are drawn in the following graph

the cost curves

 

Question 4)

  1. Three characteristics for a market to be perfectly competitive include there are a large number of buyers and sellers in the market; the market forces of demand and supply determine the price of the product and the firms are price takers in the market. Similarly three characteristics for a market to be a monopoly is that there is only a single seller in the market, the price is determined by the monopolist and the monopolist can earn

supernormal profits both in the long-run and in the short run.

  1. The super normal profits earned by perfectly competitive firms in the short run is shown below

market to be perfectly competitive

The firm produces at a point where MC = MR and at this point the AC < AR which gives a super normal profit for the firms in the short run. When the firms earn super normal profits in the short run,many new firms enter the market attracted by the super normal profits.

The supernormal profits earned by the monopoly firm is shown in the following figure

monopolist

The monopolist firm produces at a point where MC= MR and at this point the price is well above the average costs and this results in the super normal profits in the short run and also in the long run as there are barrier entries in the market and there is no competition for the monopolist both in the short run and long run. (Pindyck, S, & Rubinfeld, 2005)

  1. The monopolist is less efficient than the perfectly competitive firm as shown in the figure below. The perfectly competitive firm produces at a point where there is productive efficiency ( P= ATC) and allocative efficiency (P=MC). This is shown in the right panel of the diagram below. The long run equilibrium happens at a point where P= AC where there is productive efficiency and at this point P= MC which also indicates allocative efficiency.

market to be perfectly competitive

Whereas in the case of monopolist, the equilibrium quantity produced does not ensure productive efficiency P?ATC  and there is also no allocative efficiency P ? MC. And hence monopoly is less efficient than the perfectly competitive market structure

competitive market structure

Part B: Macroeconomics

Question 5:

  1. The consequences of unemployment in an economy have a varied negative impact on both the individuals and on the society as a whole. Unemployment results in the loss of income for individuals and reduces the standard of living for those who are unemployed and it also reduces the consumption spending of the unemployed which might have negative multiplier effects on the economy as loss of income results in production and consumption activities and investment activities which take the economy down into the recessionary trend. And there is a loss of income it results in the downward pressure on the prices of real estate and other investments in the economy which will have second-round employment effects for closing down the factories and plants in the economy, unemployment can also lead to the loss of national output where the real GDP is well below the potential GDP and it is also a waste of resources as the resources are not efficiently employed in the economy.
  2. The four types of unemployment are frictional unemployment, structural unemployment, cyclical unemployment and seasonal unemployment.

  • Frictional unemployment is a type of unemployment that happens when people are switching between jobs and looking for other jobs by leaving their current jobs currently. This kind of unemployment occurs when people are trying to look for other jobs according to the skills and potentials. For example when an employee quits his current job to find that new job that would be apt for his skills, forms a part of frictional unemployment.
  • Seasonal unemployment happens when people are currently out of their jobs because their job opportunities exist only during certain months and not throughout the year. For example agricultural workers and workers who are employed in tourism and construction industries face seasonal unemployment.
  • Structural unemployment occurs when the people who are unemployed don’t have the necessary skills to get employment opportunities in the economy and when the skills of the people get outdated they face unemployment. This happens when mechanisation and automization through out and it replaced the manual labour in the economy with the use of computers. Many manufacturing industries prefer to use machines rather than labour and this results in structural unemployment in the economy. (Hubbard, Garnett, Lewis, & O’Brien, 2013)
  • Cyclical unemployment on other hand is the unemployment arising out of demand deficiency where the products themselves get outdated and the people no longer demand the products that the workers make in the economy. This sort of unemployment is found in any economy during recessionary periods

  1. Unemployment rate = unemployed / labour force

And labour force participation rate = labour force / adult population (Miller, 2012)

And labour force = employed + unemployed in the economy

And for the data given we have the unemployment rate calculated as

Unemployment rate

  1. Unemployment rate(Feb 2016) = 732.4 / ( 11902.3  + 732.4 ) * 100 = 5.8%

Unemployment rate (Mar 2016) = 729.6 / (11910.0+729.6) * 100 = 5.77%

  1. Assume civilian labour force aged above 15 years (in ‘000) are 18310.8 in Feb 2016 and 18,323.0 in Mar 2016. Calculate the labour force participation rate for February and March 2016

Labour force in Feb is ( 11902.3  + 732.4 ) = 12634.7

Labour force in Mar is  (11910.0+729.6) = 12639.6

And labour force participation rate = labour force / adult population

And labour force = employed + unemployed in the economy

Labour force participation rate (Feb ) = 12634.7 /18310.8  * 100 = 69%

Labour force participation rate (March) = 12639.6 / 18323.0 * 100 = 68.98%

Question 6:

  1. a) Main components of aggregate demand.

AD = C + I + G + NX

Aggregate demand is the summation of consumption expenditure, investment expenditure, government purchases and a net exports in an economy. Consumption as a function of disposable income or the income minus the taxes. Investment is a function of interest rate and as interest rate increases investment spending in the economy decreases. Government spending is a autonomous function that is not affected by the price or interest rates. That exports is a function of real exchange rate where increase in the real exchange rate results in the decrease of net exports.

Main components of aggregate demand

Consumption spending as the total amount of goods and services, that are purchased by the consumers in the economy and includes the purchases of the consumers. Consumption is affected by the price level and also the disposable income of households. Investment spending in the economy is a function of interest rates and when the interest rates increases, the investment spending falls as a cost of borrowing increases. Investment spending is taken by the private firms in the economy where they invest in missionary, buildings, factories, etc. another component of the aggregate demand as the government spending that is autonomous and does not get affected by the price level or the interest rates in the economy. Net exports is the difference between the exports and imports of the economy and this depend on the real exchange rate .  when the real exchange rate increases, the value of the domestic currency increases and the price of domestic goods became relatively expensive than the foreign goods and hence the exports will decrease and imports will increase resulting in a decline in net exports. Similarly when the real exchange rate decreases, exports will increase and imports will decrease as a value of the domestic currency declines and this results in the increase in net exports (McEachern, 2012).

  1. b) Explain using diagrams the effect of the following factors on aggregate demand curve.
  2. Consumers’ confident increases.

Therefore, they increase their spending. When there is a increase in the consumers confidence, they tend to demand more goods and services from the economy and as a result the aggregate demand curve shifts to the right implying more goods and services demanded at the existing price level.

Consumers’ confident increases

  1. Price level increase.

When the price level increases from a to B, the aggregate demand is from wind the a to point B in the figure and when the price level increases to a much more higher level, it results in less output and employment in the economy

iii. A neighbouring country reduces the demand for exports due to a recession.

When the neighbouring country reduces its demand for exports, this country’s net exports decline as a result of which there is a leftward shift in the aggregate demand as shown in the figure below.

  1. Government decreases its spending on infrastructure facilities.

When the government decreases its spending on infrastructure facilities, the autonomous, component of the government purchases in the aggregate demand declines and as a result the aggregate demand shifts to the left as shown in the following figure

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