Economics Questions And Answers Economics Essay

The legislations of diminishing marginal dividends stats that whenever a company introduces more adjustable inputs successively with one fixed factor of development, total results would constantly increase, but marginal profits would reduce (Anderton, 1993). This can be explained by making use of graph listed below.

It could be seen from the graph that whenever the firm was in the beginning increasing the number of workers, total result was increasing at a larger rate every time; this isn't because every new staff member is more successful but merely because of the combined effect (Colander, 2007).

It can be seen that total result is eventually increasing at a decreasing rate. This fundamentally is happening because the percentage of inputs is continually varying. The company is facing scarcity of sources of capital (Lipsey, 2002). The percentage between capital and labour is continually widening, which means that following a certain time, the administrative centre is insufficient for the increased individuals, hence the returns started to diminish.

Since this situation would always be confronted by every organization in the short run. That is why this simple truth is known as the law of changing proportions or diminishing returns.

E. g. if the organization is facing lack of capital, then increasing the amount of labourers would profit it to the degree whereby it can make 6 employees work at a machine at a time, rather than two. How ever before when all the machines would be totally employed with their operators, than the selecting up of new staff would only lead to increased costs, but no increased out put or output.

In short, a firm faces diminishing comes back when it increases its factor inputs with one factor fixed (i. e. the brief run) and hence suffers diminishing productivities (Lipsey, 2002).

On the other palm, economies of scales are those cost cutting down advantages which appear when a organization increases its level of production (Boyes, 2008). This might be inform of purchasing/mass buying economies, technological economies, marketing, managerial, financial and risk bearing economies.

The reducing economies of size is the occurrence which pertains to the long term production of a firm. Actually this occurrence even includes the theory of Diminishing Marginal Returns. It so happens that when the company adopts an increasing production position (over time) its cost cutting down advantages tend to be plus more less (Lipsey, 2002). E. g. Mass buying discounts may reach at a certain limit and then no longer deals be offered. In the same way set costs might be at first spread at an increased proportion that proportion might drop with time, because the addition of more items would tend to contribute less in bearing up fixed costs. The economies of scale which would have been demonstrating increasing earnings to range would then learn to show diminishing dividends to scale. This is also known as Diseconomies of Range (Anderton, 1993).

When how big is the business becomes too large, the real owner cannot control everything immediately scheduled to which de centralization occurs. Business framework widens horizontally and vertically. Chain of control becomes too long credited to which communication gaps develop. The mangers are unable to organize across different departments. Because of these factors, decision making is postponed. Apart from that, being from centre, lower level professionals do not stay efficient. In short scheduled to large size of organization, it becomes difficult to manage, due to which per product cost ultimately increases (Young, 1987).

Too many employees are appointed to take care of large scale creation, credited to which supervision cost increases by more than proportionately. Workers are not completed properly be the management. Monetary and non monetary benefits are not consistent with worker's efficiency; therefore de motivation among many personnel develops. All of these factors contribute to an increase altogether cost greater in proportion to end result.

Question 2:

(a) Explain and illustrate using diagrams the difference between price and non price affects that have an impact on the behaviour of a demand curve (3 marks);


A demand curve shows the individual quantities of goods that individuals are willing and able to buy at different prices. The behaviour of your demand curve can be stretchy, or inelastic.

Elasticity of demand is referred to as the responsiveness of demand towards an alteration in price. An inelastic behavior of the demand curve would notify that consumers are irresponsive towards changes in cost. Similarly an elastic behaviour of the demand curve would show that more individuals are responsive towards price changes (Anderton, 1993). It normally happen that consumers start buying more, or new consumers start purchasing the product, when its price falls and vice versa.

The price factor which decides the demand curve behavior is its expensiveness or cheapness. When prices are arranged at higher levels, demand is reported to be more flexible. The graph given below shows that at higher degrees of demand curve, elasticity is said to be higher that 1. This means that an upward or downward change in price would cause the demand to decrease or increase by more than 10%. When people buy goods at high prices, and know about buying it expensive, they tend to stop using the, or decrease its use significantly when the costs go further up. How ever before, people would be highly drawn towards the product if it's high priced, and its price out of the blue falls, other things regular (Lipsey, 2002). .

Demand curve would be inelastic at lower degrees of price. This is really because because the price of the merchandise would be set too low, consumers wouldn't normally pay heed to any changes in price. Be it high or low. In the same way since nearly all the actual consumers would be consuming the merchandise, there would be no depth for increased demand. Higher prices (at low price level) wouldn't normally affect the intake too much (Lipsey, 2002).

Non price factors affecting the demand curve behavior include the causes given below:

Direct Fees High direct taxes mean less disposable incomes for consumers, and hence less willingness and potential to buy. Lower direct taxes would make consumers more responsive (Young, 1987).

Availability of Substitutes: Option of substitutes means that demand would become more flexible. Consumers might swap towards other substitutes if price is increased.

Degree necessarily: FMCG's and daily goal goods would face an inelastic demand curve being that they are essentials and are demanded at any price level (Solomon, 2006).

Degree of Addictiveness: If goods are habit forming or addictive, than their demand would ten to be inelastic.

Proportion of Income Spent: The bigger the proportion spent, the more stretchy the demand (Boyes, 2008).

The Situation or location where the product is purchased. E. g. a consumer won't pay 5 rupees extra for a bottle of Pepsi from a local shop. However, consumers would surely pay, and Do pay 100 rupees for the pitcher comprising the same amount of Pepsi.

Elastic Demand (Non price Factor) Inelastic Demand (Non price Factor)

(b) Explain and demonstrate using diagrams the difference between price and non price affects that affect the behaviour of a resource curve (3 markings);


A supply curve shows the respected levels of goods that producers are prepared and able to buy at different prices (Parkin, 2000). The behavior of a resource curve can be stretchy, or inelastic.

Elasticity of source is referred to as the responsiveness of resource towards a big change in price. An inelastic behaviour of the supply curve would inform that developer is irresponsive towards changes in price. Similarly an stretchy behavior of the resource curve would show that the producer(s) is reactive towards price changes (Anderton, 1993). It normally happens that manufacturer starts providing more goods on the market, or new producers get into the marketplace, so its price falls and vice versa.

The price factor which establishes the supply curve behavior is its expensiveness or cheapness. When prices are set at higher levels, source is reported to be more flexible. The graph listed below shows that at higher degrees of resource curve, elasticity is said to be greater than 1 (Parkin, 2000). Which means that an upwards or downward change in price would cause the resource to decrease or increase by more than 10%. When manufacturer sells the goods at high prices, they tend to stop selling the product, or decrease its supply if offered a slightly cheap. How ever, providers would be highly drawn towards the merchandise if it's high priced, and its price suddenly falls, other things frequent (Solomon, 2006).

Supply curve would be inelastic at lower levels of price. This is really because because the price of the merchandise would be arranged too low, companies wouldn't normally pay heed to any changes in cost whether it be high or low. Similarly since practically all the actual makers would be producing the product, there would be no power for increased source. Higher prices (at low price level) wouldn't normally affect the production too much. Providers would only keep on producing.

Non price factors affecting the source curve behaviour include the causes listed below:

Time: Source tends to be more elastic over time. Development decisions can be improved and firms or companies can respond to price changes (Parkin, 2000).

Factors of Production: Supply can be elastic if FOP's are available such as trained labour, recycleables, etc.

Stock Levels: If there are high amounts of stock piled-up in the warehouses, than the resource would tend to be elastic as providers would try to eliminate old stock and allow for newer stock (Lipsey, 2002).

Number of Organizations in the Industry: Supply will be more elastic if there are a lot of firms in the industry, because there will be greater potential for someone having available factors and stock. Low range of firms warranties low inelasticity (Boyes, 2008).

Elastic Source (Non price Factor) Inelastic Source (Non price Factor)

(c) Explain and illustrate with diagrams how and just why a marginal cost curve maps out a supply curve (4 grades).


To maximize earnings a company would sell its end result at a price where it equals to its marginal cost. I. e. the organization would keep on selling its productivity, intil the price it starts to get for its result equals to the expense of producing one extra device. Hence a marginal cost curve maps out the source curve of a firm. As long as the firm produces something, it will maximize its profits by producing "on the marginal cost curve. "

Observing the graph above, we can say that if the firm sells its output at a cost of P0, the developer would deem it profitable so long as the MC (Marginal Cost) is being covered by P (Price). In fact, MC determines how many units a company will supply, because it is assumed when learning economic that all companies have a profit maximizing objective generally. Source curves that are attracted by way of a common economics scholar are only Marginal Cost curves in cover.

Question 3:

If a government wishes to raise more sales taxes revenue as long as they impose the taxes on goods that show a higher or lower price elasticity of resource? Illustrate with diagrams and define the designer and company incidence of the tax (10 grades).


When an indirect taxes is imposed on a good, the burden of tax is either borne by the manufacturer or consumer. Who'll bear the responsibility of taxes actually is determined by price elasticity of demand and offer.

In all the three instances, i. e. elastic, inelastic or unitary stretchy, a duty of $2 has been imposed. Within the first case the source curve is properly inelastic, in second circumstance the supply is merely stretchy, and in the 3rd circumstance it is flawlessly elastic.

It can be seen in the first case that whenever a duty of $2 has been imposed, the price tag on the good in addition has increased by 2. It implies that all the burden of duty has been borne by the consumer only. The reason of this is that supply is perfectly stretchy, and can't be avoided. Producers are not willing to provide the merchandise at any other price than the common price.

In the next case source is inelastic, this means developer is irresponsive an alteration in the purchase price, therefore any imposition of duty would cause a contraction in supply; hence, the taxes burden is distributed between your consumer and companies. It can be observed in the diagrams that imposition of the 2$ taxes is reflected in price only by $1.

In the 3rd and last circumstance, supply of the developer is correctly inelastic this means firms would supply this product at any price. Therefore any tax imposed on the designer cannot be shifted on the buyer. Hence, after duty price is same.

It is evident now that who'll bear the taxes depends on the price elasticity of source. The greater a source curve is stretchy, the more the burden on consumer and vice versa.

Question 4:

(a) Pick an industry that you think satisfies the standards of perfect competition and describe and demonstrate with diagrams your case for picking this industry (5 grades);


Perfect competition is a market composition where there are a big range of small firms producing a homogenous good. One such type of industry may be the farming industry. All of the firms on the market (farms in cases like this) are so small that their end result when compared with the outcome of the industry is so small that they are unable to cause any influences on the market resource and price, therefore all the farms are to be known as price takers. Price taker means that the price of the good is set on the market place by the pushes of demand & supply. Whatever the purchase price is prevalent in the market, the firm would have to allow it (Boyes, 2008). There is no union of any kind representing the sellers, neither will there be any federal intervention. In a perfect competition firms can easily go into and exit the marketplace. Same applies for farming, where an entrepreneur can easily set up a firm, and when deemed unprofitable, may easily leave it. Which means that there are no barriers to entry and leave (Solomon, 2006). This does mean that configurations up costs are incredibly small and there are minimal legal formalities required. This also suggests that resources are totally transformable, as is the situation with farming. Land can be utilized for any other purpose, tractors be easily sold, and seeds cost very cheap. Knowledge about price and other market conditions on the part of consumers and firms is perfect. So is the situation with farming where in fact the consumer nearly understands everything about the agricultural product. E. g. consumers can commonly identify which types of signals are found in good fruits or fruit and vegetables. Similarly farmers do know about widespread market rates and other conditions. For this reason, neither developer nor the buyer can exploit each other. All the businesses in the industry are income maximising firms, and so is the case with farmers, who tend to earn more plus more from farming (Lipsey, 2002).

As we realize that the firms are price takers, a person organization would sell its complete output at the purchase price which is predetermined on the market. Farmers have no other choice than to sell their end result at the price that happens to be being quoted for their product. Demand curve confronted by a firm perfect competition would be correctly elastic.

(b) Explain and illustrate with diagrams the way the revenue maximising price and productivity is set for (1) the individual firm in this particular industry and (2) this industry all together. (5 markings)


The demand curve experienced by the firm in this industry is flawlessly elastic. Due to this, the demand curve is also the marginal income curve of the company, because every device has been sold at the same price. Plotting the cost structure of the firm we can find out the revenue maximising level of productivity of the plantation (Boyes, 2008).

At volume Q in the diagram, profits of the farm are maximised. At this quantity, the farm would be enjoying abnormal earnings in the brief run. As there are no barriers to entry or leave, these abnormal revenue would catch the attention of new businesses to enter the industry, anticipated to which prices would fall season, and soon the farm would only be making normal revenue.

As the farm would only be gaining normal profits, it could expect that price would increase In the long term, and the proper execution would be making unusual profits. It the price further falls and there is no positive contribution towards set costs, the organization would shut down.

Question 5:

(a) Explain and illustrate with diagrams the characteristics of oligopoly (5 marks);


Oligopoly is market composition about which no simple and logical explanation can be given since it is very diverse in mother nature (Boyes, 2008). Some oligopolies could have only few large organizations and others would have large number of firms but few dominating firms. Alternatively, some oligopolies would be creating a standardised good and some an extremely differentiated good. In a few oligopolies the organizations would be highly fighting against each other plus some might be quite cooperative. There would be strong barriers to entry and the businesses would be price creators. Knowledge about price and other market conditions is imperfect; organizations would also be involved in creating barriers towards entrance of new firms. In an oligopolistic market businesses attempt to combine or takeover other companies in order to further reduce the competition. The behaviour of firms in an oligopoly would be quite rivalrous. All businesses would carefully watch each others activities and would thus determine their own strategy. The businesses create the following artificial barriers:

(i) Advertising (ii) R & D (iii) Branding (iv) Sales promotion & distribution

The Oligopoly is characterised by price wars, furious non price competitions, predatory costs or limit rates (Boyes, 2008).

Above the kink, demand is relatively elastic because all other firm's prices continue to be unchanged. Below the link, demand is relatively inelastic because all other firms will bring in a similar price cut, eventually resulting in a price war. Therefore, the best option for the oligopolistic organization is to create at point E which is the equilibrium point and the kink point. A revenue maximizing company with some market ability will arranged marginal costs equal to marginal revenue.

(b) Illustrate and make clear the way the oligopolistic firms determines their collective profit maximising price and outcome levels when they collude and act like a cartel (monopoly) (5 marks);


A cartel might be became a member of by oligopolistic firms to increase their individual market ability, and the member firms work together to determine the combined level of result to be made by each member and the comparative price to be incurred. By being one, the cartel members try to become a monopoly and succeed. For e. g. if each member firm is the producer associated with an undifferentiated good, such as engine oil, the demand curve to be experienced by it would be horizontal, that is properly elastic. However if these businesses sign up for a cartel, they will then face a joint demand curve, which would be downward sloping, just like a monopolist's. Actually the profit maximizing decisions of an oligopoly (in a joint cartel) are as the same of the monopoly as shown in the number below. The cartel member organizations would determine their joint end result level, where their mixed marginal cost would equal blended marginal revenue. The cartel's chosen price would be dependant on the market demand curve at the level of result chosen by the cartel. The cartel's profit would, then be add up to the region of rectangular box, labeled "abcd" in our Shape. A cartel would, as being a monopoly, make an effort to produce or supply less end result and charge a higher price than to think it is self in a competitive market. Previously because of the elastic demand curve, the organizations could not have individually incurred a higher price by altering their particular outputs separately.

(c) Illustrate and describe with diagrams how a cheating oligopolist would choose its revenue maximising output level if attempting to increase its market talk about at the agreed original price (5 markings);


Cartel members will attempt to cheat on the agreement to limit development. By producing more outcome than it has been decided to a cartel member can increase its talk about of the cartel's profits. Before the cartel is formed produces output makes no revenue. After getting started with the cartel it reduces its outcome and changes the purchase price to the cartel price. The organization then earns income of abcd

. If a company were to cheat on this arrangement and produce an higher productivity rather than the existent one, providing the other participants don't cheat then it can view its supply curve as horizontal at the cartel price. It cannot have an impact on price by changing end result, so that it can produce and sell additional outputs without changing the price. So if a firm cheats over a cartel it benefits the greater profit instead of abcd.

(d) Illustrate and make clear with diagrams what sort of cheating oligopolist would choose its earnings maximising price and end result levels if it attempted to undercut the purchase price charged by the other oligopolistic businesses (5 marks).


One more way for participants to cheat on the cartel is to lessen prices. An undetected lessen price will supercharge company's sales to grab the consumers from other vendors, as well as customers who are not buying the product in any way. A few of these modifications may be non financial, including better credit conditions, faster delivery, or related free services. The firm has an incentive to cheat by minimizing price because the demand curve facing each firm is more elastic than the market demand curve as shown below.

Since the sooner demand curve faced by the firm in the industry as whole could have been more inelastic, the proper execution wouldn't normally have had the opportunity to attract potential buyers. How ever once the cartel has chosen a cost, and then the cheater will try to offers the productivity with a price lower, demand for the end result of this particular producer would increase significantly. The firm would increase its earnings where MR = MC by expanding output and cutting down its price. An industry demand curve is attracted below.

It is seen that lowering the purchase price by the industry all together wouldn't normally have benefited anyone. How ever before, if a company cheats, then it might take the advantage of the elastic demand curve it could face and get market talk about.

Question 6:

(a) Put together a micro monetary reform issue that is relevant to an economy of your decision (i. e home country or Australia) and make clear why this market or industry reform has been carried out? (5 marks)


Infrastructure and related business form an essential area of the economy and have been characterised by an extended tradition of federal possession and monopoly (Colander, 2007). . The procedure, gain access to and cost of infrastructure services have an impact on all business and play a substantial role in their competitiveness and in the production of the overall economy

(Solomon, 2006). Given the value of these establishments, they are the main topic of considerable reform effort lately.

Jurisdictions have pursued a multitude of approaches in reforming their infrastructure sectors. However, the reforms can be grouped into five wide-ranging categories: resolving specific problems (eg: 1983 rationalisation of the Queensland Electricity Commission payment);

administrative (eg: Commonwealth 1988 GBE reforms);

pricing (eg: putting into action appropriate cost reflective charges systems);

increased competition (eg: increasing third party gain access to); and

Privatisation (eg: airlines, lenders and electricity resources).

(b) How successful do you think these reform options were and say why referring to some data or research that has been performed (5 grades)

While reforms gathered some momentum over time, there was not really a smooth program of implementation. The passion for reform mixed among governments, as time passes and across jurisdictions (Solomon, 2006). Reform in a few areas could only be taken so far and needed to be revisited when further problems were diagnosed, lessons were learnt, or further pressures emerged. Moreover, not all policy changes presented could be regarded as true reform in conditions of bringing improvement in living criteria. For example, some plan changes had more to do with governments managing short term fiscal constraints.


Anderton, A. , (1993) Economics for GCSE. Collins Educational.

Boyes, W. , (2008). Fundamentals of Economics: College student Wording. Houghton Mifflin

Colander, D. , (2007). Economics. McGraw Hill ADVANCED SCHOOLING.

Lipsey, G. , Crystal, A. , (2002). Key points of Economics. Oxford School Press.

Parkin, M. , (2000) Economics. Addison Wesley.

Solomon, J. , (2006) Economics. Prentice Hall.

Young, R. , (1987). WORKOUT Economics. McMillan.

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