Question-Answer

Question-Answer

PartA

Question1

Opportunitycost is the value of the item or want that a consumer gives up inorder to consumer another product. Opportunity cost occurs due toscarcity. It affects decision making in issues such as allocation ofresources at individual or corporate level (Palmer &amp Raftery,1999). Two examples of opportunity cost include, a state using itslimited budget to construct roads rather than schools or when onedecides to buy shirt and forgo buying 1700 pieces of bubble gum.

Question2

Priceelasticity of demand is a concept that describes the proportional orpercentage change of the amount of goods that buyers buy as a resultof a change of its price by a particular percentage. For example anapple, if the price of apples rises by 20 per cent in a localityleading to a contraction of demand by 50%, then the same percentagerise leads to a contraction of demand by 10 percent in anotherlocality it will mean that the later has a less elastic demand. Inthe business environment, some goods are more elastic than others.Products that are less elastic are prone to upward price adjustmentsto increase profits because they have a definite market. Productsthat are more elastic are likely have less price changes especiallyupward because the result will be less amounts being consumed. Forexample, high-end cars such as Range Rovers and BMW’s are priceinelastic because buyers do not purchase them for necessity butostentation. Low-end products that have many close substitutes arevery elastic and any upward or downward price changes lead to changesin the quantities demanded. Examples of these goods are detergents.

Question3

  1. The car industry has an oligopolistic market structure because there many car producers but only few buyers in most economies. Cars are also differentiated through design, models, and comfort. Other aspects that cause differentiation are fuel consumption and the ideal place operation. Cars such as the sporty Ferrari are only fit for urban terrain where roads are passable while the British land rover can cruise through any terrain. Specifically, the car industry is an impure oligopoly.

  2. The milk industry is a monopolistic competition type of market. While there are many milk producers, there are also many potential buyers of milk and milk products. Milk products are also many and differentiated in different ways. Consumers can but the milk or other milk products such as yoghurt and cheese. In the milk industry, both real and imaginary differentiation. Real differentiation occurs to tangible differences between products while imaginary differentiation is only a conception of the consumer. In the milk industry, milk products such as yoghurt and cheese constitutes real differentiation while packaged milk constitutes imaginary differentiation because consumers buy certain brands imagining that they are better than other brands that are packaged by a different supplier.

Question4

Unemploymentis an important aspect to the economy because it imposes a cost tothe entire society. Some of the costs that the government incurs tomitigate unemployment are within the dead weight loss because thereare no particular or significant gains that are likely to offsetthem. A high rate of unemployment also affects different players inthe economy. To the government, unemployment causes shrinking of theeconomy due to reduced tax revenues, reduced GDP growth, and highwelfare costs. On firms the impact if positive because there will bea downward pressure on wages. However, the demand for the productsthey produce is lower when there is unemployment. Structuralunemployment is also an important part of it because it shows how theprofessional and skill mismatch leads to many educated people beingunemployed (Bergstrand, 1991). For example, a country that lacks oilresources may have many professionals in petroleum technology beingunemployed because their skills lack the place for utilization. Another example of structural unemployment is when automobile workersare laid off to create room for computer analysts. The automobileworkers have to retrain to rejoin the job market because their skillsare not transferable.

Question5

Thegovernment expenditure multiplier differs from the tax multiplierbecause the former has an inverse relationship with the marginalpropensity to save (MPS) (Barro, Redlick, &amp National Bureau ofEconomic Research, 2009). A change in the amount of people’s incomeas a result of a change in government expenditure is equal to theinverse of the MPS. The tax multiplier, on the hand, is a multiplefigure that represents the change in GDP due to changes in the amountof tax charged. Unlike the GEM, the tax multiplier is equal toMarginal propensity to consume as a fraction of the MPS. GEM isbetter than TM because it causes a lesser budget deficit.

PARTB

Pricesin the housing market are a subject of many other variables such asthe rate of interest rates, the price of raw materials, reducedproductivity of mortgage firms and construction companies, and hightaxes (Hall, 1982).

Theprice of raw materials: In the housing market the general value ofproperty affects the price of all raw materials. When it is expensiveto construct a house due to an increase in the price of rawmaterials, the result is an increase in the price of houses.

Increasedimport prices: When there is a devaluation of the local currency, thecost of importing furnishing materials for high-end houses will risepushing the price of houses further up. Increased cost ofconstruction are always passed to the final buyer of a house hence,pushing some buyers out of the housing market.

Profit-push:Sometimes mortgage firms and construction companies push up theirprices to keep up with the rate of inflation. This phenomenon occursduring period of rapid economic growth. The push-up aims to maintainthe profit margins hence, pushing the price of houses further up.

Decreasingproductivity of construction companies and mortgage firms: In someinstances, the firms involved in the housing market become lessproductive and let costs to increase. Increased costs invariablycause the final prices of houses to also increase.

Hightaxes: When the government imposes a higher tax, the cost ofproduction also goes up. The final buyer of a house bears the costthrough high house prices.

Question7

  1. Currency values affect the demand of goods products in the country in different dimensions. When the local currency is devalued, imports become expensive. If the product produced depends on some imported raw materials, the cost of production may rise leading to higher prices hence, less demand. In most cases, countries specialize in goods they can produce. Thus, a devalued local currency makes the goods cheaper in the foreign market hence, increasing demand. When the local currency has more value relative to foreign markets, the goods produced will be expensive hence, reducing the demand.

  2. Currency value determines the exchange rates, which defines the relationship between the local and foreign prices the goods that consumers buy. The domestic price of any good is the same as the exchange rate value of the local currency times the price of the same good in the reference foreign currency. Thus, the price of locally produced goods changes according to the value of the local currency against other foreign currencies.

References

Barro,R. J., Redlick, C. J., &amp National Bureau of Economic Research.(2009). Macroeconomiceffects from government purchases and taxes.Cambridge, Mass: National Bureau of Economic Research.

Bergstrand,J. H. (1991). Structural determinants of real exchange rates andnational price levels: Some empirical evidence. TheAmerican Economic Review,325-334.

Hall,R. E. (1982). Inflation.Chicago: University of Chicago Press.

Palmer,S., &amp Raftery, J. (1999). Economics notes: Opportunity cost. BMJ:British Medical Journal,318(7197),1551.