Economic Forecasting for Management - Assignment Example

Managerial Economics: Assessment 1 & 2 Name Institution Managerial Economics: Assessment 1 Q.1 When technology increases, this means that new cost effective methods of production have been devised. This leads to a decrease in the price of the laptops. However, the quantity of the laptops demanded does not change. This leads to a down ward shift in the demand curve leading to the equilibrium position shifting from E0 to E1 as shown in the diagram below. Q.2. Income elasticity of demand measures the degree of responsiveness of the demand of a certain good in relation to the changes in income levels (Thomas, 2003, p.4). An income elasticity of demand of 0.89 shows that this is s necessity good since its less than 1. This has been achieved through a mathematical calculation as shown below: Elasticity of demand (Eδ) = % change in quantity demanded / % change in real income A diagram may be used to depict the above scenario as follows: Quantity Eδ slope Income The shape of the slope shows that the change is slightly sloping. In this case, it means that a 1% change in the level of income (whether an increase or a decrease) leads to a proportionate change in the level of quantity demanded by 0.89%. Q.3 Minimum wage defines the lowest possible amount of money that a worker gets paid after delivery of services for a certain pre-agreed period of time (Satya, 2007, p.14; Alicia, & Michael, 2006, p.5). This could be hourly, weekly or monthly. In the labor market, setting up of minimum wages has very significant effect on the wage-employment equilibrium grid. To illustrate this better, the diagram below is applied. supply curve wages Equilibrium point Demand curve Employment When the minimum wage is set, the graph shows dramatic changes as follows. Explanation: E is the equilibrium point for wage-employment before the minimum wage is set. Increasing minimum wage: When the government decides to increase the level of minimum wage from W to W1, there is an increased level of supply for labor. However, at this wage level, the employers are only willing to employ L1. This creates a labor surplus. Decreasing minimum wage: When the wage is reduced from W to W2 in the above diagram, the people are not willing to work at this kind of pay. However, the employer is willing to take L2 levels of employment. This leads to a labor deficit in the labor market. Q. 4a Output Total cost Fixed cost Variable cost Average variable cost Average total cost 1 2000 500 1500 1500 2000 2 2500 500 2000 1000 1250 3 2800 500 2300 766.66 933.33 4 3300 500 2700 675 825 5 4000 500 3500 700 800 6 4800 500 4300 716.66 800 7 6000 500 5500 785.71 857.14 TC =FC+VC AVC= VC/Q ATC= TC/Q Q.4b MC= δTC/δQ Output (Q) Total Cost (TC) Change in Q Q1-Q0 Change in TC MC= δTC/δQ 1 2000 1 2000 2000 2 2500 1 500 500 3 2800 1 300 300 4 3300 1 500 500 5 4000 1 700 700 6 4800 1 800 800 7 6000 1 1200 1200 Q.5 During the recession, the levels of income were lowered due to deteriorating economies (Belinda, 2008, p.3). As a result of this recession, people sought ways and means to ensure that they save on their purchases (Georg, 2002, p.16). This is reflective of the choices of goods they bought. The above statement “They’re real belly fillers” depicts this. The diagram below illustrates this statement. The goods above act as substitutes. The elasticity of demand for these goods is elastic. This means that change in price of one good will affect the quantity demanded of the other goods. From the diagram, an increase in the price of good one leads to a shift in demand of the other good. For example, if the prices of pancake mixes increase, the quantity demanded of rice and beans increase too leading to a shift in the demand curve as shown. A decrease in prices brings forth an equivalent decrease in the quantity of good 2 demanded. People can move seamlessly from consuming one product to the other because they are close substitutes. Q.6 An inelastic demand curve implies that changes in prices will not bring about any significant changes in the quantity demanded (Harry, 2002, p.13). The diagram below explains this scenario. If the RTA decides to raise bus fare, the change in the quantity demanded will be negligible. Assuming, from the graph that the current price is P0 and the quantity demanded is Q. If the RTA raises the price of their fares to P1, the quantity demanded will still be Q. On the other hand, if they decide to lower the prices to P2, the quantity demanded will still not change. This is illustrated in the graph below Assessment 2 Q.1 In a perfectly competitive market, the demand curve is perfectly elastic (Emily, 1991, p.11). This implies that if one company changes the price of their products, the quantity demanded for this product changes drastically. If one trader in this market increases the prices of their goods, people shift from the trader to the others in the market. In the above scenario, the shutdown point is determined in the following ways; MP= 4 AED, TC = 500 AED,FC= 200 AED,VC= 300,Q= 30 units The total variable cost is 500-200= 300. However, for 30 units at a price of 4= 120. There is a margin of 300-120= 180. Short- run: This implies that the company can continue producing in the short-run until its shutdown point where the VC of 300 will be reached. At this level, the firm will stop enjoying supernormal profits due to entrants in the market. This is depicted by the diagrams above. The shaded section depicts the region of abnormal/supernormal profits in the short-run. To be able to determine the shut down point, the long run equilibrium position will be determined as shown in the diagram below. Long-run/ shutdown position: Q.2. Price discrimination involves the act of offering different prices for the same product in different markets (Walter, 2008, p.21). However, for this concept to be applied perfectly, these markets must have different elasticity. Coke, as an international brand exercises this concept on a wide scope. The results include increment in sales and consequently revenue volumes. The firm uses the third degree form of price discrimination. This is done through two forms; Monopoly power- as a monopolist in its category, Coke could determine the prices in various market through it capacity as the market leader. Market separation is also another form in which Coke practices price discrimination. Markets are placed apart and prices of each market set separately for the same product. This could be depicted diagrammatically as shown below using two different markets, one with an elastic and the other with an inelastic demand. Q. 3 A duopoly market is a market where there are only two producers in existence. Two companies control the whole market. In the above case, Etisalat and Du are duopolists. The individual market segmentation could be analysed through the following diagram. When the two firms merge, they stop becoming duopoly and achieve a monopoly status. The market changes and this change is depicted through the following diagram. The rectangular shape shows the region of supernormal profit that the companies will start to enjoy once they become a monopoly after merging. Q. 4 DEWA acts as a monopoly as it is now. Through this, is able to charge higher prices and producing lower quantity of produce. The status currently could be depicted using the diagram below. I agree with the government’s strategy of breaking the company down into smaller units to provide a room for competition. This will neutralize the monopoly market and make it become a perfectly competitive market where quantity will increase and prices decrease. This could be shown in a diagram below. With more than one suppliers in the market, the price will reduce from P1 to P2 and the quantity from Q1 to Q2. Q. 5 Gas B Gas A HP LP HP 200, 200 50, 400 LP 400, 50 80,80 Dominant Strategy for A If A chooses to lower prices and B raises their prices, the payoff matrix for A becomes (50,400). This is not the ideal position for A. If A decides to raise the prices and B lowers theirs, the payoff for A becomes (400,50). This is the dominant strategy for Gas station A. A profit level in this strategy is 400 compared to the profit levels of B at 50. Dominant Strategy for B If B chooses to lower prices and A raises their prices, the payoff matrix for B becomes (80,80). This is not the ideal position for B. If B decides to raise the prices and A lowers theirs, the payoff for B becomes (50,400). The dominant strategy for Gas station B is (80,80). B profit level in this strategy is 80 compared to the profit levels of A at 80 too. Nash equilibrium Following the dominant strategies for A (400,50) and B (80,80), the two firms realize that they could reap more from the market if they both designed a dominant strategy for the market. This is the Nash equilibrium. In the above case, if both firms raise their prices, they have payoffs of 200 each. This forms the Nash equilibrium in this case. Q.6 Advertisement brings more awareness of the products that exist in the market and this increases the volume of sales (Janice, & Steven, 2004, p.6; John & Marc, 2011, p.8). However, monopolists enjoy supernormal profit both in the shirt as well as the long-run. For this reason, the supernormal profit margins may not change even in the long-run. The following diagram depicts this state and shows the level of supernormal profits. References Alicia, M, G, & Michael, L, 2006, ‘Management Accounting’, SAGE Publications: London. Belinda, S, 2008, ‘Essential Management Accounting : How to Maximize Profit and Boost Financial Performance’, Kogan Page: London. Emily, P, H, 1991, ‘Essays on the Economics of Discrimination’, Upjohn Institute for Employment Research: California. Georg, G, H, 2002, ‘Economic Forecasting for Management : Possibilities and Limitations,’ Quorum Books: Westport. Harry, T, 2002, ‘Foundations of Business Economics : Markets and Prices’, : Routledge: London. Janice, M, R & Steven, M, B, 2004, ‘The Controller's Function : The Work of the Managerial Accountant’, Wiley: New Jersey. John, Y, L & Marc, J, E, 2011, ‘Advances in Management Accounting’, Bingley: UK Satya, D, P, 2007, ‘Microeconomics for Business’, SAGE: Los Angeles Thomas, J, W, 2003, ‘Managerial Economics : Theory and Practice, Elsevier: California. Walter, B, 2008, ‘Labor Economics From a Free Market Perspective : Employing the Unemployable’, World Scientific: Singapore Read More