Taylor's business foundation

QUESTION 1:-

Part A:

Arnold (2001, p.129.) stated that price elasticity of supply(PES) can be define as measurement for the percentage change in the quantity supplied resulting from one percentage change in the price and it is similar to:

One of the determinants for PES is the time period. There are two type of time period. One of it is long-run period and another is short-run period. Supply is inelastic during the short- run period. When the price of a good suddenly increases, the supplier cannot increase the quantity of supply immediately. This is because supplier maybe facing the problem of shortage for workers, raw ingredients for the good, and lack of cash. For example, the price of ABC car in the market increase suddenly, but the supplier cannot increase the quantity supply of ABC car immediately. This is because supplier maybe facing shortage of workers and the raw materials. In the other words, supply is elastic during the long-run period. This is because supplier got the enough time to adjust and estimate their productive capacity. For example, the price of ABC car increase for a period of one year, the supplier is able to distribute their cash flow, workers, technology and materials wisely. Therefore, the supplier can increase the quantity supply for the ABC car.

Another determinant for the price elasticity of supply is the ease of substitution. The elasticity is depends on the ability of the producer to shift the workers or modify the machinery of a product to shift the production from a product to another product that the price had increased. If the worker can be shift easily or the machinery can be modify easily to produce the production of the product that rises in price, this is an elastic supply. If they are hardly to be modified or shift the workers, it will be an inelastic demand.

(Lipsey R.G., Ragan C.T.S.& Storer P.A. (2008) Economics,13th edition. Pearson Education, Inc. United States of America.)

(Arnold, R.A. (2001). Microeconomics 5 edition. South-Western College Publishing. United States of America.)

Part B:

Businesses use the concept of price elasticity demand (PED) to decide on their pricing strategy. PED can be defined as the percentage change in quantity demanded divide by the percentage change in price. It can be written as below:-

PED normally is a negative value but the negative sign will be ignore. This is because the sign is showing the negative relationship between the price and the quantity demanded. It's defined under the law of demand. There are five degrees of PED, such as inelastic, elastic, unit elastic, perfectly inelastic and perfectly elastic. When it's an inelastic demand, the coefficient is less than one but greater than zero. This shows that consumers respond less to the change of the price. When it's an inelastic demand, the increase in price will cause increase of total revenue and the opposite, the increase in price will cause an increase of total revenue.

When it's an elastic demand, the coefficient is greater than one but smaller than infinity. This shows that consumers respond more to the change of the price. When it's an elastic demand, the increase in price will cause decrease of total revenue and the opposite, the increase in price will cause an increase of total revenue.

When its unit elastic demand, the coefficient is equal to one. This means that 10% decrease in price will leads to 10% increase in the quantity demanded. This means that the total revenue will remain the same.

When it's perfectly inelastic, the coefficient is equal to zero. This means that the percentage quantity demanded does not change as the percentage of price changed. This means that consumers do not respond to the change of the price. No matter there is an increase or decrease in price, there is no changes in quantity demanded. Which means that decrease in price will leads to a decrease of total revenue, vice versa.

When it's perfectly elastic, the coefficient is equal to infinity. This means that the percentage quantity demanded will changed infinitely when there is a small change in percentage in price. Although there is a small change in percentage of the price will leads to an infinite change in the percentage of quantity demanded. This says that businesses cannot change the price easily. It will lead to adverse consequences.

In the conclusion, the businesses set their price at a higher level to get higher total revenue when it's an inelastic demand and set their price at a lower level to get higher total revenue when it's elastic demand.

QUESTION 2:-

Part A:

According to Arnold (2001, p.129.), supply refer to the ability of the supplier to supply a particular quantity of supply at different prices at a particular time period.

Diagram above shows that an increases in supply. Supply curve will shift rightward form S0 to S1.

There are few reasons that cause supply of a product increases. One of the reasons is a decrease in the price of the raw materials. When there is a decrease in the price of the raw materials, the production cost will become lower. This is benefit to the producer because they can lower their cost of producing the good but they still selling the good at the same price. Hence, total revenue will increase if producer supply more good. For example, producer willing to supply more pens when the price of ink (as the raw material) decreases. This will cause the supply curve to shift rightward.

Another reason is the price of other goods. There are two types of good. That is substitute goods and complement goods. For substitute goods, the price of the good increase may leads to an increase in the supply for another good. For example, Horlicks and Milo are substitute goods, the price of Horlicks increase lead to an increase of supply for Milo. Thus the supply curve for Milo will shift to the rightward. For complement goods, the price of the good increase may leads to an increase in the supply for another good. For example, chicken and feather duster are complementary goods, the price of chicken increases will lead to an increase of feather duster. Thus the supply curve of feather duster will shift to the rightward.

The third reason is improvement in technology. When the technology is improved, the productivity of the goods increases, at the same time the cost of the production decreases. Thus producer willing and able to produce more goods. Hence, the supply curve will shift to the rightward.

(Lipsey R.G., Ragan C.T.S.& Storer P.A. (2008) Economics,13th edition. Pearson Education, Inc. United States of America.)

(Arnold, R.A. (2001). Microeconomics 5 edition. South-Western College Publishing. United States of America.)

Part B:

Price ceiling that is also known as the maximum price is set below the equilibrium price by the government. At this price level, consumers benefit from it but the suppliers do not get any benefit. This is because the price of the goods is low. According to the law of supply, a decrease in the price of the good itself will lead to a decrease of quantity supplied of the good. Hence there is low revenue for the suppliers, they are not willing to produce more of the goods for the people's need. So, shortage of the goods will occur.

Price floor that is also known as the minimum price is set above the equilibrium price by the government. This is to make sure suppliers can earn a minimum of profit when they sell any of the goods. At this price level, suppliers benefit from it but the consumers would not get any benefit. This is because the price of the goods is high. According to the law of supply, an increase in the price of the good itself will lead to an increase of quantity supplied of the good, and the law of demand, price of the good increase will lead to a decrease of quantity demanded. Hence there is a surplus occur. This is because the suppliers want to produce as many as they can so that they can earn more profit but consumer are consuming lesser because it's too costly.

Economics mean that the price floor and price ceiling distribute the resources insufficiently and wasted the resources that we have. This is because when the price floor occurs, suppliers will produce more product and results surplus. The extra products are not going to consume by consumers. It leads to wastage of the product. When the price ceiling occurs, consumer will buy a lot of the good but suppliers are not willing to produce more because they have low profit margin. This will leads to a shortage of the product.

QUESTION 3:-

Part A:

The definition for demand is the quantity of a good that consumer willing and able to pay for the good at different price level. Changes of demand will leads to a shift of the demand curve to the right or left. This will occur when the price of related goods such as substitute goods or complements goods, the size of household's income, tastes and fashion, expectations, whether condition, availability of credit facilities, size and structure of the population and advertisement. For example, when Coca-cola n Pepsi are substitute goods, the price of Coca-cola decrease will leads to a decrease of demand for Pepsi. Hence, the demand curve of Pepsi will shift to the left, from D1 to D2 as the diagram shown below.

The definition of quantity demanded is the number of units for a good that consumers are willing and able to pay for a good at different price level during particular time period. Changes of quantity demanded will leads to a movement along the demand curve. This will only occur when there is a change in price of the good itself. The change of the price itself is the only determinant that will lead a movement along the demand curve. For example, the price of Apple notebook is increases from RM1000 to RM2000, the quantity demanded of Apple notebook will decrease from 100 to 50. This leads to an upward movement along the demand curve, from A to B, as shown in the diagram below.

Part B:

Income elasticity of demand (YED) can be defined as measurement for the percentage change in the quantity demanded resulting from one percentage change in income. Similarly,

There are three degrees of income elasticity such as positive YED, negative YED and exactly zero YED. Positive YED can be further divide into income inelastic and income elastic. For income inelastic, the numerical measure of elasticity is less than one which means that only a small increase of the quantity demanded of the good than the percentage rise in income. This tells us that the particular good is a normal good. For examples, cloths and food. For income elastic, the numerical measure of elasticity is always positive and more than one which means that a large increase of the quantity demanded of the good than the percentage rise in income. This tells us that the good is a luxury good. For examples, branded bags, shirts, watches, shoes and others.

When the numerical measure of elasticity is less than zero (YED<0), it's a negative YED. This means that an increase in income will lead to a decrease of the goods. These goods can be concluding as inferior goods. For example, second-hand goods and low quality goods.

If YED is exactly equal to zero (YED=0), its show that the quantity demanded of the good does not change although the income level has increase. This is because, the good is a necessity. For examples, rice, sugar, pepper and salt.

(Lipsey R.G., Ragan C.T.S.& Storer P.A. (2008) Economics,13th edition. Pearson Education, Inc. United States of America.)

QUESTION 4:-

Part A:

Consumer surplus is meant by the price that consumer willing to pay for a good is higher than the selling price of the good. This means that the price consumer willing to pay is over the selling price of the good. This is the advantage to the purchasers or buyers because they are paying lesser than the price they are willing to pay. For example, Mr. Wong is willing to pay RM 2 for a burger, but the price of the burger cost him for RM1.50 only. This means that Mr. Wong paid RM0.50 lesser than the price he willing to pay for it.

Producer surplus is meant by the price that producer receive for a good is higher than their prediction price for the good. This means that the price producer receive after selling the product is more than their prediction at the beginning. This is the advantage to the producers because they are receiving more than the price they predicted. For example, Producer ABC predict that they can only sell their goods A at the price of RM3, but at last there is consumer that bought the good A with the price of RM4. This means that the producer receive extra RM1 for the good A as his profit.

Part B:

The three basic economic concepts are scarcity, choice and opportunity costs.

Scarcity is the situation when there are not enough resources to full fill people's desires. People need to make choice due to the shortage of the resources. They need to forgo another product when they want to choose other extra goods. The goods that being forgo is known as opportunity costs. These three concepts can be explained using the production possibilities frontier (PPF). PPF is a graph that shows different combinations of two different products that economy can possibly being produce.

From the diagram above, scarcity is represented by the unattainable combinations. That is outside the production possibilities frontier. While the attainable combinations and the points along the PPF are the choices that people can decide to choose. Opportunity cost is represented by the negative sloping of the frontier.

REFERENCES:-

  1. Lipsey R.G., Ragan C.T.S.& Storer P.A. (2008) Economics,13th edition. Pearson Education, Inc. United States of America.
  2. Arnold, R.A. (2001). Microeconomics 5 edition. South-Western College Publishing. United States of America.

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