Principles of Economics Responses, Essay Example

1. Answer 1A

Factors of production delineate as the inputs i.e. the quantity and quality of the production depends upon the output i.e. the quality and quantity of the goods is known as factor of production. There are four factors of production on which all the production procedures are dependent. They are:

Land

Land is considered to be the natural and primary gift from nature. Moreover, it is also known as the natural factor of production. The returns from this natural factor of production include rent. The classical economist named as Ricardo associated rent with the fertility of land. However, recent economist like Marshal and Javons says that “land earns rent because of its scarcity.”  Land is primary factor of production. The perfectly inelasticity supply can be achieved by this factor of production. However, this factor of production varies from region to region on the basis of fertility. This is only factor that is indestructible. This resource can be increased by purchasing more and more land for the production (“4 Factors of Production – Land Labour Capital and Enterprise “).

Labor

The term labor is defined as the ability to work. An initial human factor of production is named as labour. Like other factors of production, this factor consists of feelings, likes, dislikes and thinking ability. This resource can help us to gain better level of production. The return to the labor is called as wages (“4 Factors of Production – Land Labour Capital and Enterprise “).

Capital

Another important factor of production includes capital. Different views are available in this regard however the term capital is considered as the investment made by the businessman in organization. In fact, the commerce subjects for example organization of commerce (O.C) and secretarial practice (S.P) defines capital as the finance or firm’s investment. But in economics capital is mentioned as wealth used for production. The return to the capital is called as interest or capital gains (“4 Factors of Production – Land Labour Capital and Enterprise “).

Entrepreneur

The word entrepreneur is derived from a French word “Entreprendre” that means undertake some activity. The two functions must be performed by an entrepreneur such as organization functions and risk bearing functions. The return to the entrepreneur is called as profit (“4 Factors of Production – Land Labour Capital and Enterprise “). In order to produce any commodity, these four factors of production are needed at a time. The term input used in this scenario defines the starting point of the production activity. This is considered as the most important factor required for the production function. According to prof. Benham “Anything that contributes towards output is a factor of production.” (“4 Factors of Production – Land Labour Capital and Enterprise).

2. Answer 1B

Demand Curve

The graphical representation that shows the relationship between the price and the quantity of s particular product that the consumer wants to buy is called as “Demand Curve”. The curves are needed in order to test or measure the supply and demand of a particular product in the competitive market. Therefore, allowing the producer to know the profit against certain pricing. The change in the slope due to change in factors of production other than price is known as “Change in Demand”. The consumer behavior is determined by various factors of production but the important factor is price. If the prices of certain product fall, the demand for the quantity of that product will increase and vice versa (“What is a Demand Curve? “).

Supply Curve

The graphical representation of the relationship between the price of the product and the quantity of the product is known as “supply Curve”. (“Microeconomics – Perfect Competition “) In addition, the product of the price is measured on the y-axis and the quantity of the product is measured on x-axis.

Equilibrium Demand and Supply

If the supply curve intersects the demand curve then the situation is said to be equilibrium demand and supply curve. At this point the amount of goods that are supplied is equal to the amount of goods that are being demanded. Thus this situation satisfies the current economic condition. However, in the real world the market equilibrium only exists in the theories as the prices of the products are continuously changing in relation to fluctuating in demand and supply (“Microeconomics – Perfect Competition “).

3. Answer 2A

Elasticity of Demand

The elasticity of demand is defined as “the degree to which the demand for good or services varies with its price.” For instance cars, appliances and other luxury items shows elasticity of demand whereas other goods such as food, pharmacy and clothing shows inelasticity of demand. The three major types of elasticity of demand are

• Price elasticity of demand: the sub categories depending upon the prices of goods are elastic, unitary elastic and inelastic.
• Income elasticity of demand
• Cross elasticity of demand

Following are the factors that determine the price elasticity of goods:

• Availability of substitutes
• The degree of necessity
• The proportion of a purchaser’s budget consumed by the item
• The time period involved

However, if the elasticity of the demanded goods is less than 1 it is considered as inelastic. If it is more than 1 the demand for goods is elastic. In addition, unitary elasticity is approximately 1. The preferred demand for goods is unitary elasticity that means the percentage change in quantity demanded is about the same as the percentage change in price.

4. Answer 2B

Substitute and complementary goods

If the incomes are increase the demand for the goods also increased. These goods are called as normal goods. The prices of the goods are also responsible for the influence of purchasing. If the substitute goods satisfy the consumers taste then they will prefer low cost goods. For instance a substitute for hamburger is pork. If pork prices increases then people will shift to hamburger. These are called as substitute goods. The opposite for substitute goods is complementary goods. In another words the goods that are sold in complements with another goods for instance buns are complementary with the hamburgers are called as complementary goods.

5. Answer 3A

Perfect Competition – a Pure Market

Following are the basic assumptions for a perfect competition:

Many small firms each of them produce an insignificant percentage of total market output and thus exercise no control over the ruling market price.

Many individual buyers, none of whom has any control over the market price – i.e. there is no monopsony power

Perfect freedom of entry and exit from the industry, the Firms face no ruined costs – entry and exit from the market is possible in the long run. This assumption ensures all firms make normal profits in the long run. Homogeneous products are supplied to the markets that are perfect alternatives. This leads to each firms being passive “price takers” and facing a perfectly elastic demand curve for their product Perfect knowledge – consumers have readily available info about prices and goods from competing suppliers and can access this at zero cost – in other words, there are few dealings charges involved in searching for the required information about prices. No externalities rising from manufacture and/or consumption which lie outside the market. In real world these assumption do not exists. Some dealers may exert some control over market supply and pursue to exploit their monopoly power.

6. Answer 3B

Monopolistic Competition

A type of competition within an industry where:

1. All companies produce comparable yet not perfectly substitutable products.
2. All companies are able to enter the business if the profits are attractive.
3. All firms are revenue maximizes.
4. All firms have some market power, which means none are price takers.

If an organization is considering lowering its prices in order to increase total revenue is said to be in monopolistic competition. In this way two incompatible factors are done such as, reduced prices increase quantity of a good and vice versa. The researchers can help the firm to increase its profit via adjusting output and the price. This should be done until the marginal revenue is equal to marginal cost. The government has made the law and regulation in order to keep new firms out of the market. The economist normally disobeys this law in order to lower the prices.

Product Development and Marketing in Monopolistic Competition

The organization that is engaged in the monopolistic competition here invests into the product development and marketing for the firms in the industry. Thus, in the monopolistic competition power is achieved by the monopolistic firms. Moreover, advertising the products may cause additional cost and helps to increase the product sales in high prices. If pure competitive market is compared, the prices of the good will are higher and the quantity will be reduced in the monopolistic competition.

Work Cited

“4 Factors of Production – Land Labour Capital and Enterprise “Web. 11/19/2012 <http://kalyan-city.blogspot.com/2010/11/4-factors-of-production-land-labour.html>.

“Microeconomics – Perfect Competition “Web. 11/19/2012 <http://www.tutor2u.net/economics/revision-notes/a2-micro-perfect-competition.html>.

“What is a Demand Curve? “Web. 11/19/2012 <http://www.wisegeek.com/what-is-a-demand-curve.htm>.