Name : Ei Hnin Cho

Subject Title : Economics:1 Micro and Macro Theory and

Application

Batch : HND Business Batch 1

Date : 29.9.2021
Assessment-1/ Outcome-1
Answer-1

Total cost is the sum of fixed cost and variable cost. Fixed costs are expenses that
don’t change when the volume of output increases or decreases within a certain range. In
other words, fixed costs are fixed as long as the business stays within a certain size. Fixed
costs are less controllable than variable costs because they’re not based on volume or
operations. These include: Salaries, Rent and increase etc. Variable costs are costs that
change depending on how much a firm produces. In other words, the more goods a firm
produces, the higher its variable costs. Conversely, the fewer goods a firm produces, the
lower its variable costs. These include: Commissions, raw materials and product supplies etc.

The average cost is the cost of producing a product, and the total cost is calculated by
the total cost of the product. The average cost is the total cost divided by the number of good
units produced.

Marginal cost is the cost of producing an extra unit of production. The effect of
declining profits is that the longer a product lasts in the market, the more sales and supply
will be able to meet demand, but demand will decline overtime. When demand exceeds a
certain point, the economies of scale reverse and the cost per unit increases due to the cost of
buying so many units.

Answer-2

An oligopoly is a market characterized by a small number of firms that are aware that
they are interdependent in their pricing and production policies. The number of companies is
enough to give market power to each company.

Most oligopolies are characterized by competition on characteristics other than price.

Oligopolistic firms tend to charge relatively high prices and compete through advertising and
other means of promotion. If all the big firms in the market cut prices, this usually simply
leads to lower profits, so there’s little change in market share. This becomes a price
competition. Price competitions are usually avoided. Existing firms are safe from new entry
because barriers to entry are high.

Companies in oligopoly can work together to set a market price or production rating
to increase industry profits. In extreme cases colluding firms may act like a monopoly.
Oligopolists, on the basis of their individual interests, produce more than one monopolist at a
lower cost. It assumes that in an oligopoly market, if one firm raises its price, its competitor
will not follow suit. If they keep their prices constant, the competitors will get a higher
market share. The firm that has raised its price will find its revenue falls by a proportionally
large amount, making that part of the demand curve relatively flat. Conversely, if a firm in an
oligopolistic market lowers its price, its competitors will be forced to follow suit to avoid
losing market share. A price cut will result in a very small change in revenue, making this
part of the demand curve relatively steeper. The company then has no incentive to change its
price, as this would lead to a decrease in the company’s revenue.

Answer-3

A market in which there’re many buyers and sellers, the products are homogeneous,
and sellers can easily enter and leave the market.

The main characteristics of perfect competitions are:

 There’re a large number of companies on the market

 The companies on the market sell an identical product
 The companies are price takers
 Each company has small share of the total market (no monopolies)
 There’re no barriers to firms entering or leaving the market

In a perfectly competitive market, the demand curve reflects the fact that when the
price of good price of a good product rises, the demand for a good product decrease. Price is
determined by the intersection of supply and demand. Individual businesses don’t influence
prices under perfect competition. Once the market and demand forces are determined,
individual businesses become buyers. Individual businesses may ask for a fair price in the
market, or the buyer will buy the product from several other cheaper companies. Therefore,
the demand of each company is equal to the market fair price.
 The demand curve of a firm in a market with perfect competition is very different
from that of the market. The demand curve of the market is downward sloping, while the
demand curve of the firm with perfect competition is horizontal line equal to the equilibrium
price of the market as a whole. The horizontal demand curve indicates that the elasticity of
demand for the good is perfectly elastic. This means that any individual firm charging a price
slightly above the market price wouldn’t sell any products.

A commonly used strategy to increase market share is to offer a firm’s product at a

lower price than its competitors. In a market with perfect competition, firms can’t lower their
product price without making a negative profit. Assuming that the firm wants to maximize its
profit, it will sell its goods at the market price.

Answer-4

Profit maximization is the goal of selling the maximum amount of units at the
maximum price at the minimum cost to provide the highest possible profit to the firm. The
main disadvantage of profit maximization is that the quality of the products usually suffers,
which in turn can affect the overall image of the company.

In conventional theory of business, the main objective of a business is profit

maximization. It’s also the goal of financial management, as maximizing profits is the main
goal of any business. Assuming a given taste and technology, the price and production of a
given product are determined competitively with the sole objective of profit maximizing.
Profit maximization means increasing the company’s dollar revenue. This is the traditional
approach and the main objective of financial management. With the objective of profit
maximization, companies try to take on the investment projects, that yield greater profits and
drop all other unprofitable activities. This means that every business decision is evaluated in
terms of profit. In profit maximization, the relationship between inputs and outputs is crucial,
either inputs are minimized to achieve a given profit or outputs are maximized given input.
The goal of profit maximization is to reduce risk and uncertainty factors in business decisions
and operations. Conventional business theory defends the goal of maximization with the
following arguments:

 The profitability of a firm is an important indicator of its financial stability and

economic well-being.
 In a competitive market, only those firms survive which are able to market a profit.
Therefore, they always try to make it as big as possible. All other objectives are
subordinate to this main objective.
 Maximizing profit is a time-honored goal of a business and the evidence against this
goal isn’t conclusive or clear.
 Profit maximization promotes the socio-economic welfare of the various stakeholders
associated with the firm. It helps shareholders maximize their wealth, increases
incentives and benefits for employees, improve products for customers and creates
jobs.
 Although profit is not perfect, it’s the most efficient and reliable measure of a
company’s efficiency.
 Under the conditions of a competitive market, profit can be used as a criterion for
performance evaluation and profit maximization leads to efficient allocation of
resources.
 It leads to appropriate and efficient channeling and utilization of surplus funds for
productive business operations and other economic activities.
 The goal of profit maximization has proven to be extremely accurate in predicting
certain aspects of a firm’s behavior and trends, thus the behavior of most firms is
directed toward the goal of profit maximization.
Assessment-2/ Outcome-2

Answer-1

Cost-push inflation occurs when aggregate prices rise due to increases in the cost of
wages and raw materials. Higher production costs can reduce aggregate supply (the quality of
total output) in the economy. Since the demand for goods has not changed, price increases
from production are passed on to consumers, resulting in cost-push inflation.

The main case of cash-push inflations are:

Higher price of commodities

An increase in the price of oil would result in higher gasoline prices and higher
transportation costs. All business would see some increase in costs. As the most important
commodity, higher oil prices often lead to inflation that drives up costs.

Imported inflation

Devaluation increases domestic prices for imports. Therefore, following a

devaluation, there is often an increase in inflation due to rising costs of imports.

Higher wages

Wages are one of the most important cost factors for business. Rising wages will
drive up prices as firms face higher costs (higher wages can also lead to rising demand).

Higher Taxes

Higher VAT and excise taxes will raise the price of goods. This price increase will
only be temporary. Inflation due to increases in profits. When companies gain greater
monopoly power, they are able to rise prices to make more profit.

Higher food prices

Food accounts for a smaller share of total expenditure in Western economics but plays
a larger role in developing economics.
 Cost-push inflation could be caused by a rise in oil prices or other commodities.
Imported inflation could occur after a depreciation in the exchange rate that rises the price of
imported goods.

Answer-2

When it comes to the cost of living, a rising inflation rate means that if has become
more expensive to maintain our previous lifestyle. If our income has not increased by at least
the rate of inflation during the measured period, then our purchasing power has decreased
because the cost of goods and services has increased during that time. Inflation not only
affects an individual’s day-to-day spending, but can also affect our savings, investments and
pensions.

The impact of inflations has positive and negative impact on business. Positive impact
are:

 Industry-wide price increases enable revenue growth.

 Revenues+ Gross margin= Gross profit
 Makes using debt as a source of financing cheaper in real terms.

Negative impact are:

 If costs increase due to inflation, a company may not be able to pass them on to
customers.
 Inflation can upset sing inflation is business planning and lead to lower investment.
 Rising inflation is associated with higher interest rates- this reduces economic growth
and can lead to recession.

Answer-3

The period of 1990-1991 saw the rise of inflation in the UK. Inflation is usually
considered a problem when the inflation rate rises above 2%. The higher the inflation, the
worse the problem. In extreme cases, hyperinflation can destroy people's savings and cause
great instability. However, this type of hyperinflation is rare in modern economics. Inflation
is usually accompanied by high interest rates; However, inflation can cause problems. This
leaves savers worse off when inflation is higher than interest rates. It’s often pensioners who
suffer most from inflation. The cost of changing price lists becomes more frequent when
inflation is during high. In certain circumstances, high inflation can lead to a decline in real
wages. When inflation is higher than nominal wages, real incomes fall. Growth in inflation
leads to a period of instability and disruption to growth and economic performance. Inflation
undermines investment and long-term economic growth. This is because of the greater
uncertainty and confusion during periods of high inflation.

In 2000, UK inflation fell and between 2001-2003, inflation in the UK was relatively
stable. Lower, stable and predictable inflation is good for economy and for country’s
finances. It helps money retain its value and makes it easier for everyone to plan how, where
and when they spend. For example, businesses are more likely to grow their business be in
the coming years. This helps the economy grow at a sustainable pace, creating higher
incomes and new jobs. Low and stable inflation is supposed to provide more stability and
encourage businesses to take risks and invest.
Assessment-3/ Outcome-3

Answer

Fiscal policy is the use of government spending and taxation policies to influence
economic conditions, specifically macroeconomic conditions, including aggregate demand
for goods and services, employment, inflation, and economic growth. Fiscal policy is often
compared to monetary policy, which is conducted by central bankers rather than elected
government officials.

Governments have many goals when it comes to deciding fiscal policy. Governments
can prioritize one goal over another. The main aims of fiscal policy are:

 Economic Growth
 Full employment
 Control Debt
 Accelerating the rate of economic development
 Equitable distribution of income and wealth
 Control Inflation
 Price stability
 Economic stability
 Optimum Allocation of resources

Supply-side policies include a range of measures aimed at reducing costs, improving

efficiency, productivity and international competitiveness so that the economy can grow
without causing inflation. There’re two main types of supply-side policies:

 Free market supply-side policies include measures to increase competitiveness and

free market efficiency. Eg- privatization, deregulation, lower income tax rates and less
union power.
  Interventionist supply-side policies involve government intervention to overcome
market failures. Eg-increased government spending on transportation, education and
communications.

To reduce unemployment, the government can support interventionist policies, such

as better training and education. Free market policies can be purchased, such as improving
labor market flexibility. However, there is a limitation as supply policies are ineffective in
dealing with the cycle (low demand unemployment).

Free market supply-side policies:

Lower unemployment benefits

Lower benefits increase the incentive to find a job. It is argued that generous
unemployment benefits lead to an unemployment trap in which recipients receive only a
small increase in their after-tax income if they choose to work.

Reduced power of trade unions

Trade unions can cause real wages/ classical unemployment (where wages are pushed
above equilibrium. Restricting the power of trade unions could lead to lower wages and lower
unemployment. However, it lowers workers’ wages due to the lack of protection from
dictatorial employers.

Increased labor market flexibility

For example making it easier to hire and fire workers in theory, this should encourage
firms to start up and hire workers in the first place. The European Union has argued that
higher unemployment is due to tighter labor markets. Unemployment in the UK since 2010
has been due in part to an increase in flexible labor markets and zero-hour contracts.
However, greater labor market volatility can make workers more fearful of losing their jobs.
This can lead to higher wages and inequality.

Free Trade

Free market economists argue that the best solution to reducing unemployment in the
long run is to introduce free-markets and free-trade. Disruptions can occur in the short term,
but markets create new jobs. Attempts to stop market development and global trade have
slowed the transition from old to new industries.
Interventionist supply-side policies:

Better education and training

This will provide skills to help the long-term unemployed find and retain employment
in a rapidly changing labor market. It can help reduce structural unemployment. However, it
depends on whether the government can provide the skills that employers really need. There
is no guarantee that government spending can close the skill gap.

Training for the unemployed

It can lead to more confidence in interviews with better CVs. This can be useful in
targeting the long-term unemployed and those who have become discouraged by the labor
markets.

Better job information

It is to reduce frictional unemployment. Better access to available jobs will help

reduce this unemployment.

Employment subsidies

The government could provide subsidies to business to hire the long-term

unemployed. This could lead to new long-term unemployment opportunities. However, this is
costly and there is a risk that firms will make current workers redundant in order to benefit
from the employment subsidies.

Geographical subsidies

Unemployment is geographically based on the inability to relocate to a job growth

area due to a work-related disability. The government can provide more affordable housing
for cities with job growth.

Maximum weekly working hours

Arguably, a maximum of 35 hours a week in a maximum work week would require

hiring multiple workers to do the same job. France tested this policy. But critics say the labor
market doesn’t work this way, and companies simply cannot use the unemployed for complex
tasks.