ICL Post-graduate Diploma in Business

WPG2102-8220 Economics and Quantitative Analysis

Ass-2 (Report-2): Firm’s Profit Maximisation Behavior and

Impacts of Macroeconomic Considerations and
Government Policies on its Decision Making

Name of the student: Ranvir Singh

Student ID number: 104711

Name of the selected country: Australia

Name of the selected product: Cookies

Lecturer: Dr. Dayal Talukder Page 1 of

14
Table of Contents

Executive summary ...........................................................................................................2

Introduction ................................................................................ ......................................3
Business basic economic objective......................................................................................3
Government macroeconomic objective...............................................................................3
Objective of this report........................................................................................................4
Structure of this report ........................................................................................................4
Understanding firms profit maximization behavior .....................................................4
Short-and long-run cost calculation .............................................................. ....................4
Firm’s revenue calculation .................................................................................................5
Firm’s profit calculation ..................................................................................................5
Monopoly firm’s profit maximization ............................................................................6
Macroeconomic Consideration and Government Policy ..............................................7
Business Cycles and possible impacts on firm ...............................................................7
Unemployment and Inflation...........................................................................................8
Fiscal policy......................................................................................................................11
Monetary policy ..............................................................................................................12
Conclusion........................................................................................................................13
References .......................................................................................................................13

Lecturer: Dr. Dayal Talukder Page 2 of

14
 1. Executive summary of the report

The main objective of this report is examined about the main purpose of
Business and Government. In this report the hypothetical data has been used to
calculate the long term and short term on selected product Cookies. A report
discussed about the total revenue and marginal revenue to know about the profit
of firm and in monopoly market what are the government intercession. In this
report we examine about the cause and costs of unemployment and inflation and
how it impacts on cookies firm. There are two economic policies are also
discussed in the report which are monetary and fiscal policy and how they impact
on real GDP and price level.

2. Introduction

Business basic economic objective

Objectives are required in every area of business, without purpose the business
is like a car with no headlights running blind and every business has a objective
which they want to achieve in a future. The profit earning is the basic and primary
objective of business. Just as a water is important for plant, similarly profit is
important for business to sustain in a market. Creation of cutomers are the
another important factor for business which helps to generate profit and demand
in a business and to attract more customers regular innovation and utilization of
resources is required with new ideas and products to keep up in a growing
competitive market. At the end, last objective productivity is very important which
can be achieved by the reducing wastages and making efficient consumption of
supplies and machines and it is determined by the output of the business
activities. [ CITATION Obj \l 1033 ]

Government Macroeconomic Objective

These are the main macroeconomic objective of government

Full Employment-

The main aim of most of the government is to maintain the low unemployment
rate by using specific policies. This implies that people can find employment who
are ready and able to work.

Price Stability-

The price stability is another government aim which precludes the nation's
products from failing worldwide competitiveness and guarantee greater economic
assurance and it could exists only when there is low inflation rate

Economic Growth-

There’s an increment in its production within the short run when an economy go
through economic growth. The economy productive potential has to be expanded

Lecturer: Dr. Dayal Talukder Page 3 of

14
 to maintain its progress for an economy in the long run. It can be achieved by the
increase in the quality and quantity production factors.[ CITATION Smr \l 1033 ]

Objective of this report

The report objective is understand the basic business objective of specific firm,
profit maximization behvior by short run and low run cost and how government
strategies influence on its decision making. The selected country of this report is
Australia and product for this report is Cookies.

Structure of this report

At the beginning, the report starts with a executive summary. In second part
introduction, macro economic objective of the government and structure of the
report has been discussed. The following discussion is done about the business
profit maximization behavior by calculation of short run and long run cost, firm
revenue, firm profit calculation and calculation of monopoly profit maximization. In
fourth part there is a discussion about economic growth and GDP of Australia
and possible impacts on firm of cookies product. Then the report brings the
causes and cost of inflation and unemployment and following fiscal policy and
monetary policy is discussed with a graph. At the end, there is a conclusion with
arguments and recommendation.

1. Understanding business/firm’s profit maximisation behavior

We need to understand cost -short run cost, long run cost

(a) Short-and long-run cost calculation

Table 1: Short-and long-run cost of the firm (Cookies) (in dollar)
Units of Total Total Total Average Averag Average Marginal
output fixed variable cost cost e fixed variable cost (MC)
(Q) cost cost (TC) (AC) cost cost
(TFC) (TVC) (AFC) (AVC)
TFC/Q TVC/Q
0 0.1 0.00 0.10 0.00 0.00 0.00 0.00
1 0.1 4.40 4.50 4.50 0.10 4.40 4.50
2 0.1 6.90 7.00 3.50 0.05 3.45 2.50
3 0.1 7.40 7.50 2.50 0.03 2.46 0.50
4 0.1 5.90 6.00 1.50 0.02 1.47 -1.50
5 0.1 2.40 2.50 0.50 0.02 0.48 -3.50
6 0.1 8.90 9.00 1.50 0.01 1.48 6.5
7 0.1 17.40 17.50 2.50 0.01 2.48 8.5
8 0.1 27.90 28.00 3.50 0.01 3.48 10.5
9 0.1 40.40 40.50 4.50 0.01 4,48 12.5
10 0.1 54.90 55.00 5.50 0.01 5.49 14.5
Source: (Hypothetical data based on actual price to construct and calclualte
costs)

Lecturer: Dr. Dayal Talukder Page 4 of

14
(b) Firm’s revenue calculation
Table 2: Monopoly ffirm’s price setting behaviour (Cookies) (in dollar)
Units of Price (P) Total revenue Average Marginal
output (Q) (TR) revenue (AR) revenue (MR)
0 5.00 0.00 0.00 S
1 4.50 4.50 4.50 4.50
2 4.00 8.00 4.00 3.50
3 3.50 10.50 3.50 2.50
4 3.00 12.00 3.00 1.50
5 2.50 12.50 2.50 0.50
6 2.00 12.00 2.00 -0.50
7 1.50 7.50 1.50 -2.50
8 1.00 8.00 1.00 -0.50
9 0.50 4.50 0.50 -3.50
10 0.00 0.00 0.00 0.00
Source: Author’s calculation based on actual price from T1 in Ass1

(c) Firm’s profit calculation (in dollar)

Table 3: Profit of the firm (Cookies)

Units of output Total revenue (TR) Total cost (TC) Profit(=TR-TC)
(Q)
0 0.00 0.10 0.10
1 4.50 4.50 0.0
2 8.00 7.00 1.00
3 10.50 7.50 3.00
4 12.00 6.00 6.00
5 12.50 2.50 10.0
6 12.00 9.00 3.00
7 7.50 17.50 -10.00
8 8.00 28.00 -8.00
9 4.50 40.50 -36.00
10 0.00 55.00 -55.00
Source: (TR and TC data from Table 2 and Table 1 respectively and calculate
profit.)

Lecturer: Dr. Dayal Talukder Page 5 of

14
(d) Monopoly firm’s profit maximisation
(i) Graph

Chart Title
20

15

10

0
UNIT 1 UNIT2 UNIT 3 UNIT 4 UNIT 5 UNIT 5 UNIT 6 UNIT 7 UNIT 8 UNIT 9 UNIT 10

-5

AC MC AR MR

(ii) Explanation of firm’s profit maximisation behavior

At A, Marginal cost < Marginal revenue, then the cookies firm produce more
cookies, it means revenue will be more than the cost, because of extra production
cookies firm will earn more profit.

Lecturer: Dr. Dayal Talukder Page 6 of

14
 At B, Marginal Cost > Marginal Revenue, if a firm trying to produce extra unit of
cookies, in that case the cost will be more than revenue so that profit will be less.
Thus, MC=MR optimal quantity of cookies produced by a firm.
(iii) Monopoly: a cause of market failure
When a market fails comes up short to assign its resource efficiently, then the
market failure happens. Within the case of Monopolies, misuse of power can lead to a
market failure. Monopoly is a defective market that limits production in an endeavour to
increase profit. The reason of market failure in a monopoly is because shortage of the
goods in a market/ or the cost of the good is too superior. It can be difficult for a
monopoly to stay competitive over time without the market competitors.
(iv) Government interventions to address market failure
Government introduce some remedies in a market which Is controlled by a
central or local government for a market failure in which they limiting the production
of a specific product. Market failure can be redressed through government new laws or
charges, taxes, endowments, and trade limitations.

4. Macroeconomic Consideration and Government Policy

(a) GDP and Economic Growth of (Australia)
Table 4: GDP and growth of (Australia), 2005-2020
Year GDP ($million) GDP growth (%)
2006 1023371 2.79
2007 1062711 3.84
2008 1101585 3.65
2009 1122922 1.93
2010 1146138 2.06
2011 1174365 2.46
2012 1220378 3.91
2013 1251924 2.58
2014 1283636 2.53
2015 1311782 2.19
2016 1348127 2.77
2017 1379142 2.30
2018 1419817 2.94
2019 1450499 2.16
2020 1446367 -0.2
Source: (World Bank, World Development Indicators 2020)

Lecturer: Dr. Dayal Talukder Page 7 of

14
(b) Business Cycles and possible impacts on firm
(i) Graph

GDP
1600000
1450499
1419817 1446367
1400000
1379142
1348127
1311782
1283636
1251924
1220378
1200000 1174365
1146138
1122922
1101585
1062711
1023371
1000000

800000

600000

400000

200000

0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

(ii) Evaluate possible impacts on a firm of Cookies product

The demand of cookies is directly affected by the business cycle. The cookies
should enjoy in the period of boom because they got strong demand for the
customers. Likewise, Every firm cookies firm also rely on customers spending so
that they can maximize the profit.

(c) Unemployment and Inflation

Table 5: Unemployment and inflation rate of Australia, 2005-2020
[2 marks]
Year Unemployment rate (%) Inflation rate (%)
2005
2006 4.78 3.55
2007 4.38 2.32
2008 4.23 4.35
2009 5.56 1.77
2010 5.21 2.91
2011 5.08 3.30
2012 5.22 1.76

Lecturer: Dr. Dayal Talukder Page 8 of

14
 2013 5.66 2.44
2014 6.08 2.48
2015 6.05 1.50
2016 5.71 1.27
2017 5.59 1.94
2018 5.3 1.91
2019 5.16 1.61
2020 6.61 0.84
Source: (World Bank, World development indicators)
(i) Causes and cost of unemployment

Frictional Unemployment- It is caused by the brief moves in workforces lives

such as when a loborer shuffles to new city and should discover a new job. It also
contains the students who are freshly graduated from college just entering the labor
constain which is the main reason for unemployment.
Structural Unemployment- it is affected by the mismatch within the
socioeconomics of laborers and the sorts of employments accessible, either when they
don’t have the skills but the job is available in the market which doesn’t fill the
requirements.
Cylical Unemployment- The main reason for the cylical unemployment is
when the businesses can’t afford to offer the jobs because of lack of demand of goods
and services by consumers because in an economy.
Seasonal Unemployment- It is caused by unique businesses or parts of the
lobor market being accessible during distinctive seasons. For example, unemployment
goes up within the winter months, because numerous rural employment ends once they
harvested the crops, and those laborers start to discover a new jobs. [ CITATION
PAU21 \l 1033 ]

Cost of Unemployment

A Economic costs
1. For the person, the lost income is the most prominent economic cost of
unemployment.

2. For Society, the decrease in demand of goods and services that happens
as a result of the unemployment.

B Noneconomic costs
For the person, noneconomic costs include various effects such as physical
and mental issues, family problems, high consumption of alcohol and drug and increase
the rate of crime and suicide.

Lecturer: Dr. Dayal Talukder Page 9 of

14
 (ii) Evaluate possible impacts of unemployment on a firm of your
selected product

The possible impact of unemployment on cookies firm is customers do

not likely to spend money on cookies. First cookies is not basic necessity
people can survive without them. Moreover because of unemployment
customers only buy the cookies if they get in low price but firm will not
earn profit and the demand of the low quality products will increase.

(iii) Causes and cost of inflation

Inflation is a circumstance when the demand of goods and services are

more than aggregate supply which is measured by the Consumer Price
Index. There are various cause of inflation which include Genuine
shortage in production of goods and services, increase in consumer
spending and reduction in taxes. [ CITATION JAS21 \l 1033 ]

Cost of Inflation

a) Erodes Purchasing Power- The effect of inflation is truly fair a diverse

way of expressing what it is. It is a reduction in buying power due to a
rise in costs over the economy.

b) Causes More Inflation- inflation encourage to spend and contribute

within the confront of inflation tends to expansion in turn. In other
words, the amount of money surpasses the demand, and the cost of
money. The currency purchasing power drops at an even quicker rate.

c) Increases Growth- it is the prospect in which inflation discourage

saving which gives customers and businesses an motivating force to
spend or contribute. At least within the brief term, the boost to
investing and spending leads to economic development. [ CITATION
DAV21 \l 1033 ]

(vi) Evaluate possible impacts of inflation on a firm of your selected

product

Cookies firm generally prefer inflation to be steady and low because if It rise
above 3 or 4% cookie firm might see a increase in costs and it will also leads to
problems of rising costs, falling productivity, and decrease in universal
competitiveness. Due to this issues company have to increase the price of
cookies more than their production of cookies price and they have to change the
price of cookies regularly and the firm profit will increase for a short period.

Lecturer: Dr. Dayal Talukder Page 10 of

14
(d) Fiscal policy
(i) Graph:
Expansionary and contractionary fiscal policy

(ii) Evaluate possible influence on real GDP and price level in Australia
In Australia over the whole economy government activities has an important
influence through the changes in government expenditure or taxes. Expansionary
policy includes an increment in government expenditure and decrease in taxes
which leads to a right ward direction. Contractionary policy includes reduction in
government expenditure and increment in charges which leads to the opposiste
left ward direction. The role of expansionary fiscal approach is kick-start the
economy during a time of recession. It enhances aggregate demand, which in
turn boosts employment and productivity in the economy. The aggregate demand
main component is increase in government expenditure which move the demand
curve to the right direction. Fiscal plays also plays a very important role for the
GDP growth rate which change extremely without fiscal policy.

Lecturer: Dr. Dayal Talukder Page 11 of

14
 (iii) Evaluate possible impacts on a firm of your selected product
Due to the high government expenditure and lower in taxes encourage the
consumers to spend more which helps to increase aggregate demand and
economic growth. Increase in growth rate of economy means increase in demand
of workers which helps the firm in high production rate so that they can produce
more cookies with a heavy workforce. With the more production firm not only
expand their profit and can also build up their business.

(e) Monetary policy

(i) Graph: expansionary and contractionary fiscal policy

(ii) Evaluate possible influence on real GDP and price level in your selected
country
Expansionary monetary policy related to macroeconomic monetary policy that
looks for to strengthen the economic growth and aggregate demand. In order to
do so, administrative authorities like central banks “loosen” monetary policy by
expanding the money supply and or bringinig down interest rates which helps to
expand the overall economic growth. This policy not only benefit the customers
by spending more money, business can also make progress by more capital
speculations. In Australia it encourages savings more than spending and do the
investment on less interest rates which also support export. [ CITATION Mon \l
1033 ]Monetary policy enhance the supply of money in an economy. The
increase in the supply of money is reflected similar by an equivalent expansion ini
Lecturer: Dr. Dayal Talukder Page 12 of
14
 nominal production or Gross Domestic Product (GDP) which advances to a
greater prices and more probable actual output. [ CITATION Pra21 \l 1033 ]

(iii) Evaluate possible impacts on a firm of your selected product

In monetary policy the interest rate are very low which helps to increase the
money supply. These actions help the firm to borrow the money or take the loans at low
interest rate so they can develop their cookies business in different nations and upgrade
their technology through which they can get more profit. [ CITATION MAR21 \l 1033 ]

5. Conclusion

At the end it has been concluded that in the Australian economy government
plays a crucial role which influence the economic decisions of businesses. Such
decisions include conditions of labour market, credit cost and fast prices. The role of
monetary policy is very important in Australia economic activity. The gross domestic
product government expenditure is on average 38%. In australia, there could be a need
for complementary microeconomic changes thay look for to extend the efficiency of
Australian businesses, encourage innovation and low cost structure. Moreover, Australia
should follow some ways through which they can improve their economy. Government
should increase the productivity. Before the pandamic Australia had zero GDP growth
per capita. There is a need to change and they should enable the tax reforms for a
international investment in venture capital which will help to recover the Australia
economy.
.
References
Agarwal, P. (2021, March 09). Expansionary Monetary Policy. Retrieved from
www.intelligenteconomist.com:
https://www.intelligenteconomist.com/expansionary-monetary-policy/
Chand, S. (n.d.). 5 Main Aims of Government for Economy Development – Discussed.
Retrieved from www.yourarticlelibrary.com:
https://www.yourarticlelibrary.com/economics/5-main-aims-of-government-for-
economy-development-discussed/32858
COSTS OF UNEMPLOYMENT. (n.d.). Retrieved from www3.nd.edu.
FERNANDO, J. (2021, June 17). Inflation. Retrieved from www.investopedia.com:
https://www.investopedia.com/terms/i/inflation.asp
FLOYD, D. (2021, May 17). 9 Common Effects of Inflation. Retrieved from
www.investopedia.com:
https://www.investopedia.com/articles/insights/122016/9-common-effects-
inflation.asp
HALL, M. (2021, June 23). How Do Fiscal and Monetary Policies Affect Aggregate
Demand? Retrieved from www.investopedia.com:
https://www.investopedia.com/ask/answers/040315/how-do-fiscal-and-monetary-
policies-affect-aggregate-demand.asp
KRUGMAN, P. (2021, August 19). Learn About Unemployment: Definition, Examples,
and Causes of Unemployment. Retrieved from www.masterclass.com:
Lecturer: Dr. Dayal Talukder Page 13 of
14
 https://www.masterclass.com/articles/learn-about-unemployment#4-types-of-
unemployment-and-their-causes
Monetary policy. (n.d.). Retrieved from www.nzier.org.nz:
https://nzier.org.nz/about/economics-explained/monetary-policy/
Objectives of Business. (n.d.). Retrieved from www.toppr.com:
https://www.toppr.com/guides/business-studies/nature-and-purpose-of-
business/objectives-of-business/
TICHA, V. (2020, June 19). 6 ways to bring back the Australian economy. Retrieved
from www.newsroom.unsw.edu.au:
https://newsroom.unsw.edu.au/news/business-law/6-ways-bring-back-australian-
economy

Lecturer: Dr. Dayal Talukder Page 14 of

14