Question Answer Assignment

Student’s Name

Institution

Professor

Course ID

Date
 Part I: DEFINITIONS.

a. Demand

Demand is defined as the quantity of goods that the consumers are able or willing to buy

at different prices in just a given period of time. Demand can be explained by the relationship

between the number of goods and the prices by the use of the demand curve. For example, a

good hotel in town but with only four tables and every person wants a reservation.

b. Supply

Supply is the number of goods/resources that producers, different firms, providers of the

financial assets, or any other agents are either able or willing to give in the market or to another

agent. For example, when there are a drought and very few corn crops to buys in the stores.

c. Shortage

A shortage is a situation where the demand for something or service exceeds the supply

available. For example, during this period, many people are demanding onions in the market, but

the supply is very low.

d. Surplus

Surplus can be described as where goods or resources exceed the portion of the amount

which is utilized actively. For example, the cash which is left after someone has paid all their

bills.

e. Endogenous variables

An endogenous variable is defined as a statistical model's variable, which is altered or the

one which is determined by the relationship it has with other variables in the model. For
example, the amount of white sugar is an endogenous variable and depends on other variables

such as pests and weather, price of fuel.

f. Exogenous variable

An exogenous variable is a type of variable which is not affected by any other variable in

a system or model. For example, in farming variables like pests, weather, farmer skills, and the

availability of seeds are said to be exogenous.

g. Return on equity

Return on equity (ROE) is a type of ratio that indicates the number of profits a person or a

company has made from their money. For example, a ROE of 110% means that for every dollar

which is being invested, the company will get $ 1.10.

h. Return on investment (ROI)

Return on investment (ROI) is defined as the measure of performance, which is used to

evaluate the efficiency of any investment or make a comparison of the number to various

investments. For example, if someone invested about $100 in stock shares, and then the values

go up by $10 by the end of such fiscal year, then ROI will be 10% in the assumption that there

were no dividends paid.

i. Economies of scope

This term is defined as an economic concept whereby the unit cost used to produce a

product will always decline as the products' variety increases. For instance, it can be witnessed

in mergers and acquisitions where producers come in terms of using the same factors of

producers.
 j. Dynamic economics

Dynamic economics is the study of the economy where the rates of output are always

changing. For example, dynamic analysis is when we study variables like income, the

consumption function, and the investment in any dynamic state.

Part II. ESSAY QUESTIONS

Question 1

a.

Opportunity costs are defined as the representation of the potential profits or benefits an

investor, individual, or business person misses out on when taking a particular alternative over

the other. For example, when a person invests in growing wheat, the opportunity costs are

choosing to plant another crop.

Implicit cost, also known as imputed cost, the implicit cost is a type of cost that taken

place or occurred but has not been reported as another expense. An example of implicit costs

includes the interest income loss on funds and the machinery's depreciation for any capital

project.

Explicit costs are the normal business costs that are indicated or appear in the general ledger and

directly affects the profitability of a company. Examples of explicit costs entail; lease payments,

wages, raw materials, utilities, and other many direct costs.

Historical costs are defined as the real measure of value, which is applied in accounting

whereby the amount of and a particular asset in the balance sheet is indicated with its original

cost when the company acquired it. For instance, if a company purchased land for headquarters
at $200,000 in 1900 and its market value is anticipated to be $30 million, the value of the land is

still as $200,000 in the balance sheet.

Current cost is termed as the cost, which has factors valued at the present time's production costs

and acquisition. For instance, in the example above, the company’s land is recorded at $30

million.

b.

Total fixed cost is the cost of production, which never changes as the quantity of output which is

produced by the firm changes in the short run. The table and graph below represent total fixed

costs.
Average fixed costs are the fixed costs that are used in production divided by the produced

quantity of output. The table and graph below represent average fixed costs.

Total variable costs are defined as the aggregate amount of every variable cost, which is

associated with good's cost, which has been sold in a particular reporting period.
The average variable cost (AVC) refers to the total variable costs for a given unit of output.

AVC is the total variable cost divided by the total output

In economics, total costs are defined as the entire economy, which is used in production and is

created or made up of the variable costs, which varies with the number of goods that are

produced. It also entails variable inputs such as labor and raw materials.
Average total costs (ATC) are costs that equal the variable costs and the total fixed costs

divided by all the total units which have been produced.

Marginal cost is defined as the total change in the costs of production, which comes from

producing or making one additional unit—calculated as the change of the expenses of production

divided by the change in quantity.

 In short-run output considerations, if the price gets below the average costs, the company

is forced to shut down its short run, hence reducing its output to zero. The shutdown point,

which is the lowest point on the average variable cost curve, is also considered. The marginal

cost curve is the company's supply curve in the short run, which is for the prices which are

greater than the so-called minimum average variable cost.

Question 2
 The term market structure refers to the market's characteristics, either competitive or

organizational, which is useful for describing the nature of competition and the type of pricing

policy followed by the entire market—defined as the number of companies producing the same

goods and services in the same market and which structure is elaborated by the basis of the

competition which prevails in the market. Below are some types of market structure.

In economic theory, the short run is the concept which states that, in a certain period in

the future, a limited one input is said to be fixed while the rest remain variable. In economics, it

is used to express the idea that the economy always behaves differently depending on the time it

reacts with a given stimulus.

The long-run in economics is a concept which states that all the markets are in the state of

equilibrium, and all the quantities and prices have fully coincided with the balance. It differs

from the short run in the fact that some constraints and markets are not in equilibrium.
 Figure 1 Long-run curve

The economies of scale refer to the cost advantages which are obtained by the enterprises

because of their operation scale, with the cost per unit of the output decreasing with the increase

in scale.

Figure 2 Graph elaborates economies of scale.

The law of diminishing returns and the diseconomies of scale are different concepts in

that diminishing returns refer to the entire decrease in the output of production caused by an

increase of just a single input. On the other hand, diseconomies of scale refer to the upsurge in

the cost per unit caused by an increase in the output. In economies of scale, the long-run average

costs are decreasing due to the rise in the returns of scale.

 Question 3

Perfect competition is a market model that is based on the assumption that many

companies produce similar goods and services which are consumed by many buyers. For

instance, many firms selling electronics in the same location to the same buyers will face perfect

competition. It is also assumed that old firms can leave the market, and new ones can enter the

market to bring competition. It is also assumed that the sellers and the buyers have complete

information about the conditions of the market.

The conditions for the perfect competition is the presence of many firms producing and

selling the same products, there are many buyers and sellers to buy and sell the products
respectively, buyers and sellers have full information of the market to make decisions, and

finally, the firms have the freedom to leave and enter the market (Free entry and exit).

In the short run, industry or firm will seek the quantity of the output where the gains are

at their highest, or there is no possibility of profits and where losses are minimal. Industries

produce with fixed input and incur fixed production costs. The figure below demonstrates a

monopoly in the short run.

As shown in the diagram, maximization of profit occurs at MR=MC, and so equilibrium

is achieved at Pm and QM. Points, which is the M point. A monopoly makes supernormal profits

because the prices are set higher. The profits attract new firms in the market.

Producer, in the short run maximizing his profits, will always increase the production

provided the marginal cost is always fewer than the marginal revenue in the firm. The producers

will always decrease the production if the marginal costs are always more than the marginal

revenue; that's the rule. The producers will proceed to produce if the average variable costs are

less than the unit's price. Adjustments in the short can be shown by the use of the model of

aggregate demand and aggregate supply. For instance, when taking an increase in the cost of

healthcare and the abrupt increase in government purchases. First, what happens is the reduction
of the short-run aggregate supply, and the second is the increase in the aggregate demand. Both

change the GDP and price levels in the short run. The equilibriums are shown below.

The long-run in the perfect competition assumes that all factors of production are

variable, which means that the entrepreneur has the power to adjust the size of the plant and also

increase the output so as to achieve the maximum profit. The result is that firms are getting

normal profits, or it results in zero economic profits.

Perfect competition is said to be efficient because first, it is a market structure that is

idealized to achieve an efficient allocation of resources. The efficiency of the market is achieved

because of the profit-maximizing maximizing quantity of the output, which is produced by

perfectly competitive companies, which brings equality between the marginal cost and the price.