Assignment 1

Economic Policy

Student ID A00164911

Submitted by: - Veerpal Kaur

Submitted to: - Prof. Francis Onwuemele

Question: - Define the term economic policy analysis within macro and microeconomics with

examples.

Answer: - Financial arrangement examination is the most common way of assessing the

possible effects of government strategies on the macroeconomy and microeconomy. Economists,

politicians, and other decision-makers use it to help them make well-informed choices about

economic policies. It is used to determine how policies will likely affect macroeconomic

variables like the balance of payments, inflation, unemployment, economic growth, and so on.

Economic policy analysis focuses on the effects of policy on aggregate economic variables like

GDP, inflation, unemployment, and foreign trade at the macroeconomic level. Economists, for

instance, might investigate how a reduction in taxes would affect inflation and economic growth.

They might also investigate how an increase in government spending affects unemployment and

economic growth.

Economic policy analysis examines the effects of policies on individual households and

businesses at the microeconomic level. Economists, for instance, might investigate how a tax cut

or raising the minimum wage would affect a specific industry or household. They might also

look at how a new law affects a particular industry.

At last, monetary strategy examination likewise checks out at the impacts of strategy on the

circulation of pay and riches. Economists, for instance, might investigate how a reduction in

taxes would affect how the rich and poor divide their incomes. They might also look at how a

new rule affects how wealth is shared between different parts of the economy.
Economists, policymakers, and other decision-makers all benefit from economic policy analysis.

It helps to make sure that the economic policies that are implemented are in line with the goals

set for the economy and take into account how these policies will affect the economy.

Step by step explanation

The term "economic policy analysis" refers to the process of evaluating the potential effects of

government policies on both the macro and micro economies. Economists, legislators, and other

policymakers rely on this important tool to help them make informed decisions about economic

policy. It is used to assess how policies might affect macroeconomic variables like inflation,

unemployment, economic growth, and the balance of payments.

At the macroeconomic level, the focus of the study of economic policy is on how it affects

aggregate economic indicators like GDP, inflation, unemployment, and foreign trade.

Economists, for instance, might investigate the effect that lowering tax rates might have on

inflation and economic growth. They might also investigate how an increase in government

spending affects the rate of unemployment and the growth of the economy.

Economic policy analysis looks at how policies affect specific people and businesses at the

microeconomic level. For instance, economists might investigate the effects that a reduction in

tax rates or an increase in the minimum wage would have on a specific family's financial

situation. They might also look into how a new rule would affect a particular part of the

economy.

Last but not least, economic policy analysis investigates how the policy's implications affect how

wealth and income are distributed. Economists, for instance, would investigate how a reduction
in taxes might alter the income distribution between the wealthy and middle class. They might

also look into the effect that a new rule has on how different parts of the economy share in

wealth accumulation.

To sum up, financial strategy examination is a valuable device for business analysts, strategy

producers, and other chiefs to have available to them. It helps to make sure that the economic

policies chosen are in line with the goals of the economy and that the economic effects of these

policies are taken into account. This helps to make sure that economic policies are in line with

the goals set for the economy.

Question: - Distinguish between Price Elasticity of demand & Income elasticity of Demand with

examples.

Answer: - In economics, there are two ways to measure the responsiveness of demand to a

change in price:

- Price elasticity of demand.

- Income elasticity of demand.

Price Elasticity of Demand measures how sensitive customers are to changes in prices; how

responsive they are when prices go up or down, or how quickly they buy elsewhere when prices

rise too high. Income Elasticity of Demand measures how responsive customers are to changes

in income. It's often referred to as income elasticity because we're looking at how people respond

to changes in their income.

General information about Prize Elasticity

Prize elasticity is a measure of how sensitive the demand for a product is to the price. In most

cases, demand will be inelastic until it reaches a price at which consumers will snap up all

available units of the product. At that point, demand becomes elastic and buyers would increase

their purchases when prices are lowered again.

So prize elasticity is important because if you know your market you can calculate how many

units you need for your business plan to work (i.e. losses and profit).Let's say you have 4

options: A,B,C and D. Here is their prices:

A = $810

B = $ 1120 B is more expensive than C. Your customers may purchase up to 2 units of option B

but they would not buy more than 2 units of all options. The utility (U) value of option A:

U(A)=80 because option A has 80% utility for the customer.

The income elasticity of demand is a measure that describes the change in demand for a good in

response to a change in income. It can be used to understand how sensitive consumers are to

changes in their incomes with respect to the prices of goods or services. The income elasticity of

demand is used for many different purposes. For example, it is one of the main variables in the

demand for income approach to macroeconomic policy. In general, government and central

banks take this into consideration when deciding about monetary policies or interest rates policy

with the aim of affecting savings (consumers) and investment (businesses).

Income elasticity of demand is a measure of the responsiveness of quantity demanded to changes

in income. The term generally refers to "income elasticity", which is calculated by dividing the

percentage change in quantity demanded by the percentage change in income, and multiplying

by 100 (240/30 * 100). Income elasticity is an indicator of how a product's or service's price will

be affected by changes in income. A higher income elasticity means that people are more

sensitive to changes in their incomes.

Contrary to popular belief, a product with a low-income elasticity does not mean that it is

inelastic. For example, the price of essential food items such as bread, milk, and rice is less

responsive to changes in income than the price of luxury goods. The former are inelastic whereas

the latter is highly elastic. Thus, if people's incomes fall, they will buy fewer luxuries but will

continue to consume staples such as bread, milk, and rice.

The income elasticity of demand may also be used to determine whether an increase in income

will have a positive or negative effect on demand for a good. When income elasticity is greater

than 1, an increase in income will lead to an increase in demand for the good. If the elasticity is

less than 1, then an increase in income will lead to a decrease in demand for the good. Income

elasticity may also be calculated with respect to quantities demanded per period (i.e., quarterly,

monthly, weekly).

Question: - What is Price discrimination and what is its role in firms...a. Cost structure b. on

Marginal utility.
Answer: - The negative treatment of people who win contests and the benefits of them winning

something. They have been discriminated against because they have obtained a prize that might

not equal the value that those who don’t win direct receive.

Some criticisms of prize discrimination include:

1. The person on the receiving end of prize discrimination could be doing something that’s

illegal, like tax evasion. This is unacceptable!

2. People are not just doing the things they normally do, but some have been coerced into

participating in these activities by other people who are driving them to participate in things they

wouldn’t normally do and so creating undue pressure. This would be unfair to those who have

won and to those who haven’t.

3. Some people have themselves suggested prize discrimination and those who have won prizes

would experience a loss when they received no pleasure from participating in the activity. It

would be unfair to them.

4. Some people who have won prizes are poor and cannot afford to keep them and so it’s unfair

that they should return them, even if they don't normally enjoy these activities.

5. People’s taxes would need to be increased to cover the cost of paying for prizes and still cover

the usual costs. This is a financial burden for them. This isn’t fair on them.
6. People who have won prizes don’t normally get as much personal satisfaction from winning

prizes as non-prize winners do when they win things, because it isn't about them achieving

something that is rewarding for them, but for someone else's purposes entirely and so this can be

unfair on the prize winner.

a. The role of prize discrimination in cost structures is to reduce competition. The company has

found a way to cut the prices of their products without having to lower their quality, thus

generating more revenue. This is by advertising competitive prices on some types of products

and not competitive on others.

If a company decides that they need to lower their costs, they can do so by using the prize

discrimination model and choosing specific market-segments or niche markets where

competition is low and there are few competitors offering similar goods or services. By lowering

the prices of the goods or services in the markets where competition is low, they are able to offer

lower prices while still maintaining a competitive price-level.

The cost-benefit analysis would be that less customers will be attracted to your product which

would result in more money in your pockets. On the other hand, you may attract customers who

are willing to pay competitive prices which would create some form of competition between both

markets. The competition would drive both companies to look for ways to stay competitive. This

might result in better services and lower prices by either cutting costs or lowering the price of

their services.
The prize model can also be used as a form of customer retention. This model is most beneficial

in situations where there is a limited number of consumers willing to pay above the average price

for a product.

b. Marginal Utility

Price discrimination is another tool that businesses may employ to boost their marginal utility

and compete more effectively. The company may raise its marginal utility by collecting more of

the consumer surplus if it sets various pricing for each of its customers and then charges those

consumers accordingly. This is due to the fact that the company is in a position to charge higher

rates to customers who are prepared to pay more, while at the same time providing discounts to

customers who are price conscious.

References: -

• https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Micro-and-

Macro#:~:text=Little%2Dpicture%20microeconomics%20is%20concerned,that%20econ

omists%20call%20aggregate%20variables.

• https://corporatefinanceinstitute.com/resources/economics/elasticity/

• https://corporatefinanceinstitute.com/resources/management/price-discrimination/