Macroeconomics Assignment On Supply And Market Dynamics
Answer The Following Four Discussion Questions
- If the demands are elastic, should firms increase or reduce the price of the goods? Why? What happen if the demands are in-elastic?
- What are the key factors determining if the supply is elastic or in-elastic? Explain each of them with examples.
- What is the opportunity cost? Should individuals and nations specialise in producing goods or service for which they have comparative advantage or absolute advantage? Why?
- Does law of diminishing returns hold at low production? Why? Why the returns will diminish eventually?
A1- Elastic demand and inelastic demand
Elastic demand is a market situation in which price and other factors have a significant impact on the quantity that will be brought by consumers. Therefore it can be said that a slight increase in the price of a product will result in a significant decrease in the overall demand for the product. On the other hand as discussed in this macroeconomics assignment, if there is a slight decrease in the price of the product then the overall demand for the product will increase significantly. If a particular product or service has elastic demand then consumers will compare this product and services with alternative products. If similar product or services are available at a lower cost than they will go for other brands as compared to brand with higher prices. This is the reason as discussed in this assignment for macroeconomics that it is essential for the management of the company to reduce the price of a product if there is elastic demand. As discussed in this macroeconomics assignment slight decrease in demand can result in a significant increase in overall demand of the product which will increase revenue by high margins (Esteves & Reggiani 2014). Overall profitability will also be maintained due to higher sales as compared to other market conditions.
This is a market situation in which the price of the product would not have a significant impact on demand. Therefore demand in the market will remain the same whether the price of the product is increasing or decreasing. It is suggested in this macroeconomics assignment that management of the company should increase the price in case of in-elastic demand as the demand for the product will not decrease if the price is increased. It will help in increasing the profitability margin for the company but the amount of increase should not be very high.
A2- Factors determining if supply is elastic or inelastic
Time to produce- Available with the producers have a significant impact on elasticity. In short-run supply will be in-elastic as producers would not have significant time available to meet the increased demand on the other hand management can producer more units with time. Therefore it can be said that during initial stages supply will be inelastic whereas after sometime supply will be elastic.
The scarcity of resources- If resources available in marketer limited then the supply of the product will remain inelastic. On the other hand, if resources are available without any restriction than supply will be elastic (Brue et al. 2014).
A number of producers- Price will be more elastic if the number of producers in the industry is high. For example, if a number of producers in a particular market are high then marginal increase in production of product and services can meet the increased demand easily.
The stock of finished goods- If a particular business organization has available stock at the end of the financial year then they could supply the product in the market more easily as they do not require to do production.
The technology used- Supply and market will be highly dependent on the technology used by a business organization for the production process. For example, if a particular business organization is using automatic machines for production then supply would be more elastic as compared to a business organization where production is done manually (Brue et al. 2014).
A3- Opportunity cost
Opportunity cost can be defined as the benefits a business organization has to forgo while choosing a particular alternative for business out of more than one alternative. For example, if a particular business organization chooses to invest in the stock price of the company is a total annual return is 3%. On the other hand, management could have invested in a fixed investment yielding 8% interest. In this case given in this assignment for macroeconomics, the opportunity cost would be 5% interest on the investment. This type of cost is not recorded in financial reports but management and business owners consider this cost while taking decisions in relation to business (Polley 2015). Management of the company can take more profitable decision while considering opportunity cost in the decision-making process.
In this assignment on macroeconomics Comparative advantage can be defined as the ability of a particular business organization or Nation to produce goods and services at a lower opportunity cost. In this case business organization or nations has resources for producing a variety of product and services. On the other hand, absolute advantage is a situation in which a particular business organization or nation can make a product at a faster rate and higher quality. Therefore it can be said in this assignment on macroeconomics that a particular business organization or Nation should have specialization in producing goods and services for which they have an absolute advantage (Polley 2015). This is due to the fact that in case of comparative advantage, even if a particular business organization or Nation does not have a specialization for a particular product or services then they can opt for other products or services as they have sufficient resources for such production.
A4- Law of diminishing returns
Law of diminishing returns states that is the management of the company increases the number of employees on a constant basis then there will be a point in production where the marginal return for each employee will start to decrease. For example, is the management of the company is a producing guitar for the customer and currently they are able to make two guitars per month with a labour force of 2 employees. During initial stages increase in a number of the employee will definitely increase total production but at some point, the factory will become crowded and management would not be able to produce one guitar for an employee in a month. All the factors introduction other than a number of employees (example- factory space) should remain constant for this no of diminishing return to work. Main reason given in this macroeconomics assignment that returns will start to diminished is that management of the company would be required to increase all the resources along with increase the production (Blum & Holling 2017). If management of the company increases the office space along with an increase in a number of employees than law might not apply in the situation.
Yes, the law of diminishing return will hold at low production also because the marginal return from a particular resource will decrease if management continues to increase such resource in the production process at lower production. Macroeconomics assignments are being prepared by our economics assignment help experts from top universities which let us to provide you a reliable online assignment help service.
Blum, D and Heinz H 2017. Spearman's law of diminishing returns. A meta-analysis. Intelligence 65: 60-66.
Brue, S, Campbell, R, McConnell, S, and Randy R 2014. Essentials of economics. McGraw-Hill Irwin.
Esteves, R and Carlo, R 2014. Elasticity of demand and behaviour-based price discrimination. International Journal of Industrial Organization 32: 46-56.
Polley, W 2015. The rhetoric of opportunity cost. The American Economist 60.1: 9-19.