Faculty of Higher Education

Assignment Cover Sheet

Complete this and attach as a front cover sheet to every Assignment you submit for marking

Unit Code HI5003

Unit Name Economics for Business

Your campus and
class/tutorial number Sydney Campus
(e.g. M2)
Your Lecturer/Tutor Ronald WAKYEREZA

Assignment Number 03

Is this a Group or Individual Individual_

Assignment?

Due Date Tuesday23, February2021

Declaration

1. This assignment is my/our own work. We have NOT copied any part of it from any other student’s
work, neither from our own work in any other subject/unit, whether at Holmes Institute or any other
Educational Institution.

2. I/we have cited all sources from which data, ideas, diagrams, facts, or words (whether quoted directly
or paraphrased) were taken.

3. This assignment was prepared specifically for this unit only and has not, nor will be used for any other
unit.

0
4. The reference list is accurate and in Harvard referencing style and a true statement of the sources I/we
have personally read and used.

Student name/s Student number Which section(s) did each

person work on
[must be correct]
PVS2348 LAXMI GIRI ALL

1
Table of Contents

Question 1 3
Question 2 6
Question 3 8
Question 4 9
Question 5 11
Question 6 14
References: 17

2
Question 1

i.

Price elasticity of demand represents the amount of quantity requires changes when the
good’s cost changes(Kenton, 2020).

For petrol

Q(new) = 2450

Q(old) =2500

P(new) = 1.45

P(old) =1.35

For petrol, price elasticity of demand = (2((Q (new) - Q(old))/ (Q(new) + Q(old)))100)/ (2((P(new) -
P(old))/ (P(new) + P(old)))100)

= (2((2450 – 2500) /(2450 + 2500))100)/ (2((1.45 – 1.35) /(1.45 + 1.35))100)

= -50/2475/ 0.1/1.5

= -2.02/7.14

= -0.28

Hence, the price elasticity of demand for petrol is -0.28.

For air conditioner

Q(new) = 2000

Q(old) =2500

P(new) = 990

P(old) = 950

3
For air conditioner, price elasticity of demand = (2((Q (new) - Q(old))/ (Q(new) + Q(old)))100)/
(2((P(new) - P(old))/ (P(new) + P(old)))100)

= (2((2000 – 2500) /(2000 + 2500))100)/ (2((990 – 950) /(990 + 950))100)

= -500/2250/40/970

= -0.22/0.04

= -5.5

Hence, the price elasticity of demand for air conditioner is -5.5.

ii. The price elasticity of demand of both air conditioner and petrol is less than 1 which
indicates that both of them are inelastic. It indicates that it is less responsiveness to
price. Inelastic demand represents that there was no change or slight change in
demanded amount of the air conditioner and petrol when another there is change in
another economic factor. As both of them are inelastic which refers that air conditioner
and petrol have few substitutes and they are regarded necessities by users. Further,
from the result we found that the demand of the customers regarding air conditioner and
petrol is same when the price of them goes up or down, their buying habit does not
changed.

iii.

Let government increases the tax for petrol by x percentage and increases the tax for
air conditioner by y percentage.

When the demand of air conditioner is less than 1 which indicates that both of
them are inelastic.

When the price elasticity of demand of product or service is inelastic, the burden of tax
is more on the customer(Abolghasemi Komleh, 2018). In the given diagram the burden

4
of tax is presented in case of air conditioner. Where, P is initial price of product, and P1
is increased price of product after increase in tax. Q is initial quantity of supply and Q1
is decreased quantity supply after increase in tax.

Fig: Effect of tax on price of product

When the demand of petrol is less than 1 which indicates that both of them are
inelastic.

When the price elasticity of demand of product or service is inelastic, the burden of tax
is more on the customer. In the given diagram the burden of tax is presented in case of
petrol. Where, P is initial price of product, and P1 is increased price of product after
increase in tax. Q is initial quantity of supply and Q1 is decreased quantity of supply
after increase in tax.

5
 Fig: Effect of tax on price of product

Question 2
Given,

● Net salary = $4500 per month

● So, salary earnings = $4500 * 12 = $54,000
● Tuition fees = $3000 * 2 = $6000
● Loan = $40000
● Interest rate of loan = 8%
● So, interest amount of loan = 8% of $40000 = 3200
● Withdrawn from bank = $50,000
● So, interest of withdrawal = 5% of $50,000 = $2500
● Rental income = $11,000
● In business
o Orange section, revenue = $250,000
o Beverage section, revenue = $180,000
o Mid-year revenue = $100,000
o Wages expenses = $40,000 * 2 = $80,000

6
 o Truck expenses = $80,000
o Milk sales assistant expense = $30,000
o Manager expenses = $60,000
o Equipment expenses = $50,000
o Motorcycle expenses = $30,000

Total revenue in business = Orange section revenue + Beverage section, revenue +

Mid-year revenue

= $250,000 + $180,000 + $100,000

= $530,000

Hence, the revenue in business is $530,000.

Total explicit costs in business = Wages expenses +Truck expenses + Milk sales
assistant expense + Manager Expenses + Equipment expenses + Motorcycle expenses

= $80,000 + $80,000 + $30,000 + $60,000 + $50,000 + $30,000

= $330,000

Hence, the total explicit cost in business is $330,000.

Total implicit costs in business = Interest from bank + tuition fee + interest rate of
withdrawal

= 3200 + 6000 + 2500

= $10700

Hence, the total implicit cost in business is $10700.

We know that,

Accounting profit = Total revenue in business - Total explicit costs in business

= $530,000 - $330,000 = $200,000

7
Hence, the accounting profit in business is $200,000.

We know that,

Economic profit = Total revenue in business - Total explicit costs in business - Total
implicit costs in business

= 530,000 - $330,000 - $10700

= $189,300

Hence, the economic profit in business is $189,300.

Hence, accounting profit of James from kiosk business is $200,000 and economic profit
is $189,300 and his income from job is $54,000. As we can he that he is earning more
from kiosk business. Therefore he should he should continue his business.

Question 3
i. Monopoly of firm is regarded as the situation of market where there is presence of
single seller, with no any close substitutes that provides the company power for
increasing its cost more than its marginal price(McAuliffe, 2015). The demand curve
midpoint is the unit elastic and the upper part of the demand curve half is highly elastic
and lower part is less elastic. The ABC Inc Ltd. Firm earns profit in abnormal amount at
profit maximizing level of output due to raise in price than the average total price. At 15,
output level the amount is $55 and the $45 is average total price.

The monopoly firm company earns the profit in abnormal amount in the long term due to
restriction on new companies’ entry in market which refers that the supply on the
monopoly market is constant.

ii. The demand curve midpoint is the unit elastic and the upper part of the demand curve
half is highly elastic and lower part is less elastic. The demand curve’s elasticity varies
at different points. When it moves from top price is 80 but the quantity is zero, where
elasticity of product is infinite(Senthilnathan, 2013). When we move towards down of the
curve the price of the product decreases and quantity increases, with decrease in

8
elasticity of product. The advantage of monopoly curve to the firm are, they could
charge higher costs and they could make more number of profit rather than in
competitive market. Further, they could take advantage from scales’ economies with
increase of size from which they could experience low average prices – which is
essential for business with higher fixed prices and scope. Further, it brings stability of
price and it provides capability to scale up.

iii. The monopoly firm, ABC Company earns the profit in abnormal amount in the long
term due to restriction on new companies’ entry in market which refers that the supply
on the monopoly market is constant. The demand curve midpoint is the unit elastic and
the upper part of the demand curve half is highly elastic and lower part is less elastic.
The ABC Inc Ltd. Firm earns profit in abnormal amount at profit maximizing level of
output due to raise in price than the average total price. At 15, output level the amount
is $55 and the $45 is average total price. But in case of equilibrium, in the perfectly
industry the firm will gain zero economic profit.

iv. Monopoly market is not good for customers as it provides single power to one firm.
Hence, that firm can control price of goods. Same as with ABC firm, it has controlled the
market, and it can raise the price of goods without affecting the supply of goods.
Therefore, it is not good for customers(Bhattacharya et al., 2020).

Question 4
i.

Nominal GDP in 2016 of Happy Land Republic

To calculate nominal GDP, base year price of product of current year and current year’s
production quantity are considered, the calculation is given below,

Nominal GDP in 2016 of Happy Land Republic

Item Price Productio Price * Production

9
 n
Used car sales 2500 6000 15000,000
Factory components sales 1200 10000 12000000
Cloth sales 35 14000 490000
Beef sales 12 1,800 21600
Milk litres sales 2.50 6000 15000
Computers sales 800 2500 2000000
Printers sales 355 400 142000
Raw materials for tractor assembling 300 4450 1335000
plant sales

Nominal GDP = 15000,000 + 12000000 + 490000 + 21600 + 15000 + 2000000 +

142000 + 1335000

= 31003600

Hence, the nominal GDP of Happy Land Republic is $31003600.

Real GDP in 2016 of Happy Land Republic

To calculate real GDP, base year price of product of previous year and current year’s
production quantity are considered, the calculation given below:

Real GDP in 2016 of Happy Land Republic

Item Price Productio Price * Production

n
Used car sales 2000 6000 12000,000
Factory components sales 500 10000 5000000
Cloth sales 20 14000 280000
Beef sales 10 1,800 18000
Milk litres sales 1.50 6000 7800
Computers sales 500 2500 1250000

10
 Printers sales 300 400 120000
Raw materials for tractor assembling 250 4450 1112500
plant sales

Real GDP = 12000,000 + 5000000 + 280000 + 18000 + 7800 + 1250000 + 120000 +

1112500

= 19788300

Hence, the real GDP of Happy Land Republic is $19788300.

ii. The total value of all services and goods produced in a provided time mostly annually
or quarterly is known as nominal GDP(Chen, 2018). And real GDP is the adjustment of
nominal GDP for inflation. It is used for measuring the actual production growth without
any kinds of distorting impact from inflation. The main difference among the real GDP
and nominal GDP is adjustment for inflation. Nominal GDP is calculated by using
present time period prices and present time period production quantity. Where, real
GDP is calculated by using previous time period price and present time period
production quantity. It always differ from each other because the price of the goods or
services will not be same for the both time period, either there may be increase or there
may be decrease in the price of the goods or services which results difference among
them.

Question 5
i. The sum of the net export, government spending, investment, and consumption is
known as aggregate demand. If there is any changes in net export, government
spending, investment, and consumption components, will bring change in the aggregate
demand. Further, the general cost of economy price will also bring changes to the
aggregate demand(Zamparelli & Tavani, 2015).

11
If the level of general cost decreases or increases there will be movement along the
demand curve. If there is change other than price, in aggregate demand because of the
decrease or increase of net export, government spending, investment, and consumption
components there will be shift in the aggregate demand curve.

a. Aggregate demand shift right b. Aggregate

demand shift left

From above two figures, we can see that if the level of price was kept constant with if
the increase in net export, government spending, investment, and consumption
components in an economy the shift of aggregate demand curve will be towards right
side with increase in the real GDP, which is shown in figure a.

If there is decrease in net export, government spending, investment, and consumption

components in an economy the shift of aggregate demand curve will be towards left
side with decrease in the real GDP, which is shown in figure b.

12
Fig c

From the figure c diagram we could say that if there is increase in general price level
there will be decrease in the real GDP, or if there is decrease in general price level
there will be increase in the real GDP.

iii. If there is expectation of increase in services and goods price in Jan 2021 in
Australia. When there is increase in services and goods price in Jan 2021 in Australia,
the services and goods of Australia will be relatively more expensive for the people of
Australia and foreigners too. As a result this leads to the decrease in the demand of the
services and goods of Australia. When there is decrease in the demand of export, there
will be decrease in the aggregate demand as it is net exports functions. This is regarded
as the foreign purchases effect or net exports effect.

When there is rise of services and goods price in Australia, the average sales cost of
services and goods price in Australia increases which results inflation. Inflation is known
as the decrease in purchasing power of provided currency in the given time(Bagus et
al., 2014). Hence, increase in services and goods price in Jan 2021 in Australia results
inflation in 2021.

13
Question 6
Supply of money is regarded as the amount of cost being circulated in the economy at
the time period(Tin Fah et al., 2012). Demand of money is regarded as the desired
financial assets holding in the cash form like bank deposits or cash instead of
investments(Uzonwanne, 2019).

In worldwide, COVID-19 results economic crisis and to overcome this economic crisis,
most of the countries’ government are adopting fiscal measures and expansionary
monetary for overcoming this adverse condition. The immediate effect of COVID-19
measures are like increase in supply of money in market and increase in the spending
on the commodities in the markets of goods(Ozili & Arun, 2020).

Reserve banks would adopt the contractionary policy, with in this policy the central bank
would lower the monetary supply in the economy. Contractionary policy is a kind of
monetary measurement referring either for deduction of monetary expenditure from a
central bank(BLOOMENTHAL, 2020). They should apply contractionary policy because
it would decrease or slow down the inflation. Further it decreases the aggregate
demand and monetary supply, that would results in decrease in output and further
decrease in level of price.

Money supply measures the money present in the economy.

14
Fig: Money market

Fig: Goods and services

At the 40 billion to 70 billion equilibrium there is increase in money supply of the bank.

Contractionary policy would increase the rates of interest, discourage borrowing for
consumption and investment spending and results the original demand curve for shifting
left side to AB1, so the equilibrium occurred at the potential level of GDP. At the 40
billion to 70 billion equilibrium of GDP is obtained which results increase in money
supply of the bank.

15
Fig: Contractionary monetary policy

The rate of interest was reduced to 1.5% by the government, central banks to overcome
the covid effect but the rate of equilibrium interest is four percentage. Further, the real
GDP was 60 billion. Inflation is known as the decrease in purchasing power of provided
currency in the given time. When there is rise of services and goods price in Australia,
the average sales cost of services and goods price in Australia increases which results
inflation. During covid crises the equilibrium price of CPI of inflation is 65. Further, there
was decrease in aggregate demand of to 30 billion. At CPI 120, the economy of
equilibrium inflation was adjusted.

16
References:
Abolghasemi Komleh, R. (2018) The influence of taxation on supply, demand and market price.

Bagus, P., Howden, D. & Gabriel, A. (2014) Causes and Consequences of Inflation. Business
and Society Review, 119.

Bhattacharya, A., Morgan, N. & Rego, L. (2020) Customer Satisfaction and Firm Profits in
Monopolies: A Study of Utilities. Journal of Marketing Research, 58.

BLOOMENTHAL, A. (2020) Contractionary Policy.

Chen, S.-H. (2018) A NOTE ON NOMINAL GDP TARGETING AND MACROECONOMIC

(IN)STABILITY. Macroeconomic Dynamics, 23, pp.1–26.

Kenton, W. (2020) Price Elasticity of Demand Definition [Internet]. Available from:

<https://www.investopedia.com/terms/p/priceelasticity.asp> [Accessed 23 October 2020].

McAuliffe, R. (2015) Monopoly.

Ozili, P. & Arun, T. (2020) Spillover of COVID-19: impact on the Global Economy. SSRN
Electronic Journal.

Senthilnathan, S. (2013) A Note on Illustration of Elasticity. International Journal of Innovative

Research and Practices.

Tin Fah, C., Ariff, M. & Shamsher, M. (2012) Money Supply, Interest Rate, Liquidity and Share
Prices: A Test of Their Linkage. Global Finance Journal, 23.

Uzonwanne, C. (2019) Money and Banking. In: pp.57–109.

Zamparelli, L. & Tavani, D. (2015) Government Spending Composition, Aggregate Demand,

Growth and Distribution.

17
18