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Short-Run Costs and Cost Curves for Small Business

Red T-shirts is a small business manufacturing custom-made t-shirt. The cost structure of the firm is presented in the table below:

[i] Calculate the short-run costs by completing the above table. 

[ii] From the above table, draw AC, MC, AVC, AFC curves.

[iii] Analyze the relationship between MC and AC curves. 

Question 2   

[i]   There is a convenience store located in the same building as OPAIC. Your classmate wants to classify this type of business in economic terms. Go there and help your friend identify the market structure to which this business may belong. Justify your answer with any four reasons. 

[ii] ASB Bank is located at 138-142 Queen Street. Your classmate wants to classify this type of business in economic terms. Go there and help your friend identify the market structure to which this business may belong.  Justify your answer with any four reasons. 

[iii] Your classmate asked for your help to identify the market structure to which Auckland Airport may belong. Help your friend identify the market structure to which this business may belong.Justify your answer with any four reasons. 

[iv] Economics books mention that certain requirements must be met for a market to be perfectly competitive. Identify any four essential features of the perfectly competitive market. Why do you think it is difficult to find a real life example of the perfectly competitive market. 

Question 3  

Your friend Chris is a sole trader running a small lawn mowing business. He knows that you study economics at OPAIC and he asked for your help. The following table provides information on his business costs:

As Chris’s operation is very similar to perfect competition, he is a price taker.  You are required to advise Chris on business strategies at different price levels in the market.

[i] Assume that the price in the market is $60. Use the data in the above table to show the resulting situation in the graph. Analyze this situation and give advice to Chris. 

[ii] Assume that the price in the market is $30. Use the data in the above table to show the resulting situation in the graph. Analyze this situation and give advice to Chris.

[iii] Assume that the price in the market is $20. Use the data in the above table to show the resulting situation in the graph.  

Question 4

Go to the Air NZ and Jetstar website, compare fare prices from Auckland to Wellington and Christchurch for a return trip during labour weekend (departing Friday and coming back on Monday anytime) Record your results in a table. Also visit the Air NZ website and check prices for a return ticket flying from Auckland to Blenheim and Gisborne for the same weekend.

Required:

When is Air NZ more competitive? Discuss your results you recorded in relation to what we know about market structures.t

the Role of Government

Question 1                                                          

a)State five conditions that must be fulfilled in order to bring about allocative efficiency.

  1. b) Write an essay (200-250 words) discussing the broader objective of free tertiary education for first year tertiary students in NZ and the recent NZ political debates. In your answer mention the concepts of market failure, positive externalities, public, and private good  

Question 2                                                          

The diagram below shows the production of steel in a steel mill that spills steel dust over the neighbouring farmlands causing a negative externality or spill-over costs.  The private marginal cost is indicated by the MC curve. The spill over costs added to the marginal cost results in the marginal social cost (MSC. The marginal benefit is indicated by the MB curve.

Study the graph and answer the following questions:

  • Show in the graph the output of steel in an unregulated market where there is no government intervention. Use Q1 to show the output. 
  • Show in the graph the marginal cost of steel in an unregulated market where there is no government intervention. Use MC1 to show the marginal cost. 
  • Show in the graph the output of steel in a regulated market where there is government intervention. Use Q2 to show the output. 
  • Show in the graph the marginal social cost of steel in a regulated market where there is government intervention. Use MSC2 to show the marginal social cost. 
  • Briefly explain how the government has intervened and why the MSC is above the MC                                                                                                                      

Question 3

Do some research and answer the question below

Discuss the conflicts between market being allocative efficient and equitable given the decision by the new government this year to

- ban foreign buyers from certain countries to purchase NZ property.

- Increase the minimum wage to $20 by 2020  

Section c 

Macroeconomic Concepts and Models                    

Q1) Using the Circular Flow Diagram provided below, identify what parts of the Circular Flow Diagram correspond to the flowing scenarios in Table A. 

Scenario

Part of the circular flow model (a – l)

Garry pays $250 for a new jacket

Mary decides to save $150 from her wages

The government provides a $50,000 subsidy for doctor’s visits

A New Zealand kiwifruit grower developed a new variety of kiwifruit. This specific type of kiwifruit becomes very popular in Australia.

The Smith family takes out a mortgage to purchase a new family home

Stuart earns $10,000 from his 10% ownership of Acme industrial

Wendy pay $ 290 personal income every week

Each financial year, ABC Ltd pay around $ 220,000  to the government for taxation

Using the circular flow model illustrate and explain the following effects on national income if:

  1. Injections > leakages
  2. Injections = leakages
  3. Injections < leakages
  1. Explain what the Consumer Price Index (CPI) measures. Using the information in the table below, calculate the consumer price index for 2017 if the base year is 2000. 

Year

Quantity of Milk

Price of Milk

Quantity of Wheat

Price of Wheat

2016

1000 bottles

$3 per bottle

9,000 kilos

$2 per kilo

2017

5,000 bottles

$7 per bottle

15,000 kilos

$5 per kilo

Information for New Zealand’s national income for 2017 is presented below (hypothetical figures). Use this information to answer the following questions.

National accounting information

$ (million)

Consumption spending

400

Receipts from exported goods

200

Government purchases

100

Total investments

50

Payments for imported goods

95

Calculate New Zealand’s GDP for 2017 using the expenditure method. 

  1. New Zealand’s GDP for 2017 was equal to $640 million. Using this information as well as your answer from Question 4 (a) to calculate the rate of economic growth equal for the   period of 2016-2017.
  2. Why is nominal GDP not a good measure of the strength or weakness of the economy What would be a better measure.

Short-Run Costs and Cost Curves for Small Business

[i]

Labour

Output

TFC

TVC

TC

AC

MC

AVC

AFC

Workers per day

T-shirts per day

$ per day

$ per day

$ per day

0

25

0

25

4

25

25

50

12.5

6.25

6.25

6.25

10

25

50

75

7.5

4.17

5

2.5

13

25

75

100

7.69

8.33

5.77

1.92

15

25

100

125

8.33

12.5

6.67

1.67

16

25

125

150

9.38

25

7.81

1.56

There exists a relationship between the MC and AC curves. When MC is less than AC, AC falls and when MC is greater than AC, AC increases. In addition to that MC intersects AC at the bottom point (Ward & Begg, 2016).

The convenience store has the monopolistic market structure.

Justification:

  • Single sellers and huge buyers in the building.
  • Lack of competition allows the store to control price.
  • No product alternative.
  • Entry barrier exists (Pigou, 2017).

The ABS bank has the market structure of a monopolistic competition.

Justification:

  • One of the banks out of many in the area.
  • Product and services are slightly different from others.
  • A lot of customers in the area.
  • The bank has no control over the prices.

The Auckland Airport is a natural monopoly.

Justification:

  • The fix cost is very high, thus entry and exit is closed.
  • There is no other competitor.
  • The airport is the price setter.
  • Provides service to a lot of customers.

Conditions for perfectly competitive market:

  • Huge number of buyer and seller.
  • Homogeneous goods and services.
  • Perfect knowledge.
  • No entry and exit barrier.

In real life situation, the products of the sellers are not exactly homogenous and enjoys little bit of power over the price (Sahlins, 2017). Therefore it is difficult to find a perfectly competitive market.

i]

$60= at this point, P> ATC= Super normal profit

Therefore, it is suggested to expand the business in order to rip more benefit.  

[ii]

$30: at this price point, P=MC= ATC= Normal profit

Therefore, it is suggested to carry on the business in order to run profitably.

[iii]

$20= at this point, P=MC= AVC< ATC=> Less than normal profit.

Here it is recommended to continue the business in the short run unless the price falls further below the minimum point AVC.

Auckland

Air NZ

Jet Star

Wellington

96

84

Christchurch

112

74

Blenheim

145

Gisborne

145

Air NZ is more competitive when Jet star is there to compete as a part of oligopolistic market structure. In the case of Blenheim and Gisborne, there is lack of competition and hence the price is high similar to characteristics of a monopolistic market.

Conditions for allocative efficiency:

  1. Output= Marginal cost
  2. Marginal benefit= marginal cost
  3. Free market structure
  4. Price mechanism
  5. Zero deadweight loss.

The free tertiary education is a public good which does not include the social benefits in the cots structures. Therefore the objective is to allow everyone to make the most of the positive externality (Fisher, Naidoo & Ricketts, 2015). Another objective of the free tertiary education is also to differentiate between private and public education through deliberate market failure from the side of the government.

he government has taxed the production in order to include the social cost in the system. The MSC includes the private cost and the social cost of production and hence lies above MC, which includes just the private cost (Capello, 2015).

Question 3

Ban foreign buyers from certain countries to purchase NZ property:

This decision is more equitable than allocative efficient due to the intervention of the government (Corr & Plagnol, 2018).  Equitable decision allows the price of the market to remain low so that domestic buyers get benefitted.

Increase the minimum wage to $20 by 2020:

An allocative efficient wage rate can sometimes be low for a specified group of people and hence this decision ensures an equitable distribution of wealth rather than allocative distribution.

Scenario

Part of the circular flow model (a – l)

Garry pays $250 for a new jacket

c

Mary decides to save $150 from her wages

a

The government provides a $50,000 subsidy for doctor’s visits

g

A New Zealand kiwifruit grower developed a new variety of kiwifruit. This specific type of kiwifruit becomes very popular in Australia.

k

The Smith family takes out a mortgage to purchase a new family home

b

Stuart earns $10,000 from his 10% ownership of Acme industrial

j

Wendy pay $ 290 personal income every week

d

Each financial year, ABC Ltd pay around $ 220,000  to the government for taxation

f

 Q2)

  1. Injections > leakages= Increasing national income
  2. Injections = leakages= Unchanged National income
  3. Injections < leakages= Decreasing national income

CPI for the year 2017 is=

[((1000*7)+(9000*5))/((1000*3)+(9000*2))]*100= 247.6

C+I+G+(X-M)

= 400+50+100+(200-95)= $ 655 Million.

GDP in the year 2016= $ 640 Million.

Therefore the growth=

((655-640)/640)*100= 2.3 %

The nominal GDP is higher for higher population and thus does not help in the comparison between two different economies. The per capita nominal GDP is neutralises the effect of population and hence the best measure to understand the performance of an economy.

Reference

Capello, R. (2015). Regional economics. Routledge.

Corr, P., & Plagnol, A. (2018). Behavioral Economics: The Basics. Routledge.

Fisher, B., Naidoo, R., & Ricketts, T. H. (2015). A field guide to economics for conservationists. Roberts Publishers.

Pigou, A. (2017). The economics of welfare. Routledge.

Sahlins, M. (2017). Stone age economics. Routledge.

Ward, D., & Begg, D. (2016). Economics for business. McGraw-Hill.

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