Attend college instead of taking a job
Ride a bus instead of driving a car
The opportunity cost can be simply defined as the cost or value that was foregone by the individual in order to achieve some other benefit. Although the cost is not recorded in the financial statement however the cost benefit is considered for decision making purpose (Steiner, 2010).
In case of taking a decisions relating to attending college instead of taking a job shows that the individual will experience a loss of current income from the job and also a loss of experience that would have helped the individual in future income. This is the opportunity cost.
In case of availing a bus instead of a car the individual losses the freedom to choose own schedule and also lose the freedom of privacy and safety.
Question 2. Define price elasticity of demand and how you will use it to define an inferior good? Give two examples of an inferior good?
Answer 2. Price elasticity of demand shows the relationship between price and quantity demanded.
PED = (% change in quantity demanded / %change in price)
The degree of PED can be of the following types namely:
- Less than 1 indicates PED is inelastic
- Greater than one indicates PED is elastic
- Zero indicates PED is perfectly inelastic
- Infinite indicates PED is perfectly elastic
Inferior good is the types of good the demand for which declines with the rise in the level of income. For instance the products sold at the discount markets or shops fall under the category of inferior goods (Zhou, 2011). With the rise in the income level the consumers stop purchasing from these stores. Some of the food products like rice, potato and noodles are considered to be inferior goods because their consumption decreases with the increase in the income level.
Question 3. Explain the differences between demand pull and cost push inflation?
Answer 3. Both cost push inflation and demand pull inflation have the same effects of price rise on the goods however the difference between the two exists only behind their causing factors.Wang (2010) opined when the purchasing power of the people increase the demand for the goods increase simultaneously. Under this circumstance there occurs a shortage in the supply of goods resulting in increase of price. This is the situation in demand pull inflation. The following factors may result in demand pull inflation namely higher employment rate, depreciation of exchange rate and faster economic growth.
On the contrary in case of cost push inflation the cost of the production of the goods increases which makes the supply costly. This inflation results from increase of component costs, rising labor costs, higher tax rates and low exchange rates. A backward shift of the supply curve denotes cost push inflation whereas a rightward shift of the demand curve denotes demand pull inflation.
Question 4. Identify the key factors affecting the demand for currency
Answer 4. Level of consumer spending: During the periods of higher consumer spending like in the festival seasons the demand for money increases since the consumers are willing to pay more for their products.
Inflation rate: The high rate of inflation forces the price of the goods to rise. Hence the demand of money for the purchase of the goods increases among the individuals (Steiner, 2010). Hence there exists a direct relation between the price rate and the rate of currency demand. The rate of currency demand increases with the increase in the price of goods and services.
Precautionary motive: According to Lai and Joseph (2010) if in any market situation the individuals feel that they need to store cash for the future purpose then the individuals will sell all kinds of bonds and shares and will convert them to liquid cash. This will in turn increase the demand for money in the market.
Interest rates: The two major sources of wealth are bonds and money. The bonds generally offer high rates of interest to the purchaser and hence the demand for bonds are generally high compared to the demand for keeping liquid cash. However Kiyono and Ishikawa (2013) suggested that when there is a decrease in the rates of interest of bonds the demand for liquid cash increases.
Question 5.What policies would be effective to reduce the structural rate of unemployment? Define at least one.
Answer 5. Two major strategies may be adopt3ed for reduction of unemployment namely the demand side policies and the supply side policies. Among the demand side policies the most effective policies are Fiscal policy and monetary policy. The supply side polices include the simple policies like education and training, reduction of power of trade unions, employment subsidies and improved labor market.
The supply side policy attempts to give sufficient education and training to the unemployed workers making them eligible for employment (Gillespie, 2010). Moreover the bargaining power of the trade unions should also be decreased so that the real wage unemployment can be avoided. The policy of providing financial assistance to the unemployed workers to help them move to highly employed areas will help to generate more employment options.
Question 1. Justification of statement
Answer 1. The rise of the oil prices is temporary hence the suggestion of the advisor to increase the money supply is not a feasible suggestion. In the future when the price of the oil will decrease the market will have high money supply which will create a situation of demand pull inflation. This will negatively affect the demand for oil and will result in increase of oil price permanently.
Question 2. Measures taken by UK coalition Government
Answer 2. To make a better economy the UK coalition government introduced the following fiscal and monetary policies
- Age related allowances for pensioners
- Price stability to maintain low levels of inflation
- Maintaining an inflation rate of 2% to stimulate a steady growth of the UK economy
- Introducing a tight fiscal policy to reduce the inflationary pressure by reducing the growth of aggregate demand in UK economy (Fund, 2010)
- Increasing of taxes to improve the government finances
Fund, I. (2010). Ethiopia. Washington: International Monetary Fund.
Gillespie, A. (2010). Business economics. Oxford: Oxford University Press.
Zhou, Q. (2011). Advances in applied economics, business and development. Berlin: Springer.
Kiyono, K. and Ishikawa, J. (2013). Reexamination of Strategic Public Policies. Japanese Economic Review, 64(2), pp.201-231.
Lai, B. and Joseph, N. (2010). Pricing-to-market and the volatility of UK export prices. Applied Financial Economics, 20(18), pp.1441-1460.
Steiner, A. (2010). Contagious policies: an analysis of spatial interactions among countries' capital account policies. Pacific Economic Review, 15(3), pp.422-445.
Wang, P. (2010). An examination of business cycle features in UK S ectoral O utput. Applied Economics, 42(25), pp.3241-3252.