1. What is opportunity cost? Describe some of the opportunity costs when you decide to do the following?
a. Attend college instead of taking a job.
b. Ride a bus instead of driving your car.
2. Define price elasticity of demand. How you will use it to define an 'inferior good'? Give two examples of an inferior good?
3. In which market structure would you place each of the following products: monopoly oligopoly, monopolistic competition, or perfect competition? Why?
a. Water and sewerage services.
b. Breakfast cereal
4. Define discretionary fiscal policy? What is the relationship with automatic stabilisers?
5. Explain the differences between demand pull and cost push inflation?
6. Identify the key factors affecting the demand for currency?
7. What policies would be effective to reduce the structural rate of unemployment? Define at least one?
1. Opportunity Cost
Opportunity cost is defined as the money or other advantages being lost in order to seek a specific course of action instead of an alternative that is mutually exclusive. Therefore, the opportunity cost is the benefit that may have been gained from the use of alternative of the similar resources.
Attend college instead of taking job: For example, if a student attends college for four year then in this case the opportunity cost is the lost of money that a student would have gained if he/she would have taken up the job. Opportunity cost for going college are books, supplies, cost of tuition, etc and a person can find good or better job opportunity and better salary.
Ride a bus instead of driving a car: If a person rides a bus then it can be cheaper to him/her but may not be as convenient as riding a car. Opportunity costs for taking bus comprises, wait for bus, person may have to walk to reach the destination from the bus stop.
2. Price Elasticity of demand
Price elasticity of demand I regarded as the measure to know the demand for the product or services of the customers in relation to price change. Therefore, it shows a relationship between an alteration in the demand of quantity and alteration in price. Inferior goods are considered that good which reduces in demand if there is arise in the income level of consumers or vice versa. Examples of Inferior goods are:
Inter-city bus can be taken as inferior good. The travelling through inter-city bus is cheaper than rail or air travel but in can be time consuming. Therefore, if a person has more money, then person may prefer rail or air transport. Thus, it can decrease the demand for inter-city due to rise in income level.
The cheaper bikes can be inferior goods as the people may prefer cheaper bike due to income constraint but when there is rise in income then the same person may prefer buying costly bike.
3. Deciding market structure
Water and sewerage services: The services may fall into monopoly market structure as the services can be provided by one firm. The water and sewerage service is sole entrepreneurship. For instance, if there is large number of buyers in particular society and lack of water and sewerage service provider then one firm providing service in society can be considered as monopoly. Moreover, there is scarcity of fresh water and sewerage service provider therefore, it falls under monopoly.
Breakfast Cereal: The product falls under oligopoly market structure. Oligopoly means few amounts of sellers and large buyers. The breakfast cereals that are sold by firms are very less such as Nestle, Kellogg’s, etc.
4. Discretionary fiscal policy and its relationship with automatic stabilizers
Discretionary Fiscal Policy is considered as the part of the action of government that can be altered year to year. It is a policy by the government that does not implies mandatory modification in spending, taxation or fiscal activities in context to changes in economic situations or recessions. Therefore, it is regarded as deliberate changes of government taxation, transfer payments and purchases so that macroeconomic goals can be promoted such as stability in price, GDP growth, full employment, etc.
Automatic stabilizers are regarded as budget policy that alters automatically in order to stabilize the fluctuations in gross domestic product. The automatic stabilizer is different from discretionary fiscal policy. In order to make discretionary fiscal policy, the government has to have support from all areas whereas automatic stabilizers functions automatically if any economic situation arises. Examples of Automatic Stabilizers are corporate profits, unemployment insurance programs and progressive income taxes.
5. Demand Pull and cost push inflation
Demand Pull Inflation: This kind of inflation is caused by excess and higher demands. For instance, if the people have more money, than they use more money to buy the product and services. The factors that lead to increase in aggregate demand are: increase in the level of money supply; rise in government purchase and rise in level of price in rest world. Therefore demand pull inflation can lead to shortages and rise in prices.
Cost Pull Inflation: This kind of inflation is erupts by disruptions in supply. For instance, if oil prices increases then it make production more expensive. Therefore, production price can increase. The decrease in total supply can be due to hike in wage rates or increase in the raw material prices.
6. Factors affecting demand for currency
Interest Rates: If there is higher interest rate associated with the borrowing, then the person may not be able to acquire money as required. For instance, if an investor invests money in foreign company and the interest rate in foreign company decreases then it can result in lower yield.
Trade Balance: It impacts the demand and supply for the currency. For example, if a particular nation is suffering from trade deficit then the demand for currency can decrease and supply of currency can increase that can lead to higher supply and less demand.
Political Situation: If there is higher global tension then it can lead to FOREX market instability. Moreover, there can be irregular outflow and inflow of currencies that can result in exchange rate fluctuation.
7. Policies for reducing structural rate of unemployment
The structural rate of unemployment can be reduced by making policies such as:
- Introducing Government Training programs for the structurally employed
- Payment of subsidies to companies providing raining
- Increasing wage level and Helping unemployed to relocate themselves in working areas
The policy to provide help to the structurally employed can be helpful in relocating them to the area where their job exists. The provision of assistance can help the person to regularly visit the office to carry on with their business activities. Moreover, it can decrease the burden from their health and can it can decrease the travel time. Therefore, it can help in attending office on time. Further, the hike in wage level can motivate the people to work.