,

ASSIGNMENT COVER SHEET

Surname Ahanonye

First Name/s Natachi Teresa

Student Number 114162

Subject ECONOMICS 1A

Assignment Number 1

Examination Venue Johannesburg

Date Submitted 13 -05 - 2010

Submission First submission

Postal Address 15508, Secunda. Code; 2302

E-mail natiebag@gmail.com

Contact Number 0834779822

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TABLE OF CONTENTS

Question Page

Question 1 3-4

Question 2 5-6

Question 3 7-8

Question 4 9-11

Bibliography 12

Drawings 13-18

QUESTION 1
D 2
 F

1.2 The opportunity cost of increasing the production of soccer balls from 100 to 200
is 40 because to produce 200 soccer balls, there is a drop in the production of
rugby balls; meaning the best forgone alternative in producing soccer balls is 40.

1.3 The point (ABCD) on the production possibility curve shows efficiency which
means that the resources are used to full capacity, utilizing all available
resources.

1.4 It is not possible for Sportsletic Manufacturing CC to increase the production of

soccer balls and rugby balls to 520 and 450 respectively due to the fact that the
resources are limited, which means the company has to produce or work with the
given resource.
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 And yes it is also possible for the company to increase the production of both
soccer balls and rugby balls respectively, which means the company can produce
more of the same product with the available resource and it is possible only when
there is an improvement in technology in the production of these balls and when
there is a discovery of more resources.

1.5 The point E inside the Production Possibility Curve (PPC) indicates inefficiency
in the utilization of resources, meaning that, the resources are not put into
maximum use where as the point F outside the production possibility curve
indicate that the production of these balls can not be achieved at the moment but
in future, the production could grow and attain the point outside the PPC curve.
Example, if there is an improvement in technology in the production of these
balls.

1.6 The opportunity cost of producing 420 balls is zero; meaning that there was no
best forgone alternative and the resources available was used in the production of
rugby balls.

QUESTION 2

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2.1 Price elasticity of demand is the degree of responsiveness of percentage change in
quantity demanded if the price of the product changes by one percent.

(Mohr, P., Fourie, L. and associates 2000:218).

Price Elasticity of Demand (PED) is calculated or obtained by dividing the percentage

change in the quantity demanded by the percentage change in the price of the good or
services concerned.

PED = Percentage change in Quantity Demanded

Percentage change in Price

2.2 The 2.5 value of one of my product shows that the demand for this good is elastic
because it is greater than one and the product has a very close substitute (a decrease in
price will increase revenue).

2.3 The price of the product should decrease to maximize profit since the product6
has a class substitute. The one percentage change in price will be five percent relative to
the quantity demanded, meaning that, a decrease in price for this product will yield a
greater turnover in quantity demanded and there by increase revenue.

2.4 Income elasticity of demand: This is the degree of responsiveness of quantity

demanded relative to the changes in the income of a consumer. Income elasticity of
demand is calculated as percentage change in quantity demanded divided by percentage
change in income.

Example: As consumer’s income rises or increases, he/she will go for more normal good
which has income elasticity of above zero, and if the income falls, the consumer will go
for inferior goods with negative income elasticity. This means that quantity demanded is
relative to the consumer’s income.

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2.4.1 Difference between normal and inferior goods: Normal goods are goods with
income elasticity of above zero or positive and this means demand will grow as
increase in income leads to increase in demand at each price level. On the other
hand, inferior goods have an income elasticity that lies between zero and minus
infinity because as income rises, consumers buy fewer inferior goods and it means
that demand for inferior goods fall as income rises.

2.2.4 Difference between Essential and Luxury goods: Essential increase goods one
goods with an income elasticity of demand of between zero and one; meaning that
demand for goods rises with income but not proportionate. This is also because
humans have a limited need to consumer additional quantities of essential goods
are goods as a real living standard. Luxury goods are goods with an income
elasticity of demand greater than one and it means to a change in income. These
are items that consumers can do without during periods of below average income
and falling consumer confidence. Examples of Essential or necessity goods, are,
basic food stuff, electricity, petrol, medical care etc. Example of luxury goods;
entertainment, recreation, luxury motor vehicles.

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QUESTION 3

Monopolistic competition is a highly competitive market with many buyers and sellers
where firms may use product differentiation or branded product (Begg and ward,
2007:132).

Examples of firms in monopolistic competition are banks, health spas, radio stations,
convenience stores, night clubs and bars, etc.

3.1 Difference between monopolistic competition and perfect competition: One of

the differences between monopolistic competition and perfect

One of the difference between monopolistic competition and perfect competition as

shown in figures (1a and 1b, 2a $b) is that monopolistic competition is characterized by
an inefficient use of resources. Consumers pay a higher price and less output is produced
than under perfect competition. (Mohr, P., Fourie, L. and associates 2000:360) This also
indicates in Fig (1b) that firms in monopolistic competition tend to be less efficient in the
long run than firm in perfect competition.

Secondly, a monopolistic competition has a downward sloping demand curve for its
outputs while the total revenue curve of a perfect competition is an upward sloping
straight line, meaning that, perfect competition has a fixed cost that is incurred even if no
output is produced due to the fact that consumers view their respective products as
interchangeable (Homogeneous).

Thirdly, monopolistic competition has some controls over their price because the have
some monopoly power over product and they are price gives .where in the case of perfect
competition the are price takes meaning that they do not determine or influence the price
of the market, the take what ever that is in the market. Example, T-shirt industries.

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The different between monopolistic competition and monopoly:

Firstly figure (1a)shows the short run situation of a firm in monopolistic competition
where firms here makes economic profit only in short run situation not while in figure
(3), it shows that monopoly firm which is also industry makes economic profit both in
short run and long run.

Secondly, firms in monopolistic competition have relatively free entry and exist, meaning
that firms can enter the market wherever the like especially where there is economic
growth and exist when ever the like if demand for the product drops and the tend to loose
their investment.

Thirdly, monopolistic competition has many buyers and many sellers and is highly
competitive: where as in monopoly is a single firm and they are one sellers of their
product with many buyers. Example Eskom where consumers has limited, little or no
choice.

3.1 Different between monopolistic competition and oligopoly competition:

Monopolistic competition has a down-ward demand curve figure (1a and 1b) while figure
(4) shows that firms in oligopoly has a kink in their demand curve which depends on the
responses of its rivals to its price and output decisions.

Secondly, monopolistic competition has relatively free entry and exit where firm can
enter or leave the market when the like but in oligopoly, there is barrier to entry and exit.

Thirdly monopolistic competition has tiny monopoly over the product where as in
oligopoly, there is interdependent among firms and this interdependence refers to the
degree to which the actions of one firm affect the action of other firms (Mohr, P., Fourie,
L and associates 2000: 362). Example, Organization of Petroleum Exporting Countries
(OPEC)

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 QUESTION 4

4.1 Relationship between production and cost in a short and long run:

Production and cost in a sort run: A firm’s cost structure depends on the productivity of
the firm inputs given the prices of the inputs. This indicates that the shape of the unit cost
curves is determined by the shape of the unit product curves.

When marginal product (MP) is increasing, the marginal cost (MC) of producing a good
is falling but when marginal product (MP) declines, marginal cost (MC) increases.
(Mohr, P., Fourie, L. 2004:242).

Production and cost in a long run: In production theory, the long run is the period long
enough for the firm to change, the quantities of all the inputs in the production process as
well as the process itself. Though the actual time period that is required to vary all the
input or adopt new production techniques depends on the characteristics of the firm, the
production process etc and it can differ from case to case.

In long run, there are no fixed inputs or fixed cost. All the input and cost are variable and
all the factors of production are variable in the long run. In the long run, firms have to
take decisions about the scale of its operation, the location of its operation and the
techniques of production it will use and all these decisions will affect the cost of
production of a firm.

4.2 Economies and diseconomies of scale:

Fig (5), Economies of scale refer to the relationship between costs and output and it is
specifically to a decline in unit cost as output expands. This is experienced if costs per
unit of output fall as the scale of production increases. (Mohr, P., Fourier, L. and
associates 2004: 244-245)

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Economies of scale are the benefits a company enjoys from large scale production that
result in lower costs. Economies of scale spreads total costs over a greater range of
output. A company can either enjoy internal or external economies of scale.

Internal economies of scale are the benefits that arise as a result of the growth of the firm
and can include; Technical, Commercial, Financial and Managerial. External economies
of scale are the benefits firms can gain as a result of the growth of the industry normally
associated with a particular area and may include; Supply of skilled labour, and skills,
Infrastructure and Training facilities.

Diseconomies of scale on the hand are the disadvantages of large scale production that
can lead to increasing average costs of the firm for example, Problems of management,
maintaining effective communication, Co-ordination and De-motivation

4.2 Increasing returns to scale and decreasing returns to scale:

Increasing returns to scale refers to a situation where a given percentage increase in

inputs will give rise or lead to a larger percentage increase in outputs, meaning that if a
firm doubles its inputs, it will yield triple outputs.

Decreasing returns to scale refers to a situation where a given percentage increase in

inputs will yield to a smaller percentage increase in output, meaning that if a firm puts in
100% increase in the inputs and it yields or leads to a 50% increase in its output.

Fixed costs and variable costs:

Fixed Cost is the cost that remains constant irrespective of the quantity of output
produced while Variable Cost is the cost that changes when total product changes, and it
represents the cost of variable inputs. (Mohr, P, Fourie, L and associates 2004:236)

In figure (7), when production is increasing, fixed cost remains the same, example. Rent
for building or land.

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Total cost consists of total fixed cost and total variable cost. Total fixed cost is the same
all levels of output but total variable cost varies as output changes and this means that the
distance between total cost and total variable cost is always equal to total fixed cost.

Productive efficiency and allocative efficiency:

Allocative efficiency is achieved when price of each product is equal to its marginal cost
in the long run, e.g. firms in the perfect competition. Firms in the perfect competition are
productively and allocatively efficient when they produce at a point when Price (P) is
equal to marginal Cost (MC), that is when it is producing at minimum Average Cost
(AC) meaning the firms in perfect competition seeks to maximize profits by producing
the quantity of output at which Marginal Revenue (MR) is equal to Marginal Cost (MC)
and because of the firm in perfect competition, Price P= Marginal Revenue (MR), it
obviously achieves allocative efficiency.

Production efficiency is when a firm is producing at the least point of efficiency and at
the least point of average cost, meaning that the firm in the industry produce when their
long run average or unit cost are at minimum.

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BIBLIOGRAPHY

Begg, D. and Ward, D. 2007 Economics for Business. 2nd Edition. London: McGraw-
Hill.
Mohr, P. and Fourie, L. 2004 Economics for South African students. 4th Edition. Pretoria:
J.L. van Schaik.
Schiller, B.R. 2007. The Economy Today. 11th Edition. Boston: Mcgraw-Hill

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