Opportunity of Costs in Economics

Questions: 1. What is opportunity cost? Describe some of the opportunity costs when you decide to do the following?A. Attend college instead of taking of taking a job.B. Ride a bus instead of driving your car.2. Define prince 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 perfecct competition? Why?A. Water and sewerage services B. Breakfast cereal4. Define discretionary fiscal policy? what is the relationship with automatic stabilisers?5. Explain the differences between demand pull and cost push inflation?6. Oil prices have risen temporarily due to political uncertainty in the Middle East. An advisor suggests,"Higher oil prices reduce aggregate supply. To offset this we must increase the money supply. Then the price level won't need to adjust to restore equilibrium, and we'll prevent a recession"?7. It is a role of every government to smooth the business cycle. Every economy faces different challenges including the business cycles that may emanate from the global market. Try to examine measures taken by the UK's coalition government in trying to ensure that the economy benefits every citizen and reduces overall burden of it (QE, Fiscal policy, Monetary policy, Multiplier effect)? Answers: 1. Opportunity cost can be defined as the value or benefit of something which must be given in order to obtain something else. Opportunity costs are regarded as the fundamental cost in Economics and are utilized in assessing cost benefit analysis of a project (Heymann and Bloom, 1990). These cost are not recorded in books of accounts but are recognized at the time of decision making. For example, if we have 30, then we can utilize it either for buying Economics book or eat a delicious meal in the restaurant. The opportunity cost of buying the test book is the restaurant that we cannot pay. A. The opportunity cost of attending a college instead of taking a job is the loss of the current income and the experience. B. The opportunity cost of riding a bus instead of driving your own car is the loss of freedom of staying alone instead of being crowded among strangers as well as loss of freedom to choose your own schedule. 2. Price Elasticity of demand can be defined as the measure of the relationship between the change in the quantity demanded of a particular good and a change in its price. It is used for discussing the price sensitivity in Economics (Boyer, Taylor and Imai, 1994). The price Elasticity of demand is computed by the following formula: Price Elasticity of Demand= percentage in quantity demanded / percentage change in price The above formula generally yields a negative value. For example, if the price of good X increases from 100 to 110 and its demand fell from 100 units to 80 units, then: % change in quantity of demand= (-20/100) 100 = -20% % change in price= (10/100) 100= 10% PED= -20/10= -2.0 It is important to note: PED=1 means unit elastic PED1 means elastic PED The price elasticity of demand for inferior goods is positive. This implies that when the price decreases, the demand of inferior goods decreases. Two examples of inferior goods are canned goods and frozen dinner. 3. (a) The market structure of water and sewage services is generally monopolistic. Monopoly is kind of market structure where there is only single producer. The water and sewage service industry are generally monopolistic because it is quite difficult to enter in the market. This industry does not generally have close substitutes (Heywood and Peoples, 2006). 3.(b) Oligopoly is the desired market structure for breakfast cereals. In this type of industry, producers somehow coordinate actions to avoid competing with each other. Oligopoly is the most prevalent market structure. The industries producing breakfast cereal do not consider the responses of their competitors while undertaking pricing decisions. 4. Discretionary policy can be defined as the macroeconomic policy which is taken in response to the changes in economy. They do not sallow a strict set of rules. Automatic stabilizers refer to the budget policy which automatically changes to stabilize fluctuations in GDP (King, 2006). When an economy goes through an economic fluctuation, the discretionary policy began to work. With discretionary policy, there is general time lag before an action could be taken. Automatic stabilizers exist before economic booms and busts wherein discretionary policy is created in responses to change in economy. There is negative correlation between automatic stabilizers and discretionary policy. 5. Cost-push inflation occurs when there is considerable increase in the price of important goods and services and there is no suitable alternative is available. The price of the good rises due to the disruption in supply (Berlatsky, 2013). Demand-pull inflation arises when the aggregate demand in an economy exceeds the aggregate supply. This causes inflation as the GDP rises. These two inflations can be distinguished on the basis of their causes. The effect of these two inflations is same, i.e., they increase the price level. Demand pull inflation is caused by excessive demand. This causes shortages and price rise (Rowlatt, 1992). On the other hand, cost push inflation is caused by disruption in supply. This disturbance of supply causes rise in the price of production leading to inflation. Demand pull inflation demonstrates the process of starting price inflation and cost pull inflation explains why inflation is difficult to stop. 6. Increase in prices cause the aggregate supply to decline. The increase in the prices of oil reduces the production cost and lead to decrease in short-run aggregate supply. With increasing the money supply, the price level would drop and GDP would increase (Sloman and Sutcliffe, 2003). This will cause an exogenous decrease in wage rate and an increase in the physical capital stock. The increased supply of money leads to the increase in labour and capital. With the help of more resources, it is possible to produce more final goods and services and hence the real GDP rises (Krugman and Obstfeld, 2000). 7. In UK, BOE has raised the selling of QE asset purchase program to 375 billion, most of which is used to purchase UK government securities. In the Euro area, ECB has introduced series of long term refinancing operations in 2008, two round of cover bound buying program in 2009 and 2011, an unlimited securities market programs in 2009 and 2011 as well as an open-ended outright monetary transaction in 2012 (Giudice, Kuenzel and Springbett, 2012). With the help of QE, Central Banks tries to enhance growth and bring down the problem of joblessness to reasonable levels and support the banking system to boost spending by pumping more money in the economy. When there are high levels of unemployment and the business cycle is not effective then the coalition government of UK can fuel the economy and provide benefit to the people by decreasing taxation. This will enable the consumers to spend money wherein increasing government spending in the form of buying services from the market (Harbury and Lipsey, 1993). With the help paying for such services, the government creates job and wages that are pumped into the economy. In this process, the level of unemployment will be reduced. The BOE can undertake monetary policy by regulating the cost and the supply of money and credit for the purpose of achieving socio-economic objectives of the country (Fender, 2012). The major aim of the monetary policy is to stimulate the process economic growth with a view to raise the income of the country. BOE has made allocation of funds to the various sector as per the priorities laid down by the plan and requirements of day to day developments. The monetary policy of BOE aims to control the prices and reduce the inflationary pressure in the economy (Walsh, 1998). References Berlatsky, N. (2013). Inflation. Detroit, MI: Greenhaven Press. Boyer, Y., Taylor, T. and Imai, R. (1994). The defence trade. London: Royal Institute of International Affairs. Fender, J. (2012). Monetary policy. Hoboken, N.J.: Wiley. Giudice, G., Kuenzel, R. and Springbett, T. (2012). UK economy. London: Routledge. Harbury, C. and Lipsey, R. (1993). An introduction to the UK economy. Oxford, UK: Blackwell. Heymann, H. and Bloom, R. (1990). Opportunity cost in finance and accounting. New York: Quorum Books. Heywood, J. and Peoples, J. (2006). Product market structure and labor market discrimination. Albany: State University of New York Press. King, R. (2006). Discretionary policy and multiple equilibria. Cambridge, Mass.: National Bureau of Economic Research. Krugman, P. and Obstfeld, M. (2000). International economics. Reading Mass.: Addison-Wesley. Rowlatt, P. (1992). Inflation. London: Chapman Hall. Sloman, J. and Sutcliffe, M. (2003). Economics. Harlow, England: Prentice Hall/Financial Times. Walsh, C. (1998). Monetary theory and policy. Cambridge, Mass.: MIT Press.