Economics for Business Principles and Applications

Question: Describe about the Economics for Business for Principles and Applications . Answer: 1). Introduction: A monopolist, being a price maker, always faces two options in an attempt to maximize profit. First, either increase price and lower output. Second, increase output and lower price. It determines the price not with the help of intersection of the demand and supply curve as there is absence of supply curve in the case of monopolist firm. It is the monopolist firm who decides how much it wants to sell in the market. The price is set where the marginal revenue is maximized, ultimately determining the level of supply in the economy. This profit maximization level is achieved where marginal revenue equals marginal costs. This determines the level of quantity to be put for sales in the market and hence the corresponding price is the equilibrium price. This implies that the firm will not set highest maximum price as it doesnt lead to maximum profit and is guided by the level of output. Analysis: Given this, following two condition would prevail that explains when the firm would want to pursue higher or lower price (Pindyck and Rubinfeld, 2004; Mankiw,2007). a)In case firm decides to lower the price of product, it will do so as the demand is higher at the lower prices given the downward sloping nature of the monopolists demand curve. Moreover, marginal revenue gained from the sale of the extra unit of product would always be less than the price. However, a firm would continue to do so in order to reach profit maximizing output where MR= MC. Other most important factor is the elasticity of the demand for the product. A firm would reduce the price only when it is aware that the price elasticity of demand for his product is very elastic. Any change in the price would cause a substantial change in the quantity demanded and corresponding change in the level of prices. Higher the elastic demand is, greater will be the changes in the prices quoted and hence changes in profit(Pindyck and Rubinfeld, 2004). b). A firm would increase the price of its product when it is sure that there is no close substitute present for its product thereby making the demand for its product to be highly inelastic. This way there will besmaller reduction in the quantity demanded due to the increase in the price given the inelastic nature of its product(Mankiw, 2007). Conclusion: Thus, elasticity of the demand is an important factor which determines the level of price and output offered by the supplier. Greater the elasticity, higher would be the fluctuations in the quantity demanded and vice versa. 2). Introduction: A theory of comparative advantage states that a country must specialize in the production of that commodity where the opportunity cost is low and would engage in the trade with the other countries and import that commodity in which the opportunity cost of producing it is high. Analysis: The given statement is not correct. A country would always benefit when engaged in trade where it trades commodities it produces more efficiently than other countries. It is always a good idea for a country to specialize in a product it can produce cheaply, efficiently and at a lower opportunity cost than the other country. For example, consider the following table where the opportunity cost for producing 1 unit of wine is 1.8 units of textile for US. For UK, the opportunity cost for producing 1 unit of wine is 1.14 units of textile. Thus, UK has comparative advantage in producing wine because it has lower opportunity cost. US have comparative advantage in producing textile due to lower opportunity cost. Wine Textile United States (US) 5 9 United Kingdom(UK) 7 8 Total 12 17 Conclusion: Thus, given constant returns to scale, each country specialize(US in textile and UK in wine) in producing a product that doubles after specialization. That is, UK will be producing 14 units of wine instead of total 12 units of production and US will now produce 18 units of textile instead of 17 units (Mankiw, 2007). References: Mankiw, G , Economics: Principles and Applications, 4th edition South Western, Cengage Learning India Private Limited. (2007). Pindyck, RS Rubinfeld D. Microeconomics, 6th edition,Prentice Hall.(2006).