ECONOMICS FOR BUSINESS

Economics for Business Individual Portfolio



Economics for Business Individual Portfolio

Question 1

Calculate average and marginal cost, average and marginal revenue.

Average cost shows the cost of producing a single unit at a given level of output. It is computed as total cost divided by total output in units. The marginal cost reflects change in total costs with change in each level of output. Average revenue shows the revenue per unit at each level of output. In other words, it is the price at which the firm offers its product to the customers. Marginal revenue, on the other hand, is the change in total revenue due to change in output. It is computed by dividing the total revenue by the given level of output. The following table presents the calculated AR, AC, MR, and MC of the firm:

Output/Sales Volume

Total Costs

Total Revenue

Average Cost

Marginal Cost

Average Revenue

Marginal Revenue

0

1

0

1

1

0

0

1

13

27

13

12

27

27

2

24

53

12

11

26.5

26

3

33

78

11

9

26

25

4

40

102

10

7

25.5

24

5

50

125

10

10

25

23

6

66

147

11

16

24.5

22

7

84

168

12

18

24

21

8

104

188

13

20

23.5

20

9

126

207

14

22

23

19

Plot (accurately on graph paper or using spreadsheet software) the average and marginal cost together with the average and marginal revenue schedules on one graph. Clearly identify the profit maximising level of output and price on your graph.

Following graph shows the average and marginal costs as well as average and marginal revenues at each level of output. The x axis shows the costs and revenues while the y axis shows levels of output.

How much profit is being made at this combination of price and output?

As indicated in the graph above the profit maximisation point is where MR=MC, or 8 units to be precise. At this level of output and price, the firm will make £84 of total profit.

d) Giving your reasons what sort of market structure do you believe this firm is operating in?

The average and marginal revenues are well above the average and marginal costs of the firm. Also, as seen from total costs and total revenues, the firm has only modest increments in the average cost over different levels of output. This type of cost-volume-profit relationship is atypical of monopolistic product markets such as those of telecommunication companies. In this type of market structure, firms' output levels reflect the observable price controls to a certain extent. Average and marginal revenues remain above the average and marginal costs. Firms optimise at the point where MR=MC. At this point, they have the highest profit maximising output. Firms in a monopolistic market structure are few in number, and are able to exercise some control over market price due to their capacity to limit supply.

Question 2

What economic factors appear to have contributed the most recent (2008/09) recession in the UK economy?

There were many factors that resulted in escalating the economic downturn which emerged in 2007-08. These factors vary in their dimensions; however, had significant impact in worsening the economic situation. From the banking point of view, these include low real interest rates, high credit outflow, apparent excess liquidity, sub-prime mortgages, and unreliable assessment of future risks associated with lending in consumer markets (Sun, Stewart & Pollard 2011, ...