UNDERSTANDING THE MARKET

Understanding the Market



Understanding the Market

Section A

Explain in one paragraph on the answer sheet provided why the long run average cost (AC) curve might be U-shaped. Use an appropriate diagram to illustrate your answer.

Average fixed cost (AFC) is an economic term that refers to fixed costs of production (FC) divided by the quantity (Q) of output produced. Average fixed cost (AFC) is an economics term that refers to fixed costs of production (FC) divided by the quantity (Q) of output produced.

The long run average cost curve is always in U-shaped because fixed costs are incurred before production and initially the average costs of production is high, thus; the average costs are increasing while quantity is less. An increasing marginal cost curve will intersect a U-shaped average cost curve at its minimum, after which point the average cost curve begins to slope upward. As production increases, average costs increase per unit again, causing an upward slope in our curve. Hence while, the curve was initially low, it begins to slope upwards after the production units' increase. Initially the average costs are high because the machines were not fully utilized (McConnell, Campbell, Brue, Stanley, 2006, 165).

Draw an opportunity cost curve for an economy. Label the axes appropriately. Comment on the shape of the curve you have drawn. What will happen to the curve over time and why?

In economics, all costs are opportunity costs because when a resource is used for any purpose, it implies that other property cannot be produced with the same resource. This means that another resource is not used instead of the resource, and we give up income to other products using this resource. Thus, each cost is first an explicit cost for the resource used, but equally, an implicit cost of possible alternative uses of that resource (Blinder, William, Colton, 2001, 212).

When a student takes a course in economics, the cost of this course is more than just the money spent on instruction, textbooks and study aids. For example, the time devoted to study could be used to work in a supermarket and earn a good salary. Following is an opportunity curve for an economy:

The horizontal x-axis shows the output for consumer goods while the vertical axis shows the cost of capital goods. The opportunity cost of an asset is the amount of other property (or other goods or services) that must be renounced for the first. If the economic system resources are fully and efficiently used, increase the production of goods is a reduction of another, this reduction is the opportunity cost (McConnell, Campbell, Brue, Stanley, 2006, 165). A production system is efficient (in economic terms) when you cannot increase production of one good without decreasing the other.

Explain what is meant by elasticity of demand. Explain the relationship between demand elasticity and firm revenue.

Elasticity of demand is a concept that indicates how a change in price causes a relative change in quantity demanded. In economics, the price elasticity of demand refers ...