Introduction to Economics - Essay Example

? Introduction to Economics Introduction to Economics Answer a) For Business Studies innovation and invention aresignificant but there exists a subtle difference between invention and innovation. Invention Invention is a new solution to an existing issue or it is something that didn’t exist previously. It requires analytical skills, imagination, courage and information to move ahead of the traditional structure of actions and thinking. Creativity and curiosity of human results in an invention. These inventions are projected by the teams or by an individual. Inventions are mostly related to the technological development. Generally, the technological solution of any problem is called invention. In spite of the fact that in today’s growing world many of the inventions are recorded (and performed) in fields far outside of the technology (Peng, 2010). Innovation The process through which an invention is brought in order to provide the users with the industry or market is called innovation. Innovations are critically important for the development of economy. Innovations are produced on the side of production and not on the consumption side. According to Schumpeter “But innovations do not usually appear spontaneously and neither are they generated in the following way: new wants are first created by consumers and under their pressure production apparatus is adjusted. It is the producer who usually initiates economic change, and if necessary edifies consumers...so if in the theory of circular flow it is not only possible but it is simply necessary to regard wants of consumers as independent and in fact basic factor, then in the analysis of changes our point of view must be reversed.” (Stokes, Wilson & Mador, 2010) Innovation doesn’t happen by chance but these are planned. Therefore it is necessary to a strategy and vision for innovation. Its strategy includes alternative plans, an actual overview of opportunities, effective analytical tools and the functioning of any speciality that one could have. Answer # 1 (b) Types of Innovation Innovation was clearly identified by the first economists named Joseph Schumpeter (Schumpeler. 1934). He classified innovation in five types in the 2nd chapter of his book The Theory of Economic Development (1934). According to Schumpeter the five main types of an innovation are (Stokes, Wilson & Mador, 2010): 1. Conquering a new source of raw materials 2. Introducing a new good 3. Introducing a new method of production 4. Opening a new market 5. Reorganising an industry in a new way. Answer # 1 (c) Some of the examples of a Schumpeterian type of innovation are: 1. The development of a new or improved product conquering a new source of raw materials. 2. Internet-based financial services are an example of a new method for the introduction of new goods in market. 3. Pilkington's float glass process is an example of introducing a new method of production. 4. Direct marketing and internet marketing are examples of opening a new market. 5. BPR (business process re engineering) and TQM (total quality management) systems: Is the new method of innovative management. This method would be helpful in reorganizing the industry in a new way. Answer # 2 (a) Output per Worker Output/worker England Portugal Wine 3 4 Cloth 6 2 Absolute Advantage A nation that produces any service or good more efficiently than any other is said to have an absolute advantage of the production of that service or good (Zhang, 2008). In the above example it is not true that England has absolute advantage over Portugal in every sector. By using the Labour theory of value it can be seen that in England one unit of wine is exchanged with three units of cloth, however, in Portugal two units of wine is exchanged for one unit of cloth. Therefore England has an absolute advantage in production of cloth whereas Portugal has an absolute advantage in wine production because in England one unit of cloth require less labour for its production and for the production of wine in Portugal less labour are required. Answer # 2 (b) The opportunity cost of wine production in England is 1/3 units whereas the opportunity cost of wine in Portugal is 2/1. Answer # 2 (c) Comparative Advantage It is one of the most important concepts of international trade. If a nation produces a good at lower opportunity cost than any other countries than it is said that the nation has a comparative advantage in the production of that good. Portugal has comparative advantage in wine production because the opportunity cost of wine in Portugal is 2/1 whereas England has a comparative advantage over cloth because it requires less labour for its production. Answer # 2 (d) As England would have the comparative advantage in production of cloth and Portugal would have the comparative advantage in the production of wine. Therefore in this case, trade gains could be realized only when both countries specialized in their absolute and comparative advantage goods. Answer # 3 (a) If price elasticity of demand is less than 1 then it is called as inelastic which means that despite changes in price of product, the demand will remain relatively constant. In our case the price elasticity of demand for tobacco is -0.05 and the price elasticity of demand for alcoholic drinks is -2.35, so the alcohol being more negative is less effective to change in cost and the government can impose more tax without having a change in the demand of alcohol. Answer # 3 (b) In this case both newspapers i.e. the Times newspaper and the Daily Telegraph are substitute goods. Substitute goods are those goods that are used as a substitute of other for example, the Times newspaper and the Daily Telegraph. The economic value of the substitute goods changes in the same direction. Prices of Substitute Goods as Determinants of Demand If the price of one good falls the demand of other good decreases. If the price of one good increases the demand of other good increases. Both newspapers can be used in place of one another. As in this case, the owner of the Times newspaper lowered its price from 45 pence to 30 pence therefore the demand of its substitute i.e. The Daily Telegraph decreases from 1,500,000 to 1,000,000. Consequently, demand of the Daily Telegraph decreases, then the demand function shifts downward, and the area under it, the consumer surplus, decreases. Answer # 4 (a) Answer # 4 (b) The market demand for wine is given by, And Supply is, The equilibrium point is defined as the point where the quantity demand by the consumer and the quantity supplied the firm are equal. Mathematically equilibrium condition is given as, For this case the equilibrium condition can be written as; Equilibrium Price for Wine From Above equation, Hence the above calculation shows that the price of wine at equilibrium condition is 12 ?. The Equilibrium Quantity The quantity of wine can be found by using the equation of quantity supplied, i.e. Here the equilibrium price is 12 ?, therefore above equation becomes, Hence the quantity of wine at equilibrium is 40 units. Answer # 4 (c) Consumer Surplus Consumer surplus is indicated by the demand curve. It is the difference between the total number of consumers that are able and ready to pay for a service or good and the market price (the total amount that they actually pay). The level of consumer surplus is shown by the area under the demand curve and above the market price. Producer Surplus Producer surplus is indicated by the supply curve. It is the difference between what producers are able and ready to supply a good or service for and the price they actually receive. The area below the below the market price and above the supply curve is the level of produce surplus. Answer # 4 (d) The market demand for wine in this case is given by, And Supply is, For this case the equilibrium condition can be written as; Equilibrium Price for Wine From Above equation, Hence the above calculation shows that the price of wine at equilibrium condition is 6 ?. The Equilibrium Quantity The quantity of wine can be found by using the equation of quantity supplied, i.e. Here the equilibrium price is 12 ?, therefore above equation becomes, Hence the quantity of wine at equilibrium is 4 units. Answer # 4 (e) The tax revenue earned by the government is given by Therefore, tax earned by the government is 54 ? Answer # 4 (f) A dead weight loss arises from tax because it prevents occurring of mutually beneficial transactions. The size of the dead weight loss is equal to the producer and consumer surplus that is forgone from these missing transactions. Question # 5 (a) As total cost is the sum of fixed cost and variable cost or mathematically, Where fixed cost is any cost that does not depend on firm’s level of output. These costs are incurred even if the firm is producing nothing. So because of these fixed costs there is a cost of production even if the output is 0. Answer 5 (b) Output 0 1 2 3 4 5 TC (?) 10 25 38 48 56 60 MC(?) 0 15 13 10 8 4 AC(?) 0 25 19 16 14 12 Marginal Cost is given by, (i) (ii) (iii) (iv) (v) (vi) Average cost is given by, (i) (ii) (iii) (iv) (v) (vi) Answer # 5 (c) Output 0 1 2 3 4 5 TC (?) 10 25 38 48 56 60 MC(?) 0 15 13 10 8 4 AC(?) 0 25 19 16 14 12 The average cost is always greater than the marginal cost when average cost is falling.  Marginal cost rises faster than AC and lies above AC with the rise in average cost. At the minimum point of AC, the marginal cost curve must cut the average cost curve. References Peng, M.W. (2010). Global Business. Cengage Learning. Stokes, D., Wilson, N. and Mador, M. (2010). Entrepreneurship.Cengage Learning EMEA. Zhang, W.B. (2008). International Trade Theory: Capital, Knowledge, Economic Structure, Money, and Prices over Time. Springer. Read More