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BA 7103- ECONOMIC ANALYSIS FOR BUSINESS

IMPORTANT SHORT QUESTIONS (SOLVED)

UNIT 1

Define Economics

A social science that studies how individuals, governments, firms and nations make choices
on allocating scarce resources to satisfy their unlimited wants. Economics can generally be
broken down into: macroeconomics, which concentrates on the behavior of the aggregate
economy; and microeconomics, which focuses on individual consumers.

Define Economy

The state of a country or region in terms of the production and consumption of goods and
services and the supply of money.

What are the fundamental economic problems

The fundamental economic problem is related to the issue of scarcity. Because of limited
resources and infinite demands, society needs to determine how to produce and distribute
these relatively scarce resources.

 What to Produce
 How to Produce
 For Whom to Produce

What are the twin themes of Economics?

Scarcity and Efficiency refers to the Twin themes of Economics;

Scarcity

occurs where it's impossible to meet all unlimited the desires and needs of the peoples with
limited resources i.e; goods and services. Society must need to find a balance between

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sacrificing one resource and that will result in getting other.

Efficiency

Denotes the most effective use of a society's resources in satisfying peoples wants and
needs. It means that the economy's resources are being used as effectively as possible to
satisfy people's needs and desires.
Thus, the essence of economics is to acknowledge the reality of scarcity and then figure out
how to organize society in a way which produces the most efficient use of resources.

Define PPF.

A production possibility frontier (PPF) is a curve or a boundary which shows the

combinations of two or more goods and services that can be produced whilst using all of
the available factor resources efficiently.

Define Externality.

Externalities are a loss or gain in the welfare of one party resulting from an activity of
another party, without there being any compensation for the losing party. Externalities are
an important consideration in cost-benefit analysis.
UNIT 2
State “Law of Demand”.

The law of demand states that there is a direct relationship between the price of a good and
the demand for it. In particular, people generally buy more of a good when the price is low
and less of it when the price is high. This is a general rule that applies to most goods called
normal goods. As the price of a normal good increase, people buy less of it because they are
usually able to switch to cheaper goods. An example is butter, which can be substituted for
margarine when the price of butter increases.

Differentiate Total utility and Marginal Utility.

Total utility is the total satisfaction obtains by a consumer by consuming all units of
commodity. Marginal utility is the additional satisfaction you get for every additional unit.

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For example, if you buy 3 slices of pizza one at a time. For the first one, you might get 10
utils, because of the law of diminishing returns, you will only get 7 utils for the second one
and 3 utils for the third one. Your total utility is 20 utils (10+7+3). But you can find your
marginal utility by looking at each slice of pizza individually.

Differentiate Micro and Macro Economics

 Microeconomics is the study of particular markets, and segments of the economy. It looks at
issues such as consumer behaviour, individual labour markets, and the theory of firms.
Eg : Individual consumer behaviour. e.g. Consumer choice theory

 Macro economics is the study of the whole economy. It looks at ‘aggregate’ variables, such
as aggregate demand, national output and inflation. Eg: Reasons for inflation, and
unemployment

What are the Features of Micro Economics

 Supply and demand in individual markets
 Individual consumer behaviour. e.g. Consumer choice theory
 Individual labour markets – e.g. demand for labour, wage determination
 Externalities arising from production and consumption.

What are the Features of Macro Economics

 Monetary / fiscal policy. e.g. what effect does interest rates have on whole economy?
 Reasons for inflation, and unemployment
 Economic Growth
 International trade and globalisation
 Reasons for differences in living standards and economic growth between countries.
 Government borrowing.

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Define Market

A regular gathering of people for the purchase and sale of provisions, livestock, and other
commodities. A medium that allows buyers and sellers of a specific good or service to
interact in order to facilitate an exchange. The price that individuals pay during the
transaction may be determined by a number of factors, but price is often determined by the
forces of supply and demand.

What is Demand Curve

Graph curve that normally slopes downward towards the right of the chart (except for
a Giffen good, where it slopes toward the left), showing quantity of a product (good
or service) demanded at different price levels

Define Elasticity of demand.

The degree to which demand for a good or service varies with its price.
Normally, sales increase with drop in prices and decrease with rise in prices. As
a general rule, appliances, cars, confectionary and other non-essentials show elasticity of
demand whereas most necessities (food, medicine, basic clothing) show inelasticity of
demand (do not sell significantly more or less with changes in price).
Also called price demand elasticity.

Different types of elasticity of demand

1. Price Elasticity of Demand

2. Income Elasticity of Demand
3. Cross Elasticity of Demand
4. Advertisement Elasticity of Demand

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Types of Price Elasticity of Demands:

a) Perfectly Elastic
b) Perfectly Inelastic
c) Relatively Elastic
d) Relatively Inelastic
e) Unitary Elasticity

Factors influencing Price Elasticity of Demand:

a) Nature of Commodity
b) Availability of Substitutes
c) Number of Uses
d) Durability of commodity
e) Consumer’s income

What is Income elasticity of demand:

In economics, the income elasticity of demand measures the responsiveness of the quantity
demanded of a good to the change in the income of the people demanding the good. It is
calculated as the ratio of the percent change in quantity demanded to the percent change in
income. For example, if, in response to a 10% increase in income, the quantity of a good
demanded increased by 20%, the income elasticity of demand would be 20%/10% = 2.
What is Cross elasticity of demand:
In economics, the cross elasticity of demand and cross price elasticity of demand measures
the responsiveness of the quantity demand of a good to a change in the price of another
good.

It is measured as the percentage change in quantity demanded for the first good that occurs
in response to a percentage change in price of the second good. For example, if, in response
to a 10% increase in the price of fuel, the quantity of new cars that are fuel inefficient
demanded decreased by 20%, the cross elasticity of demand would be

-20%/10% = -2.

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What is Advertisement Elasticity of Demand:

The degree of responsiveness of quantity demanded to the change in the advertisement
expense of expenditure.
Ea= Change in quantity demanded x original advertisement expenses
Change in advertisement expenses original quantity demanded.

Define Supply

The total amount of a product (good or service) available for purchase at any specified price.
Supply is determined by:
(1) Price: producers will try to obtain the highest possible price whereas the buyers will try
to pay the lowest possible price both settling at the equilibrium price where
supply equals demand.
(2) Cost of inputs: the lower the input price the higher the profit at a price level and more
product will be offered at that price

State Law of Supply

The law of supply is a fundamental principle of economic theory which states that, all else
equal, an increase in price results in an increase in quantity supplied. In other words, there
is a direct relationship between price and quantity: quantities respond in the same direction
as price changes.

Define Elasticity of Supply

Elasticity of supply is measured as the ratio of proportionate change in the quantity

supplied to the proportionate change in price. High elasticity indicates the supply is sensitive
to changes in prices, low elasticity indicates little sensitivity to price changes, and no
elasticity means no relationship with price. Also called price elasticity of supply.

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Define Market equilibrium

Market equilibrium is a market state where the supply in the market is equal to the
demand in the market. The equilibrium price is the price of a good or service when the
supply of it is equal to the demand for it in themarket.

Define Consumer Surplus

Consumer surplus is defined as the difference between theconsumers' willingness to pay
for a commodity and the actual price paid by them.

For example, assume a consumer goes out shopping for a CD player and he or she is willing
to spend $250. When this individual finds that the player is on sale for $150, economists
would say that this person has a consumer surplus of $100.

Define Consumer Equilibrium

The state of balance achieved by an end user of products that refers to the amount of goods
and services they can purchase given their present level of income and the current level
of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible
from their income.

Define utility

An economic term referring to the total satisfaction received from consuming a good or
service.
For eg : A company that generates, transmits and/or distributes electricity, water and/or gas
from facilities that it owns and/or operates.

What are the types of utility

 Form Utility
 Time Utility
 Place Utility
 Service utility

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 Possession utility
 Knowledge utility

Define 'Law of Diminishing Marginal Utility'

A law of economics stating that as a person increases consumption of a product - while

keeping consumption of other products constant - there is a decline in the marginal
utility that person derives from consuming each additional unit of that product.

Law of Equi Marginal Utility

This law states that the consumer maximizing his total utility will allocate his income
among various commodities in such a way that his marginal utility of the last rupee spent on
each commodity is equal
Or
The consumer will spend his money income on different goods in such a way that marginal
utility of each good is proportional to its price.

What is Short run production function

 The short run is a time period where at least one factor of production is in fixed
supply. A business has chosen it’s scale of production and must stick with this in the
short run
 We assume that the quantity of plant and machinery is fixed and that production can
be altered by changing variable inputs such as labour, raw materials and energy.

What is long run production function?

A period of time in which all factors of production and costs are variable. In the long run,
firms are able to adjust all costs, whereas in the short run firms are only able to influence
prices through adjustments made to production levels. Additionally, whereas firms may be a
monopoly in the short-term they may expect competition in the long-term.

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What is Returns to scale

Output of a business responds to a change in factor inputs is called returns to scale.

 Increasing returns to scale occur when the % change in output > % change in
inputs
 Decreasing returns to scale occur when the % change in output < % change in
inputs
 Constant returns to scale occur when the % change in output = % change in inputs

Define Economies of Scale

The cost advantage that arises with increased output of a product. Economies of scale arise
because of the inverse relationship between the quantity produced and per-unit fixed costs;
i.e. the greater the quantity of a good produced, the lower the per-unit fixed cost because
these costs are shared over a larger number of goods. Economies of scale may also reduce
variable costs per unit because of operational efficiencies and synergies.

Define Diseconomies of Scale

An economic concept referring to a situation in which economies of scale no longer

function for a firm. Rather than experiencing continued decreasing costs per increase in
output, firms see an increase in marginal cost when output is increased.

UNIT 3
Define Product market

Product market is where goods and services produced by businesses are sold to
households. The households use the income they receive from the sale of resources to
purchase the products.

Different types of market structure

1. Perfect Competition – many firms, freedom of entry, homogeneous product, normal profit.

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2. Monopoly – One firm dominates the market, barriers to entry,

3. Oligopoly – An industry dominated by a few firms, e.g. 5 firm concentration ratio of > 50%

4. Monopolistic Competition – Freedom of entry and exit, but firms have differentiated
products. Likelihood of normal profits in the long term.
5. Duopoly : a situation in which two suppliers dominate the market for a commodity or
service.

What are the factors of Production

An economic term to describe the inputs that are used in the productionof goods or
services in the attempt to make an economic profit. Thefactors of production include land,
labor, capital and entrepreneurship.

What arê the economic costs of imperfect competition

The cost of inflated prices and reduced output.
Imperfect competitors reduce outputs andr a i s e p r i c e s -
m o s t v i v i d l y s e e n i n m o n o p o l y market.

Define Market Efficiency

Measure of the availability (to all participants in a market) of

the information that provides maximum opportunities to buyers and sellers to
effect transactions with minimum transaction costs.

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UNIT 4

What is National Income

National income is the total value a country’s final output of all new goods and services
produced in one year. Understanding how national income is created is the starting point
for macroeconomics.

Methods of Determining National Income

1. Product method
2. Income Method
3. Expenditure method

Define Say’s Law of Market

An economic rule that says that production is the source of demand. According to Say's
Law, when an individual produces a product or service, he or she gets paid for that work,
and is then able to use that pay to demand other goods and services.

Define Aggregate demand

Aggregate demand is the demand for the gross domestic product (GDP) of a country, and
is represented by this formula: Aggregate Demand (AD) = C + I + G + (X-M) C =
Consumers' expenditures on goods and services. I = Investment spending by companies on
capital goods.

Define Aggregate supply

In economics, aggregate supply is the total supply of goods and services that firms in a
national economy plan on selling during a specific time period. It is the total amount of
goods and services that firms are willing to sell at a given price level in an economy.

What is fiscal Policy

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Fiscal policy is the means by which a government adjusts its spending levels and tax rates
to monitor and influence a nation's economy. It is the sister strategy to
monetary policy through which a central bank influences a nation's money supply.

What is Monetary policy

Monetary policy is the process by which the monetary authority of a country controls the
supply of money, often targeting a rate of interest for the purpose of promoting economic
growth and stability.

Define Multiplier effect

An effect in economics in which an increase in spending produces an increase in national

income and consumption greater than the initial amount spent.
UNIT 5

Define Unemployment

Unemployment occurs when a person who is actively searching for employment is unable to
find work. Unemployment is often used as a measure of the health of the economy. The
most frequently cited measure of unemployment is the unemployment rate. This is the
number of unemployed persons divided by the number of people in the labor force.

Define Inflation

The rate at which the general level of prices for goods and services is rising, and,
subsequently, purchasing power is falling. Central banks attempt to stop severe inflation,
along with severe deflation, in an attempt to keep the excessive growth of prices to a
minimum.

What are the two types of inflation

Inflation means a sustained increase in the general price level. However, this increase in the
cost of living can be caused by different factors. The main two types of inflation are

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1. Demand pull inflation – this occurs when the economy grows quickly and starts to
‘overheat’ – Aggregate demand (AD) will be increasing faster than aggregate supply
(LRAS).
2. Cost push inflation – this occurs when there is a rise in the price of raw materials, higher
taxes, e.t.c

Define Philips Curve

An economic concept developed by A. W. Phillips stating that inflation and unemployment
have a stable and inverse relationship. According to the Phillips curve, the lower an
economy's rate of unemployment, the more rapidly wages paid to labor increase in that
economy.

Define Money market

A segment of the financial market in which financial instruments with high liquidity and
very short maturities are traded. The money market is used by participants as a means
for borrowing and lending in the short term, from several days to just under a year.
Money market securities consist of negotiable certificates of deposit (CDs), bankers
acceptances, U.S. Treasury bills, commercial paper, municipal notes, federal funds and
repurchase agreements (repos).

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What are the functions of money market

State Okun’s Law.

The relationship between an economy's unemployment rate and its gross national product
(GNP). Twentieth-century economist Arthur Okun developed this idea, which states that
when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for
the U.S. economy, and only applies when the unemployment rate falls between 3-7.5%.
Other version of Okun's Law focus on a relationship between unemployment and GDP,
whereby a percentage increase in unemployment causes a 2% fall in GDP.

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