Economics Questions (Q1-Q9) Essays Example

Q1.
Essentially, the opportunity cost is what someone is giving up to get an item. Investopedia (2016) defines it as the “cost of an alternative that must be forgone in order to pursue a certain action”, alternatively, the benefits the one might enjoy if chosen another option.
a) Hence, the opportunity costs of attending a college, assuming this is a full-time education, is not being able to take a job and earn money immediately, again, assuming the inability to take a part-time job. This also means lack of job experience. In addition, the opportunity cost of this option is the total cost of education. Alternatively, choosing not to have higher education means decreased opportunities to find a high-paid job in future (Porter, 2014).
b) Riding using a bus in most of the cases is cheaper, however, it is less convenient, and often more time-consuming than driving a car. Thus, the opportunity costs of taking the bus are mostly related to better time and convenience.
Q2.
Price elasticity of demand means the decrease of the responsiveness of the demand towards the change in price, providing other factors are the same (BusinessDictionary, 2016). Another related phenomenon is the income elasticity of demand, hence, the relationships between the real income of a consumers and quantity of certain good required (Riley, 2015). If there is a negative income elasticity of demand for, thus the higher income means lower consumption, this is an example of inferior goods. Hence, two possible examples are instant noodles and inter-city bus services. People of higher income tend to consumer these products and services less.
Q3.
There are different market structures, this depend on the number of buyers and sellers, their influence on competition and extent of product differentiation (Kling, 2007). Essentially, the difference is the following:

Monopoly: one seller has a large control over the prices and level of supply;

Oligopoly: few major sellers have certain control over the prices;
Monopolistic competition: many producers of differentiated products with some control over the prices;
Perfect competition: many sellers/producers of the same product with no influence on supply and price.
a) In most of the cases, there is only one firm that offers water and sewerage services, often government controlled. It is a monopoly. Public utilities are often used as the example of monopoly.
b) Usually, this is oligopoly, with few firms, such as Kellogg’s or Nestle offering similar products.
Q4.
In economics, multiplier means an effect when the injection of spending results in the greater final income for the economy than the initial spending (Economics Online, 2016). For example, the government injection of £100m may result in the rise of GDP by £150m is the multiplier effect is 1.5, because the spending will result in increased consumption of related products.
In the view of this, tax multipliers show the increase of consumers spending after the government decreases taxes. On the other hand, spending multiplier means the effect of increased government spending and its effect on the economy. Change in government spending is more effective, as spending multiplier is higher than the tax multiplier; as different studies show (Jalil, 2012).
Q5.
Inflation is the rate of increase in general level of price; with the major causes are an increase in money supply, a decrease in the demand for money, a decrease in aggregate supply or increase in aggregate demand (Heakal, 2015). Thus, there are two types of inflation related to aggregate supply and demand. The cost-push inflation occurs when prices are “pushed up” because of the increased costs of production/services, such as higher wages or higher oil prices. Demand-pull inflation is the increase in aggregate demand, as “too much money chasing too few goods”, causing the rise of prices (ibid).
Q6.
Currency is the system of money that is used in a particular country; for example, U.S. dollar is used in the United States and British Pound used in the UK. Demand for currency depends on the number of factors, such as trade balances (change in exports vs. imports value; higher imports means higher demand for foreign currency and vice versa), foreign direct investment, as foreign currency is exchanged to local currency, purchase of local currency by foreign or local investors, and interest rate differences, as countries with higher interest rate attract the attention of foreign investors (Riley, 2016).
Q7.
Supply and demand are regarded as the “the most fundamental concepts of economics”. Demand is the quantity of a product or service desired by buyers while supply is the amount of products or services market can offer (Heakal, 2013). Equilibrium is the point (price) when demand and supply are equal; the prices on the market thus constantly change because of the fluctuations in demand and supply and the market seeks to find the equilibrium point (ibid)

Graph 1. Supply, Demand and Equilibrium (Heakal, 2013)

Excess supply is the situation when the quantity of products good or service (i.e. bananas) is greater than quantity demanded; it will thus lead to the decrease of demand as decreased price encourages buyers to buy more. Alternatively, excess demand means an increase in price.
Q8.
Different sources, such as Gola (2011) Saleem (2012) and Dagnew (2012) notices different factors that affect the demand for water services. Among the households, they are the monthly income, the number of people in the family, demographic composition, etc. In general, higher population, warmer climate, and higher quality of water and wastewater services mean higher demand; another factor for water demand is the development and size of agricultural and industrial sectors. On the other hand, water is essential for living, hence, price elasticity of demand is very low, hence increase in the price for water services would lead only to a small decrease of demand, as the following graph shows:

Graph 2. Inelastic demand (Heakal, 2014)

Stavins (2011) notices that only a small share of water is consumed as a drink while most of it used for other purposes; hence, the elasticity is proved to be higher expected, according to many studies. However, still, most of the studies show that the demand for water (services) is rather inelastic and has a coefficient lower than 1.
Q9.
The budget surplus is a situation when the government revenues exceed government spending. The reason why some many countries lack any budget surplus during the recession is that they try to spend money to cause an economic growth (see the multiplier effect in Q4). The deficit is financed by increasing national debt, hence finding a creditor of the government. For example, for the UK, it has increased significantly in recent years, if measured against GDP.

Graph 3. UK Debt as % of GDP (Chris, 2013)

The major holders of the debt are the central bank, insurance and pension funds, private brands, and foreign holders (Pettinger, 2013).
Graph 4. Holdings of UK Gilts (Pettinger, 2013)
Hence, the two major ways to achieve budget surplus is to decrease spending and increase government revenues, mostly in the form of taxes. This might be achieved only if the economy will be in a good condition, and the income of people and companies would be increasing leading to higher tax revenues.

References

BusinessDictionary, (2016). elasticity of demand, online, accessed on January 12 2016, available at: http://www.businessdictionary.com/definition/elasticity-of-demand.html
Chris F., (2013). UK National Debt as percentage of GDP over the last 20 years, figures from Office of National Statistics, online, accessed on January 12 2016, available at https://commons.wikimedia.org/wiki/Category:Economic_statistics_for_the_United_Kingdom#/media/File:UK_National_Debt.svg
Dagnew C., (2012). FACTORS DETERMINING RESIDENTIAL WATER DEMAND IN NORTH WESTERN ETHIOPIA, THE CASE OF MERAWI, online, accessed on January 12 2016, available at: http://soilandwater.bee.cornell.edu/Research/international/docs/Dessalegn_Chanie_Dagnew-MPS_Project_Paper.pdf
Economics Online, (2016). The multiplier effect, online, accessed on January 12 2016, available at: http://www.economicsonline.co.uk/Managing_the_economy/The_multiplier_effect.html
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Heakal R., (2003). Economics Basics: Supply and Demand, online, accessed on January 12 2016, available at: http://www.investopedia.com/university/economics/economics3.asp
Heakal D., (2014). Economics Basics: Elasticity, online, accessed on January 12 2016, http://www.investopedia.com/university/economics/economics4.asp
Heakal R., (2015). Cost-Push Inflation Versus Demand-Pull Inflation, online, accessed on January 12 2016, available at: http://www.investopedia.com/articles/05/012005.asp
Investopedia, (2016). Opportunity Cost, online, accessed on January 12 2016, available at: http://www.investopedia.com/terms/o/opportunitycost.asp
Jalil, A. (2012). Comparing Tax and Spending Multipliers: It's All About Controlling for Monetary Policy., online, accessed on January 12 2016, available at: http://eml.berkeley.edu/~webfac/obstfeld/jalil.pdf
Kling A., (2007). Introduction to Macroeconomics, online, accessed on January 12 2016, available at: http://arnoldkling.com/econ/macro/macroprint.html
Pettinger T., (2013). Who owns UK debt?, online, accessed on January 12 2016, available at: http://www.economicshelp.org/blog/1407/economics/who-owns-government-debt/
Porter E., (2014). A Simple Equation: More Education = More Income, online, accessed on January 12 2016, available at: http://www.nytimes.com/2014/09/11/business/economy/a-simple-equation-more-education-more-income.html
Riley G., (2015). Income elasticity of demand, online, accessed on January 12 2016, available at: http://www.tutor2u.net/economics/reference/income-elasticity-of-demand
Riley G., (2016). Exchange Rates - Factors Affecting Currency Values, online, accessed on January 12 2016, available at: http://www.tutor2u.net/economics/reference/exchange-rates-factors-affecting-currency-values
Saleem F., (2012). Factors Influencing Water Demand in Abbottabad, online, accessed on January 12 2016, available at: https://www.academia.edu/2642001/Factors_Affecting_water_demand_in_Abbottabad
Stavins R., (2011). Misconceptions About Water Pricing, online, accessed on January 12 2016, available at: http://www.huffingtonpost.com/robert-stavins/misconceptions-about-wate_b_175281.html