Basic Economics Theories


Basic Economics Theories

Word count 2257


Explain the term price elasticity of demand? How is it measured? What factors influence market demand for products? If the price elasticity is -3 and RM 100 is the marginal cost of product X, what should be the optimal sale price?

What is meant by price discrimination? What are the conditions to make price discrimination effective? Discuss your answers with examples from the Airline Industry.

Write short notes on:
a. Law of diminishing returns and the short-run cost curve
b. Economies of Scale and the long run cost curve
c. New Economies of Globalization

Briefly explain how firms compete/set price under –
a. Perfect competition
b. Oligopoly

In recent years, the price of oil has fallen drastically. Explain if this is a result of:
a. A drastic reduction in the cost of production (i.e. shift in the supply curve)?
b. A fall in the demand for oil and oil products ( i.e. shift in the demand curve?
c. Other factors ?

How does the macroeconomic environment affect the firm’s decision making? Explain briefly the important variables influencing business activities.

What are the main components of Aggregate Demand? Which components are more volatile than others? Explain

What determines the foreign exchange rate? Discuss critical factors which may have caused the recent depreciation of the Malaysian Ringgit

Additional information


Part A

Question 1

Price elasticity of demand is economic indicator that use to measure of the change in the quantity demanded of a product related to its change of the price.
Economist use price elasticity to identify how supply or demand changes according to changes of price to identify the economic trend of the products. The term “elastic” refer that if the quantity demanded of a product shows a significant change in response to changes of its price. The term “inelastic’ use if the quantity demanded shows a small change in response to price. Prices of inelastic products do not change much based on demand. As an example, demand for petrol does not change even petrol price is changed. On the other hand, vegetables are highly price elastic products. Prices of vegetables are fluctuated highly based on the demand. Price elasticity of demand is measured as follow.

Price elasticity of demand = % change in quantity demanded/% change in price

There are many factors influence market demand for products.
 Changes in income – There is a positive relationship between income and demand. When peoples’ income is high, demand for goods is also getting high.
 Taste – A good for which the tastes and preferences of consumers are higher, its demand would be high and therefore, its demand curve will be at a higher level.
 Prices of related goods – Demand for one commodity is also affected by the prices of other commodities, especially those associated with them as a complements or substitutes. When the price of substitutes for a commodity decreases, the demand for that commodity decreases, and when the price of the substitute increases, the demand for this commodity increases. On the other hand, the commodities that complement each other, the drop in prices of one of them would favorably influence the demand for the other.
 No of buyers – There is a positive relationship between number of buyers and demand. When the number of buyers is greater for a good, the market demand for it is also higher.