People, Profit and Price Essay Example | Topics and Well Written Essays - 1500 words

People, Profit and Price - Essay Example Q2: What do you mean by income elasticity? Identify the symbolic form of income elasticity. Income elasticity of demand refers to the reaction of demand to change in consumers' income. In other words, it is the extent of change in demand to a change in consumers' income. Income elasticity of demand is calculated by the ratio of percentage change in demand to income (Anon., 2005, p.22). According to Anon (2005, p.22) it is represented as: Income Elasticity of Demand = In symbolic form, eY=  Where eY =Income elasticity of demand; Y =income of consumer, Q=quantity demand, Y=proportionate change in income Q: 3 what is mean by production function? What is the use of production function in production analysis? The production function refers to a technological relationship between input and output (Anon., 2005, p.50).It indicates the output of a business, industry, or economy for the input. When it comes to the use of production function in production analysis, assume a firm that uses N amount of inputs, such as, machinery, labor, and materials, for producing a single output. Production function (q=f(x)) is used to summarize the technological possibilities of that firm. Here, q represents the output and x=(x1, x2†¦xn)' is an N?1 vector of inputs (Coelli, Prasada, Christopher and George, 2005, p.12). Q: 4 what are the characteristic features of free market economics? How are the central problems of resource allocation solved in such economic? Characteristics of free market economy include: consumers, producers, private owners, and government are primary actors, three actors (consumer, producer, property owners) are driven by self-interest while government is driven by social welfare, all factors of production are the property of private owners, owners have the right to buy and sell through market mechanism, competition exists when there is freedom to allocate resources. Decision making is decentralized since individual economic actors are free to allocate th eir resources. Resource allocation is defined by individual economic agents. Economic actors pursue their interest but resource allocation is in interest of society (Anderton, 2006, p.22). Q: 5 explain the term â€Å"economic costs†? How do these differ from accounting costs? Use examples to illustrate your answer The economic cost (EC) is greater than the accounting cost (AC) because EC includes both explicit accounting cost and implicit cost which is the value of owner's personal resources.EC incorporates implicit costs that could have been gained when same resources are invested somewhere else. If a couple decides to invest $100,000 on building for opening a restaurant. Implicit costs would be 3 percent or $3,000 or the money earned from some other investment. It is because of different rate of return in mutual funds (9 percent) and capital investment (6 percent) on $100,000(Musgrave and Elia, 2001). Task: 2 Explain the causes of market failure. Should market failure alway s invite government intervention? Discuss the different ways in which government intervene in the market. Give example in support of your answer? Introduction "Market failure is a blanket term used by economists to describe situations in which markets might not work and/or markets might