Botswana College of Distance & Open Learning

Diploma in Business Management

Economic

Assignment: 1

Mmoniemang Motsele: 201006379

Section A
1. A
2. A
3. D
4. B
5.D
6. D
7. C
8. B
9. C
10. B

Section B
Question 1
1. T
2. T
3. F
4. F
5. T
6. T
7. T
8. F
9. F
10. F

Section C
Question 1
A Change in Quantity Demanded: This is a change in the specific amount of the good that buyers are
willing and able to purchase. It is caused by a change in the demand price and is indicated by a movement
along the demand curve from one point to another.
A Change in Demand: This is a change in the overall demand relation, a change in all price-quantity
pairs. It is caused by a change in one of the five demand determinants and is indicated by a shift of the
demand curve.
Question 2
There are several factors that may cause a shift in a good's supply curve. Some supply-shifting factors
include:

Prices of other goods - the supply of one good may decrease if the price of another good increases,
causing producers to reallocate resources to produce larger quantities of the more profitable good.

Prices of relevant inputs - if the cost of resources used to produce good increases, sellers will be
less inclined to supply the same quantity at a given price, and the supply curve will shift to the left.

Technology - technological advances that increase production efficiency shift the supply curve to
the right.

Question 3

Section C
Question 4
Tebogo spends her income of P150 per week on two goods: movie (which cost P5 each) and books(which
cost P10 each).
Marginal utility of last movies consumed in 20 and marginal utility of last book consumed is 30.
MUm
Pm
20=
5
4 =

MUb
Pb

30
10
3

Question 5
Profit Maximization
The first condition of the firm to be in equilibrium is that marginal cost should equal to marginal revenue.
This is necessary condition for profit maximization but not sufficient. This is because it is possible to
satisfy the condition without the firm being in equilibrium. Therefore we can say that the second condition
for profit maximization of the firm is for the MC curve to have a positive slope at the point where it
intersects the MR curve. That is the Mc curve must intersect the MR curve from below. Profit is
maximized R=MC and the MC curve has a positive slope, that is it intersects MR curve from below.
Maximized profit means maximizing the difference between total revenue and total cost.
Questions 6
Explain the concept of diminishing returns
A concept in economics that if one factor of production (number of workers, for example) is increased
while other factors (machines and workspace, for example) are held constant, ceteris paribus the output
per unit of the variable factor will eventually diminish.
Although the marginal productivity of the workforce decreases as output increases, diminishing returns do
not mean negative returns until (in this example) the number of workers exceeds the available machines or
workspace.
Law of diminishing Marginal Utility table
Labour per day
1
2
3

Output (shoes)
4
7
9

Marginal shoes repaired per additional

workers per day
4
3
2
5

4
10
1
5
10
0
6
9
-1
The table above shows that pr day the first worker repairs 4 shoes. When the second worker is brought in,
the marginal utility of shoes repaired goes on down to 3 units of utility; the third worker will drop the
marginal utility of repaired shoes form 3 units to 2 units. The 4th worker will cause a drop in marginal
utility from 2 to 1 unit. The worker will cause marginal utility to drop down to zero and if more workers
are added to repair shoes, further from this point, the utility changes into disutility (-1)

SECTION D
a) The Countrys production possibility curve

b) If 10 units of goods are produced, this will make up to 50 units of goods from 40 units. 65 units of
services will be provided instead of 70 units. As goods gain 10 more units, 5 units of services have
to be given up. The opportunity cost of gaining 10 more units of goods is 5 units of services.
c) As the units of good increases from 0 to 100, the units of services decrease from 80 to 0. On the
contrary if units of services increase from 0 to 80 then units of goods decreases form 100 to 0. The
principle of increasing opportunity cost is clearly illustrated, for example 30 units of goods were
produced while 74 units of services were provided, 10 more units of goods were provided to make
40 units of goods and 70 units of services were provided. As 10 more units of goods were
produced 6 units of services were given up. The opportunity cost of producing 10 more units of
goods is giving up 6 units of services.
d)
Goods
Service
s

0
80

11
79

22
77

33
74

44
70

55
65

66
58

77
48

88
35

101
19

110
0

The production possibility curve shifts outwards to the right because of the technical progress. The
opportunity cost of producing extra unit of services changed in a way that before the 10% technical
progress, for example for 77 units of services, units of goods were produced, if 2 more units of services
were produced 79 units of services were produced while 10 units of goods were produced, giving up 10
units of goods. After 10% technical progress, for example, for 77 units of services were provided while
22 units of goods were produced, if 2 more units of services were produced to make it 79 units of services
then 11 units of goods were produced giving 11 units of goods. The opportunity cost of producing extra
units of service has increased.
e) The 30% increase in price will lead to the decline in revenue. A change in price will lead to the greater
relative change in the quantity demanded. The price elasticity of demand (2.5) is greater than 1 which
qualifies it to be relatively elastic. The increase in price will lead to the decrease in quantity demanded
which decreases revenue.

Section D Question 2

Both Perfect competition and Monopoly maximize profits where MR=MC

A perfectly competitive firm would produce Qpc at price PC. The perfect competitive firm maximizes
where MR=MC=AC and makes normal profits. The monopoly operated at Qm and price PM. Monopoly
firms produces a smaller quantity and sell at higher price compared to perfect competition. Under perfect
competition the consumer surplus would have been represented by DAPpcPC, but under monopoly it is
now only DAPmM. Therefore monopoly has gained DBMPC of the consumer surplus, but there is a loss
to society of the quantity represented by area MPC Qpc Qm, which is now not produced or sold. The
triangle mbpc represents the loss in consumer surplus called deadweight loss. Deadweight loss: is where
neither the consumer nor the manufacturer is gaining. The monopoly produces the deadweight loss while
perfect competition does not produce the deadweight loss.
Monopoly is less efficient than Perfect competition because a monopoly prevents some of the gains from
trade being achieved. A monopoly imposes costs that equal its dead weight loss plus the cost of the
resources devoted to seeking returns.

References
1. I. O Kolawole, Economics Made Easy for Botswana, 2007
2. David Begg, Economics, 7th edition, 2004

10