Professional Documents
Culture Documents
NO
PARTICULARS
PAGE
2-11
12-20
21-28
39-45
54-60
4
5
6
7
8
29-38
46-53
61
Summary
The article shows that the worlds largest glove maker Top Glove Corp Bhd plans
to boost its nitrile gloves production capacity. Based on the product mix by glove volume
from 1 March 2015 till 31 May 2015, nitrile still topped the list, claiming 30% global
demand. Its advantage was the capacity to take orders, backed by faster, more efficient
and technologically advanced production lines. While the company has given more
emphasis on automation, the expansion plans for its factories in Port Dickson, Klang and
in Thailand catering for nitrile gloves in progress. For the third quarter ended May 31,
2015, Top Gloves net profit rose 75%. The better performance was due to higher sales
volume from robust demand for both nitrile and rubber gloves. Aside from the stronger
US dollar, better margins due to advanced and efficient operations also pitched in the
good results.
Discussion
Microeconomics
The field of economics is subdivided into two distinct areas, which are
microeconomics and macroeconomics. Microeconomics is the study of how household
and firm made decision and how they interact in specific market. For example, demand
and supply, price elasticity and market structure. However, macroeconomics is the study
of economy wide phenomena, including inflation, unemployment and economic growth.
Market Structure
The model of monopolistic competition defines a common market structure in which
firms have many competitors, but each firm sells a slightly different product. Top Glove
is categorized as monopolistic competition firm. Monopolistic competition markets
reveal the following characteristics:
1. Large Number of Small Firms
Monopolistic competition market contains a large number of small firms, each
firm which is relatively small compared to the overall size of the market. This
ensures that all firms are relatively competitive with very little market control
over price or quantity. In particular, each firm consists of hundreds or even
thousands competitors. The size of capital of these firms are small.
2. Relatively to Enter or Exit the Market
Average fixed costs (AFC) are found by dividing total fixed costs by output. As fixed cost
is divided by an increasing output, average fixed costs will continue to fall.
Average Variable Costs
Average variable cost (AVC) is calculated by dividing total variable cost by quantity
produced. It will reflect an increasing then decreasing efficiency in production as output
changes.
Average Total Cost
Average total cost (ATC) is calculated by dividing total cost by the quantity produced. It
can also be obtained by adding up average fixed cost and average variable cost at each
level of production. The average total cost curve is represented a steep decreasing portion
and a slightly increasing portion. These are attributable to the fixed and variable cost
arrangements.
Marginal Cost
Marginal cost (MC) is calculated by dividing the change in total cost by the change in
quantity. The marginal cost curve reflectsan increasing then decreasing efficiency as
output increases. For example, the marginal, or additional, cost per unit changes more
than the average total cost for each unit. The cost of one additional meal start to increase
before average total cost does.
Analysis
Market Structure
Top Glove is considered as monopolistic competition market because when
consumers can find that there are many brands of gloves available in the shop. Besides,
there are many sellers competing for the same group of consumers. Top Glove produces
the glove that is at least slightly different from the other firms. The sellers in this market
are price makers rather than price takers, therefore Top Glove faces a downward sloping
demand curve.Furthermore, the demand curve is downward sloping because glove is
considered as a necessity product, so it is elastic and has many close substitutes products
in the market.
Moreover, the firms can enter or exit the market easily without restriction. Thus,
the number of firms in the market can be adjustfrom an economic profit to a zero
economic profit or from an economic loss to a zero economic profit in the long run. A
monopolistically competitive market departs from the perfectly competitive ideal because
each of the sellers offers a slightly different product.
The monopolistically competitive firm follows a monopolists rule for profit
maximization: It chooses the profit-maximizing output at which marginal revenue equals
marginal cost and then uses the demand curve to find the market price reliable with the
quantity.
In the short-run, Top Glove will maximize profit by producing the quantity at
which marginal revenue equals marginal costs. Top Glove in Figure 1.1 makes an
economic profit because, at this quantity, price is above average total cost. However,
when there is a short-run economic profit, it will attract new firms to enter the market.
This will increase the number of glove products supplied or offered by the other firms.
Top Glove will face a decreasing demand of glove in the market. Therefore, incumbent
firms demand curves will shift to the left. As the demand of glove products decrease,
thus Top Glove and the other firms profit will be declined.
Price
of Glove
MC
ATC
P
ECONOMIC PROFIT
ATC
D=AR=P
MR
0
Profit-maximizing Quantity
Quantity
of Glove
MC
ATC
ECONOMIC LOSS
MR
0
Loss-minimizing Quantity
D=AR=P
Quantity
of Glove
D=AR=P
MR
0
Profit-maximizing
Quantity
Quantity
of Glove
Figure 1.3: Top Glove Makes Zero Economics Profit in Long Run
9
Cost of Production
Economy is made up of thousands of firms that produce goods and services for
consumer enjoy every day. For example, Top Glove produces various types of gloves.
Top Glove needs to employ thousands of workers to produce these types of gloves.
Besides, according to the law of supply, most firms are willing to produce and sell a
larger quantity of a good when the price is higher, and this response leads to a supply
curve that upwards sloping.
Using technology to produce goods can make tasks more efficiency. Therefore,
Top Glove has started to use the technology to produce gloves, and it makes the
production lines more efficient, faster, easier and at a low cost. This advancement on
technology has a great impact on short-run curves by when technology improves then
production of gloves will increase. As the production of gloves increase which causes the
average variable cost decrease. Besides, when the production of gloves increase, the fixed
cost is spread over more output, causing the average fixed cost to decrease. For instance,
the fixed costs which isincluded rental payments, salaries for full-time employees,
monthly equipment fees and structured loan payments. Top Glove has given more
emphasis on the automation in production line causes the average of variable cost
decreases. The variable costs involved the wages for workers, utility fees, and costs of
raw materials. Because of the automation in production line which is used by Top Glove,
the labour in Top Glove will be replaced by the technology. By improvingthe technology,
Top Glove will only hire fewer workers or employeesand will increase more production
of glove on average. Therefore, the amount of wages paid and time required for
producing gloves decrease, which will decrease the average variable cost.
Moreover, Top Glove will finally reach the point where there is the advancement
of technology can be produced. Therefore, productivity of Top Glove will rise to a
maximum possible output. Furthermore, human will try to improve or introduce new
technology for producing the glove in the future. Human would come up with latest
technology and change the technology become more efficient, faster and save costs.
Figure 1.3 shown that the technology came to the singularity. The singularity is meant
technological change so rapid and so profound that it represents a rupture in the fabric of
human history. Hence, Top Glove will face the singularity problem in the future in the
production line for producing gloves.
10
Technological
Progress
Singularity
Time
Figure 1.4: Technology Advancement for Top Glove in the Future
Conclusion
In conclusion, Top Glove is a monopolistic competition firm because there are
many sellers and they can enter or exit the market easily. Furthermore, the advancement
of the technology makes the production easier, faster by using a low cost and increase the
quantity of outputs.
11
12
Summary
Honda Malaysia SdnBhd expects its vehicles prices to be reduced between 1% and 2% on
average, after the implementation of Goods and Services Tax (GST) in April this year.
This is due to the proposed GST rate of 6% is lower than the current 10% of Sales and
Service Tax (SST). CEO Yoichiro Ueno is targeting 85,000 sales units this year and said
that the drop of the car prices is expected for almost of its models, depending on each
model as the SST is different for each car. Last year, the group has exceeded its 76, 000
units sales target, where it achieved 77, 485 units, translated to an increase in market
share to 11.6% against 2014 TIV of 667, 000 units.
Discussion
Price Elasticity of Demand and Its Determinants
The law of demand states that a fall in the price of a good, and it will affect the
quantity demanded to rise. The price elasticity of demand measures how much the
quantity demanded responds to a change in price. If the quantity demanded responds
substantially to changes in the price, demand for a good is elastic.Whereas the demands is
inelastic, when the quantity responds only slightly to changes in price.
The determinant of price elasticity of demand is availability of close substitutes.
Good with close substitutes tend to have more elastic demand. Whereas good with no
close substitutes or few substitutes tend to have less elastic demand. Beside, we can
determine the price elasticity of demand based on the time horizon. In long run, the price
elasticity of demand is inelastic. This is because consumers can take time to adjust their
arrangement toward the articular goods if the price of goods decrease or increase.
However, in short run, the price elasticity of demand is inelastic because the consumers
have not enough time to do their adjustment. Furthermore, price elasticity of demand can
be determined based on the necessities versus luxuries. Necessities tend to have inelastic
demand. For example, if the price of rice increases, consumers still will go and buy as
usual because this is necessary goods for them. Whereas luxury goods tend to have elastic
demand and consumers will have highly responsive if the price of luxury goods increase
or decrease.
Taxes are imposed by government to raise revenue, and that revenue must come
out of someones pocket. Both buyers and sellers are worse off when a good is taxed: A
tax raises the price buyer paid and lower the price seller received.
Deadweight loss is a loss of economic efficiency caused by an inefficient
allocation of resources. It does not matter whether a tax on a good is levied on buyer of
seller of the good. When a tax is levied on buyer, the demand curve will shift downward
by the size of the tax. Besides,when it is levied on seller, the supply curve will shift
upward by the amount. In case, when the tax is imposed, the price paid by buyer raises,
and the price received by seller falls. In the end, buyer and seller share the burden of tax,
regardless of how it is levied.
Market Structure (Oligopoly)
There are four types of market structures which are included perfect competition,
monopoly, monopolistic competition and oligopoly. An oligopoly market has a few
characteristic which included:
1. Mutual Interdependence
Mutual interdependence exists when the actions of one firm has a major impact
on the other firms in the industry. Mutual interdependence exists within an
oligopoly industry because each of the oligopolists has a sizable part of the
market. As a consequence, when it changes its sales, its prices, or its marketing
strategies, this oligopoly firm will likely affect the sales of other firms within the
industry.
2. Many Barriers of Market Entry and Exit
Barriers to entry are the key characteristic that separates oligopoly from
monopolistic competition on the continuum of market structures. This is because
with substantial entry barriers found in oligopoly, firms cannot enter the industry
as easily. The most noted entry barriers are exclusive resource ownership, patents
and copyrights, other government restrictions, and high start-up cost.
3. Products
Oligopolistic industries general come in two varieties which are identical product
oligopoly and differentiated product oligopoly. Identical product oligopoly tends
to process raw materials or produce intermediate goods that are used as inputs
such as petroleum. While different product oligopoly focuses on the goods that
are mainly foe personal consumption because different people have difference
wants and needs. The example of differentiated product oligopoly included
computer and automobile.
14
Analysis
Price Elasticity of Demand
Price elasticity of demand of Honda can be inelastic and elastic based on different
situation.
Price of Honda
P0
P1
DD
Q0
Q1
Quantity
Of Honda
P3
P4
DD
Q3
Q4
Quantity
of Honda
16
DD
Quantity of Honda
17
Price of Honda
PB
P
SS
C
D
PS
DD
Quantity of Honda
mean that sellers of Honda bear most of the burden of the tax where is the area of D in
the Figure 2.4.
Market Structure
Honda cars market structure is categorized under oligopoly market. One of the
characteristics of oligopoly is many market barriers of market entry and exit. Due to
government restrictions, Honda Company has its own copyright given by the government
and Honda has their own patent issues. Besides, Honda is now become a mature and has
successfully reached economies of scale. Before Honda becomes one of the automobile
industries in Malaysia, Honda had already gone through brand name recognition by the
government. Honda is capable to reach the start-up cost to start up their company. If a
new firm tries to enter the automobile market they would have to go through what Honda
had went through if they fail to do so, they will fail to enter the market.
Moreover, Honda is a differentiated product oligopoly. Hondas products seem
different from other companies but the engines or functions of their products can be
same. The technology that uses to produce a car compare to other industries is different.
Firms have designed many patterns for the car, the main purpose is to attract customers to
buy their products. In addition, the patents and ways to produce have to be different from
other industry. Besides, they have their own copyrights and name recognition. This is
why Honda which is in oligopoly market is homogenous and can be differentiated at the
same time.
Furthermore, Honda had been characterized by a small number of competitors and
usually non-price competition because it just has few suppliers. Honda which is
oligopolistic firm keeps a close eye on the activities of other firms such as Toyota, Kia,
19
and Mitsubishi in the industry. Decisions made by Honda invariably affect others and are
invariably affected by others where each Honda seller is aware of the others actions, and
where these actions effect the decisions of the other sellers. When Hondas price
decreases, the other competitors will also decrease their price and will not have conflict
in the price competition.
Price of Honda
MC1
D1
MR1
P1
MC2
D2
MR2
Q1
Quantity of Honda
will decline in spite of the price increase. If Honda lowers its price (D 2), then the other
firm will match the decrease to avoid losing market share. This is because there is a gap
in the marginal revenue curve (MR1- MR2). Since Honda maximizes profit by producing
that quantity where marginal cost equals marginal revenue, Honda will not change the
price of their product as long as the marginal cost is between MC1 and MC2.
Conclusion
In conclusion, the price elasticity demand of Honda can be elastic and inelastic. It
depends on the purchasing power of consumer and other determinants. Besides, when
government imposes the GST of 6%, the tax that bears by seller and buyer are different.
This depends on the price elasticity of demand and supply. Furthermore, Honda is
considered as an oligopoly firm. This is because Honda has few seller and produce
differentiated products in the market. Honda also has barrier to enter and exit and
mutually interdependent.
21
22
Summary
This article talk about the increase in Americans minimum wages to $15 will
harm Americans poorest workers. In 2013, the federal minimum wage would rise to $9
an hour from $7.25 an hour according to the Obama Administration proposed. However,
in 2014 they increased the proposal to $10 an hour. Lately, however, in some cities such
as Seattle, San Francisco and Los Angeles, the minimum wages have risen too high to
$15 an hour. New York also raised its minimum wage to $15 for its fast-food workers.
Many economists worry that the increase in minimum wage would lead to the reduction
of employment, thus hurting young and less-educated workers the most. This will result
in an increase in unemployment but also drops in formal labor force activity and perhaps
some growth in undocumented work among immigrants.
Discussion
The Supply for Labor
The labor supply is the total hours that workers or employees are willing and able
to supply at a given wage rate. The labor supply curve for any industry or occupation will
be upward sloping. This is because, as wages rise, other workers enter this industry as
they are attracted by the incentive of higher rewards. They may have moved from other
23
industries or they may not have previously held a job, such as housewives or the
unemployed.
Factors affecting labor-supply curve to shift
1. Change in Attitude toward Work: Higher wages raises the prospect of increased
factor rewards and the number of people willing and able to work. Opportunities to boost
earnings come through overtime payments, productivity-related pay schemes, and share
option schemes.If companies do not pay overtime, employee would not want to work
overtime. When employee is paid for overtime, they tend to change their attitude toward
work. The result is an increase in the supply of work.
2. Change in Alternative Opportunities: The real wage rate on offer in competing jobs
affects the wage and earnings differential that exists between two or more occupations.
For example an increase in the earnings available to trained plumbers and electricians
may cause some people to switch their jobs.
3. Immigration:Movement of workers from region to region, or country to country, is an
obvious and often important source of shifts in labor supply. When immigrants come to
U.S, for instance, the supply of labor in U.S increases and the supply of labor in the
immigrants home country contracts.
when wages increase, the combined effect of the substitution and income effect is that
workers will choose more consumption; the effect on the level of labor and leisure is
uncertain.
Price Floors
A price floor is the lowest legal price a commodity can be sold at. Price floors are
used by the government to prevent prices from being too low. The most common price
floor is the minimum wage which is the minimum price that can be paid for labor. Price
floors are also used often in agriculture to try to protect farmers. For a price floor to be
effective, it must be set above the equilibrium price. If its not above equilibrium, then the
market wont sell below equilibrium and the price floor will be irrelevant. Price floor sets
a minimum price in order to protect suppliers. A price floor creates a surplus.
Analysis
The Supply for Labor
Wages of Labor (Dollar)
S2
S1
$15
$10
D1
0
100
150
Quantity of Labor
25
I3
$900
I2
I1
0
60
100
Hours of Leisure
Workers try and maximize their utility based on their preferences between having
free time and having money, and on their budget constraint.A worker's budget constraint
can pivot with a change in the wage. According to the Figure 3.2, if the wage increases,
the curve pivots outwards (I3). If the wage drops, then the curve pivots inwards (I 1).
Therefore, assuming worker are awake for 100 hours per week with the minimum wage
of $15, for every hour a worker works, he earns $15, which he spend on consumption
goods. Thus, his wage $15 reflects the trade-off the worker faces between leisure and
consumption. For every hours of leisure he gives up, he works one more hour and gets
$15 of consumption. This graph shows a workers budget constraint.If he spends all 100
hours enjoying leisure, he has no consumption butif he spends all 100 hours working, he
earns a weekly consumption of $1,500 but no time for leisure. If he works a normal 40
hours week, he enjoys 60 hours of leisure and has weekly consumption of $900.
Consumption
$15
$10
I1
60 70
I2
Labor Supply
100
Hours of Leisure
100 150
Hours of LeisureSupplied
27
According to this article, it stated thatminimum wages have risen too high to $15
an hour in some cities. So when Americans minimum wages rises, they move to a higher
indifference curve. As long as consumption and leisure are both normal goods, they are
induced to work less, which tends to make the labor-supply curve slope downward
(Figure 3.3). This is because when income increases Americans tends to spend more and
work less. This is supported by a report of Andrew Zatlin, stating that Americans are
having fun and spending. He says that households are back from summer vacations and
budgeting for back-to-school and holiday shopping. Therefore, in order for them to have
more time to enjoy, they would have to give up their time to work. Therefore, income
effect is more likely to occur in U.S. So, it can be concluded that the labor-supply curve
is downward sloping.
Price Floors
Wages Rate
Labor Supply
Unemployment
$15
Minimum Wages
$10
Equilibrium
Labor Demand
0
100
150
200
Quantity of Labor
The U.S governments have imposed a minimum wagethat firms are not permitted
to pay less than the amount that the government mandates. This is to raise the wages of
workers who are earning very little. A minimum wage is very similar to a price floor
because it is set above the market wage.
According to the article, it shows that the minimum wages of Americans have
risen too high to $15 an hour in some cities such as Seattle, San Francisco and Los
Angeles. The equilibrium wage is at $10, while the quantity of workers at that wage is at
150. Right now, the labor market has found its equilibrium, and it's in balance. However,
the governments concerned about unskilled workers and decided to impose a minimum
wage of $15, instead of $10. This is to help those workers who are having trouble paying
the bills. The labor market actually loses jobs. At a price of $15, firms only demand and
hire 100 employees, while workers, of course, would love to earn a higher wage, and
there are 200 workers willing and able to take jobs at this minimum wage. So, the
quantity of labor demanded falls, while the quantity of labor supplied rises. Since, there
are 200 workers looking for jobs, but the firms only hire 100, that mean there is a surplus
of 100 workers. The surplus is unemployment. A minimum wage set above the market
wage will increase unemployment by 100 workers.
Conclusion
In conclusion, when minimum wages of Americans increase, the supply of labor
will decrease.Besides, the increase in minimum wagescauses labor to decrease (income
effect). Moreover, increase in minimum wages will cause unemployment because the
quantity of labor demanded decrease, while the quantity of labor supplied increase.
29
Summary
Central Illinois farmer, Rodney Weinzier knew that it is in reality a mere matter of
supply and demand that the corn costs have fallen as yields have increased. In the last ten
years, with the exception of a drought year in 2012, advances in seed technology, plant
food, equipment and planting methods have contributed to historic corn yields. On the
surface, an increase in production would typically be seen as a positive, but the lack of a
market for corn has led to corn being sold at dollars off the profit margin per bushel.
Thus, low prices of the corn per bushel have created more stress for the average farmer.
Although there has been a recent rise in prices to $4.20 per bushel, that price still isn't
enough as there is a study by the University of Illinois shows that $4.30 is the break-even
price for a farmer.
Discussion
Demand and Supply
30
Supply and demand are perhaps one of the most fundamental concepts of
economics and they are the backbone of a market economy. Demand refers to how much
(quantity) of a product or service is desired by buyers. The quantity demanded is the
amount of a product people are willing and able to buy at a certain price; the relationship
between price and quantity demanded is known as the demand relationship. Supply
represents how much the market can offer. The quantity supplied refers to the amount of
a certain good producers are willing and able to supply when receiving a certain price.
The correlation between price and how much of a good or service is supplied to the
market is known as the supply relationship. Price, therefore, is a reflection of supply and
demand.
The relationship between demand and supply underlie the forces behind the
allocation of resources. In market economy theories, demand and supply theory will
allocate resources in the most efficient way possible.
The Law of Demand
The law of demand states that, if all other factors remain equal (ceteris paribus),
the higher the price of a good, the lesser the consumer willing to buy for that good. In
other words, the higher the price, the lower the quantity demanded. The amount of a good
that buyers purchase at a higher price is less because as the price of a good goes up, so
does the opportunity cost of buying that good. Opportunity cost is where the loss of
potential gain from other alternatives when one alternative is chosen. As a result, people
will naturally avoid buying a product that will force them to forgo the consumption of
something else that they value more. For an example, they will not demand for a
particular good if the goods are priced at a more expensive price. They will want to save
the money to spend on other goods and services. The graph below shows that the curve is
a downward slope.
P1
P0
0
DD
Q1
Q0
AandB are points on the demand curve. Each point on the curve reflects a direct
correlation between quantity (Q) and price (P). The demand relationship curve illustrates
31
the negative relationship between price and quantity. The higher the price of a good, the
lower the quantity demanded and the lower the price, the higher the quantity demanded.
The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be
sold at a certain price. But unlike the law of demand, the supply relationship shows an
upward slope. This means that the higher the price, the higher the quantity supplied.
Producers supply more at a higher price because selling a higher quantity at higher price
will increase their revenue.
P
D
P1
P0
SS
Q1
Q0
C and D are points on the supply curve. Each point on the curve reflects a direct
correlation between quantity (Q) and price (P). The supply relationship curve illustrates
the positive relationship between price and quantity. The higher the price of a good, the
higher the quantity supplied and the lower the price, the lower the quantity supplied.
Equilibrium
When supply and demand is equal which is when the supply function and demand
curve intersect, the economy is said to be at equilibrium. At this point, the allocation of
goods is at its most efficient because the amount of goods being supplied is exactly the
same as the amount of goods being demanded. Thus, the buyer and seller are satisfied
with the current economic condition. At the given price, suppliers are selling all the goods
that they have produced and consumers are getting all the goods that they are demanding.
P
SS
Pe
Equilibrium
32
DD
0
Qe
Based on the graph above shown that equilibrium occurs at the intersection of the
demand and supply curve, which indicates no allocative inefficiency. At this point, the
price of the goods will be Pe and the quantity will be Qe. These figures are referred to as
equilibrium price and equilibrium quantity. However, in the real market place equilibrium
can only ever be reached in theory, so the prices of goods and services are constantly
changing in relation to fluctuations in demand and supply.
Disequilibrium
Disequilibrium occurs whenever the price or quantity is not equal to the
equilibrium price and equilibrium quantity.
1. Excess Supply (Surplus)
P
Qs >Qd
Surplus
P1
SS
Pe
DD
0
Qe
Qd
Qs
At the beginning, the equilibrium price is Pe and equilibrium quantity is Qe. When the
price of that good increase, the suppliers are trying to produce more goods, which they
hope to sell to increase profits, but those consuming the goods will find the product less
attractive and purchase less because the price is too high.This has increased the price
from Pe to P1, which has led the quantity demanded less than the quantity supplied. This
has caused the disequilibrium of market economy, surplus. Therefore, if the price is set
too high, excess supply will be created within the economy and there will be allocative
inefficiency.
P (Shortage)
2. Excess Demand
SS
Pe
Qd> Qs
P2
0
Shortage
Qd
Qe
33
DD
Qs
At the beginning, the equilibrium price is Pe and equilibrium quantity is Qe. The
shortage is created when the price is set below the equilibrium price. Because the price is
so low, too many consumers want the good while producers are not making enough of it.
This has decreased the price from Pe to P2, which has led the quantity demanded more
than the quantity supplied. This has caused the disequilibrium of market economy,
shortage. However, as consumers have to compete with one another to buy the good at
this price, the demand will push the price up, making suppliers want to supply more and
bringing the price closer to its equilibrium.
Cross-Price Elasticity of Demand
The cross-price elasticity of demand measures the change in demand for one good
in response to a change in price of another good.
The cross-price elasticity of demand shows the relationship between two goods or
services. More specifically, it captures the responsiveness of the quantity demanded of
one good to a change in price of another good. Cross-price elasticity of demand is
calculated with the following formula:
CrossPrice Elasticity of Demand=
34
Production Possibilities Frontier (PPF) is the curve that shows all of the possible
combinations of two goods that can be produced within a specified time with all its
resources fully and efficiently employed.
Quantity of
Good B
A
C
B
D
Quantity of
Good A
The economy can produce at any combination on or inside the curve (A, B, D).
Point C outside the curve is not attainable.
There are four assumptions on PPF, which are full employment and productive
efficiency, producing two goods, fixed resources and fixed technology. It is said that
points A and B are attainable and efficient because all resources are fully and efficiently
employed. Points inside the curve (D) is attainable and inefficient because resources are
not fully and efficiently employed. Point outside the curve (C) is unattainable because of
limited resources.
Consumer Goods
A
A
Shifts in the Economys
Production Possibilities Frontier
This is when there is an increase in available resources or technological advance that
benefits consumer goods.
Capital Goods
35
Analysis
Demand and Supply
Price of Corn
S1
S2
$4.30
$4.20
Q0
Q1
Quantity of Corn
36
As the price of corn has reduced due to advancement of technology, it can be shown on
the Figure 4.2 that after the drop in the price of corn. This is followed by the increase in
demand for corn cereal. The corn cereals main ingredient would be corn which corn is
the input goods for corn cereal, the manufacturer of corn cereal are more willing to
produce corn cereal at a lower price as the raw material (corn) is now cheaper. Thus, the
demand for corn cereal will therefore largely increase. In this situation, it can only be
good news for the manufacturer of corn cereal as the cost of production has largely
reduced. They are able to produce vast amount of corn cereal with a much lower cost.
Cross-Price Elasticity of Demand
The cross-price elasticity of demand is a positive or negative number
depends on whether the two goods are substitutes or complements. We assume that corn
and wheat are substitute goods. Substitutes are goods that typically used in place of one
another. A decreases in corn price will induces the producer to manufacture products by
using corn. The producer will switch the input goods from wheat to corn due to the drop
37
in corn price. Thus, the price of corn and the quantity of wheat demanded move in the
same direction, the cross-price elasticity is positive.
Besides, the corn and farm equipment are complement goods, which
means goods that are typically used together. The advancement of technology has
decrease in the price of corn. Therefore, farmers will plant and harvest more of this
commodity and will need more farm equipment to harvest the crops. In this case, the
cross-price elasticity is negative, indicating that the drop in price of corn will increase the
quantity of farm equipment demanded.
Production Possibilities Frontier (PPF)
This is a production possibilities frontier graph that makes the assumption that the
economy only produces two goods, wheat and corn. It has also assumed that it has
already in a condition where it has full employment and productive efficiency, the
technology is fixed and the resources available are also fixed.
Quantity of
Corn
A
C
B
D
Quantity of Corn
0
Quantity of Wheat
Quantity of Wheat
38
39
40
Summary
The creator, Mark Pivac who is an Australian engineer has built a robot that can
build houses in two days, and could work every day to build houses for people. The robot
is called as Hadrian, it was a solution to the lack of available workers for bricklaying as
the average age of the industry is getting much higher, and the robot might be able to fill
some of that gap. However, there is also some people are arguing that it will take the jobs
of human bricklayers and this causes unemployment in bricklaying field in Australia.
This is because human house-builders have to work for four to six weeks to put a house
together, and have to take weekends and holidays. The robot can work much more
quickly and doesnt need to take breaks. In fact, Hadrian works by laying 1000 bricks an
hour, letting it put up 150 houses a year. Also, Mark Pivac will now work to
commercialise the robot, first in West Australia but eventually globally.
41
Discussion
Demand for Labor
The industrysdemand for labor is a derived demand; it is derived from the
demand for the firm's output. If demand for the firm's output increases, the firm will
demand more labor and will hire more workers. If demand for the firm's output falls, the
firm will demand less labor and will reduce its work force.
Effects of Technological Change for demand for Labor
Scientists and engineers are constantly figuring out new technologies to give
better ways for human being. Technological advance raises the marginal product of labor,
which in turn increase the demand of labor and shifts the labor-demand curve to the right.
As a result, demand for labor for particular field would be increased.
However, it is also possible that technological change to reduce the labor demand.
The invention of a cheap industrial robot, for instance, could conceivably reduce the
marginal product of labor, shifting the labor-demand curve to the left, reducing the
demand for labor. Economists call this labor-saving technological change. This is because
the invention of the robot has become the substitute for human labor, the industry would
prefer robot rather than human as it is more effective.
History suggests, however, that most technological progress is instead laboraugmenting. Think about secretaries that used to type letters on typewriters long time
ago. It may be now replace typewriter with modern computers that can easily duplicate
and edit documents, one secretary now can do the same amount of work as four
secretaries could in the days of typewriters. That means the labour of the secretary has
been augmented by the advance of technology, one secretary is now worth four
secretaries in the past. When a technology is improving then it means the population and
labour force grows, and actually grow the number of effective workers faster than the
population grows.
why diminishing marginal would causes a loss for industry, we need to study the table
below.
Output MP of
(kg)
Labor
100
0
80
100
60
180
40
240
20
280
300
Labor
0
1
2
3
4
5
Value of MP of
Labor (RM)
1000
800
600
400
200
Wage
(RM)
500
500
500
500
500
Marginal Profit
(RM)
500
300
100
-100
-300
Based on the table above, when number of worker increases, the quantity of
output will increase. At the same time, diminishing marginal product occurs, when the
number of labor increases, the marginal product (MP) declines.
Production Function
Quantity of Output
300
280
240
180
100
Production function is a graph showing the relationship between the inputs into
production (worker) and the output from production. As the quantity of input increases,
the production function gets flatter, this reflects the property of diminishing marginal
product is happening.
MP,
Value of MP
43
A decrease in marginal product of labor (MPL) will cause a reduction for value of
the MP. To calculate the marginal profit, we need to minus workers contribution to the
value of MP from the wages that pay to worker. Lets assume that a kilogram of the
output is RM10, if an additional worker produces 80 kg of output, the worker has
produced RM800 of revenue, so the first worker has helped the firm to earn a profit of
RM 500, because the value of MP is more than wage. However, the third worker causes
the firm to have a loss of -RM100 because value of MP is less than wage. Since the
primary goal of an industry is to maximize the profit, it force to stop hiring additional
worker in this field.
Analysis
Demand for Labor
In general, when there is high demand of the output, the demand for labor will
increase, this is because demand of labor is derived demand. In this case, the demand for
brick house in Australia is high, and the demand of labor is supposed to increase.
According to Master Builders Association of NSW executive director Brian Seidler, the
44
labor drought came amid increased demand for bricklayers not just in the new home
market but from thousands of renovators. Nearly 65 per cent of existing housing stock is
25-35 years old. They all need renovations. The problem is weve got to get people
interested in the industry, MrSeidler said. However, in this case, the demand for labor
has decreased, this is due to the invention of Hadrian, a robot which become the
substitute to the available bricklayer. The shortage of bricklayer has been solved, and
demand for bricklayer is no longer higher.
Wages of Bricklayer
S0
W0
W1
D0
0
D1
Figure 5.1: Demand forQuantity
Labor
of Bricklayer
L1 L0
The invention of robot, Hadrian has assisted Australia to solve the shortage of
available labor. However, this technology has led to labor-saving technological change
also. The demand of labor is decreasing in Australia, thus shifting the demand for labor
curve from D0 to D1 that has shown in Figure 5.1. This is because Hadrian has become the
substitute to the labor. The invention of Hadrian allows more brick houses to be built in
short period, whereas labor need a long period to build more brick houses. Human house
builders have to work for four to six weeks to put a house together, and have to take
weekends and holidays. The robot can work much more quickly and does not need to
take breaks. Although Hadrian has benefits the demand market for brick house, there is
also some disadvantages. Since the demand labor has reduced, the wages of the labor will
be affected. Wages will be reduced, industry has more options regarding the type of
inputs to build the brick houses, either Hadrian or human labor. There is a high possibility
that the unemployment rate will rise in Australia. Bricklayers will lose their job, and they
have to look for other highly demanded job.
45
Market
Wages
Value of
Marginal Product
0
Profit- maximizing
quantity
Quantity of Bricklayer
47
Summary
This article talks about a new product that KFC introduced for its customers in
conjunction with the festive season. The product is called the KFC Ayam Kicap
Meletup. With the tagline So Meletup Sure Must Share, it features a combination of
Malaysias favorite condiments and unique soy sauce that suits local taste buds. The KFC
Ayam Kicap Meletups price ranges from RM 10.95 to RM 74.25 with various side
dishes and free cutlery sets. It is available at all KFC restaurants nationwide.
Discussion
Utility
Utility is an abstract measure of the satisfaction or happiness that a consumer receives
from a bundle of goods. According to economists, if a bundle of goods provides more
utility than the other, it is to be preferred by consumers. By using an indifference curve,
we are able to find out how consumers maximize utility with the choices they make.
There are four properties of indifference curves:
1) Higher indifference curves are preferred to lower ones.
People usually prefer to consume more goods rather than less.
2) Indifference curves are downward slopping.
The slope reflects the rate at which the consumer is willing to substitute one good
for the other. If one good is reduced, the quantity of the other good must increase
for the consumer to be equally happy. This also assumes that the marginal rate of
substitution is always positive.
3) Indifference curves do not cross.
It is because at the point of intersection, the higher curve will give as much utility
as of the two goods as is given by the lower indifference curve. This is absurd and
impossible.
4) Indifferent curves are bowed inwards.
The slope of an indifference curve is the marginal rate of substitution- the rate at
which the consumer is willing to trade off one good for the other. It reflects the
consumers greater willingness to give up one good that he already has in large
quantity. People are more willing to trade away goods they have in abundance and
less willing to trade away goods they have little, thus it is bowed inwards.
A budget constraint illustrates the limit on the consumption bundles that a consumer can
afford. By combining the budget constraint with indifferent curve, we are able to see how
consumers maximize their utility within their income. The point where the budget
constraint touches the indifference curves is the optimum point. It represents the best
combination of bundled goods available to the consumer. At the optimum, the slope of
the indifference curve equals the slope of the budget constraint. Thus, the consumer
chooses consumption of the two goods so that the marginal rate of substitution equals the
relative price.
48
Market structure
Monopolistic competition is a market structure in which many firms sell products that are
similar but not identical. It has the following attributes:
1) Many Sellers
There are many firms competing for the same group of customers.
2) Product Differentiation
Each firm produces a product that is slightly different from those of other firms.
3) Price Maker
They can easily change the price strategy of the market. If one company changes
their product price, it will also influence the other firms to change their prices.
4) Free Entry and Exit
Firms can enter and exit the market without restriction. The number of firms in
the market adjusts until economic profits are driven until zero.
Economies and Diseconomies of Scale
Economies of scale is the property whereby long-run average total cost falls as the
quantity of output increases. Diseconomies of scale is the property whereby long-run
average cost rises as the quantity of output increases. Constant returns to scale is the
property whereby long-run average total cost stays the same as the quantity of output
changes. Economies of scale often arise because higher production levels allow
specialization among workers. Diseconomies of scale can arise because of coordination
problems that are inherent in any large organization.
At low levels of production, the firm benefits from increased size because it can
take advantage of greater specialization. By contrast, the benefits of specialization have
been realized at high levels of production, and coordination problems become more
severe as the firm grows larger. Thus, long-run average cost falls at low levels of
production because of increasing specialization. It rises at high levels of production
because of increasing coordination problems.
49
Analysis
Utility
Based on the article, KFC introduced a new product, which is the KFC
AyamKicapMeletup. This is because they need to attract consumers and increase the
marginal utility of customers. Assuming that the KFC Original Flavored Fried Chicken
was KFCs best-selling product before the new product is introduced. In the earlier stages
of introducing KFC Original Flavored Fried Chicken, consumers tend to buy the KFC
Original Flavored Fried Chicken and their total satisfaction increases accordingly.
However, as the total satisfaction of customers increases day by day, the marginal utility
towards KFC decreases with each additional unit of the same good consumed. Based on
Figure 6.1, when the total utility of the consumer reaches the maximum point (Point A),
the marginal utility of consumer will become zero. Therefore, the additional satisfaction
of consumer toward KFC will decline and this makes the marginal curve downwardslopping. This downward-sloping marginal utility curve has a significant effect for
consumer behavior regarding demand of KFC. Hence, KFC introduces a new product to
increase the satisfaction of consumers.
TU
Point A
0
MU
Quantity of KFC
Quantity of KFC
A0
100000
B0
5000
Indifference Curve
0
200
51
Market Structure
KFC is a monopolistic competition firm. KFC sell products that are different from
each other but there are no perfect substitutes for their products in terms of quality,
branding and location. KFC also sell differentiate product such as KFC Red Hot Chicken
and KFC Original Flavored. There are many firms in the market due to the unrestricted
freedom for other firms to enter to industry. It mean that firms can easily entry and exit
the market. When the market make a profit, many firm will entry into the market without
any restriction whereas when the market make a loss, the firm will exit the market. Due
to this condition, KFC will make zero economic profit in long run. We can analyze from
the Figure 6.3.
Price of KFC
Price of KFC
D1
0
Quantity of KFC
Quantity of KFC
Figure 6.3: KFC Makes AZero Economics Profit in the Long Run
Based on the Figure 6.3, we can assume that the demand of KFC increase and
cause the price of KFC increase from P 1 to P2. Hence, KFC are making profits and this
situation have cause new firm to enter the market. The entry increases the number of
sellers and numbers of KFC products. When the number of sellers increase, supply curve
increase from S1 to S2, it causes the price of KFC decrease from P 2 to P1. When the price
decrease to the original price P1, KFC does not make any profit and KFC is in the market
have an incentive to exit. Therefore, the remaining firm earn exactly zero economic
profit in the long run.
Besides, KFC cannot limit their production as they have many competitors in the
fast food chain such as MC Donald and Burger King. For the pricing strategies, KFC
ignored the price of the competitors and set up their own price. This can explain why
KFC is a price maker. As a monopolistic competition market, KFC set their own price
based on the cost and theres no perfect substitute for the tastiness of their meals. The
price of the AyamKicapMeletup ranges from RM10.95 to RM74.25 with different
quantities and side dishes.
52
Economies of Scale
Cost
P11
P21
LRATC
Quantity of AyamKicapMeletup
Q21
01
Q11
Figure 6.4: Economies of Scale
Figure 6.4 above shown that the increase in quantity of AyamKicapMeletup
produced causes the long run average total cost (LRATC) to decrease. By introducing the
new AyamKicapMeletup, the increase of customers would lead to KFC increasing their
output to fulfil the demand of customers. In the long run, KFC will face economies of
scale as the increased production of the new product would lower the cost of production.
From Figure 6.4, we can see that the increase in quantity from Q 1 to Q2 has decreased the
cost of production from P1 to P2. This is because workers are able to specialize and
become better at his or her assigned task.
Diseconomies of Scale
Cost
LRATC
P21
P11
Q1
Q2
Quantity of AyamKicapMeletup
53
Conclusion
In conclusion, introducing new flavour of KFC which is KFC AyamKicapMeletup has
increase the satisfaction of consumers. Hence, consumers will buy more new flavour of
KFC compare to the old one. Besides, KFC is considered a monopolistic competition
market because KFC has many sellers. KFC is a market which has free barriers to enter.
Therefore, it can enter and exit easily. KFC is a monopolistic competitive firm because
KFC is a price maker.
54
55
56
Summary
FAO and the World Water Council have reported by 2050, water is most likely to be
scarce as the increased competition, which has affected 2/3 of the world. The reason for
water scarcity is also said to be caused by water pollution as a result of intensive
agriculture, industrialization and fast growing cities and over consumption mainly for the
production of food. As the pollution of water produced by humans, programs that can
ameliorate the water storage facilities, wastewater capture and reuse and research to
reduce water usage in farming.
Discussion
Scarcity
Scarcity is one of the most basic economic problems the economy face. Scarcity
happens because the society has unlimited wants, but is simply provided with limited
resources. Thus, decisions have to be made on what to take. Trade-offs are often pressed
out as an opportunity cost, which is the most preferred possible alternatives. Resources
have to be allocated efficiently and effectively due to resources are limited and insatiable
demands.
Economists would then need to reach certain decisions made and what is the next
best alternative that they had to give up. A commodity is considered scarce if it receives a
non-zero cost to consume. In other words, it costs something. Nearly every good
consume costs something and is scarce. By consuming one good, another good is
foregone. Therefore, scarcity forces decisions and tradeoffs to be taken in.
Different kind of goods
1. Private Goods
They are both excludable and rival in consumption. Excludable means that it is possible
to prevent someone from consuming the good, to consume, one must pay in order to
consume the goods. Rival in consumption as in one particular good has been consumed
by a person, it cant be consumed by another person anymore. For example, Ali bought a
pancake and he ate it. Bakar can no longer eat that particular pancake anymore, as that
particular pancake is considered as a private good for Ali.
2. Public Goods
They are neither excludable nor rival in consumption. A person cannot be prevented from
using a public good and one persons use of the public good does not reduce another
persons ability to use it. For example, Clarisse walked through the alley at night with the
help of streetlights. Clarisse cannot be prevented from using the streetlights and after
using the streetlights. It will not stop Denise from using the streetlights too.
3. Common Resources
They are rival in consumption, but not excludable. For example, when Evan caught a
fish from the ocean, there will be fewer fish to be caught by others. Due to the vast size
57
of the ocean, the fishes are not excludable goods as it is difficult to stop others from
fishing fish out of the ocean.
Common resources are often overconsumed. The problem can be illustrated by the
parable of the Tragedy of the Commons. This parable is a story with a general lesson:
when one person uses a common resource, he or she diminishes other peoples enjoyment
of it. Because of this, the imposition of regulations and taxes are executed by the
government to reduce the use of common resources.
4. Natural monopoly goods
They are excludable but not rival in consumption. For example, consider an uncongested
toll road such as the North South Highway in Peninsular Malaysia. It is an excludable
good since one has to pay toll to use the road. Yet uncongested toll road are not rival in
consumption and the use of the road by one person does not affect the amount of use of
another person.
Externalities
An externality arises when a person enlists in an activity that acts upon the
wellbeing of a bystander and yet neither pays nor receives any compensation for that
effect comes by that activity. If the impact on the bystander is beneficial, it is called
positive externalities. Nevertheless, if the impact is adverse to the bystander, it is called
negative externality. In the presence of externalities, societys interest in a market
outcome extends beyond the well-being of buyers and sellers who participate indirectly.
This is because buyers and sellers overlook the external effects of their natural processes
when determining how much to demand and supply, the market equilibrium is not
effective when there are externalities. That is, the equilibrium fails to maximize the entire
benefit to society as a whole.
Externalities come in many forms, namely:
Positive externalities
A positive externality exists when an individual or firm preparing a decision does
not have the entire benefit of the decision. The welfare to the individual or firm is less
than the benefit to society. Thus, when a positive externality exists in an unregulated
market, the marginal benefit curve (the demand curve) of the individual making the
decision is less than the marginal benefit curve to society. With positive externalities, less
is produced and consumed than the socially optimal level.
When a positive externality exists in an unregulated market, consumers pay a
lower price and consume less quantity than the socially efficient outcome. There are
many common examples of a positive externality. Immunization prevents an individual
from getting a disease, but has the positive effect of the individual not being able to
spread the disease to others. Keeping your yard well maintained helps your house's value
and also helps the value of your neighbours homes. Beekeepers can collect honey from
their hives, but the bees will also pollinate surrounding fields and thus aid farmers.
58
Once again the government can correct the market failure by inducing market
participants to internalize the externality. The appropriate response in the case of positive
externalities is exactly the opposite to the case of negative externalities. To move the
market equilibrium closer to the social optimum, a positive externality requires a subsidy.
Health and medication are heavily subsidized through public hospital.
Negative externality
A negative externality (also called "external cost" or "external diseconomy") is an
economic activity that imposes a negative effect on an unrelated third party for which
they are not compensated. In this case, the market has failed because no one pays for the
cost resulting from negative externalities. It can arise either during the production or the
consumption of a good or service. Externalities commonly occur in situations where
property rights over the assets or resources have not been allocated, or are uncertain. For
example, no one owns the oceans and they are not the private property of anyone, so
ships may pollute the sea without fear of being taken to court.
Government can correct these market failures. A variety of approaches can be
used to address the problem of negative externalities. For example, the government can
impose a pollution compensation tax on an activity that creates negative externalities in
order to bring the private cost in line with the social cost of the activity. Creating new
property forms is another alternative. Here, instead of government directly regulating an
activity to make sure that resources are allocated efficiently, resources may be privatized
so that the individuals will have an incentive to exercise property rights to the resources
efficiently. Or, the government may impose obligatory controls regarding certain
activities. For example, most municipalities do not allow leavers to be burned or dogs to
roam freely.
59
Analysis
Scarcity
Water is the resource that is scarce in this article. The reason being
overconsumption of water and water pollution. The natural resource of water is not
enough to cover the high consumption of our society. Therefore in order to solve the
problem, the authorities have urged public and private sectors to invest in programs that
protects water supplies.
Different types of goods
Water, like public goods, is not excludable. The water consumption of one does
not hinder the other person from using it. It is, however, rivalrous in consumption. When
one consumes water, it precludes the consumption of water by another person. Therefore,
water is a common resource. While public goods are free of charge to anyone that uses
them, it is not the same for common resources. To prevent overuse of water, the
government has imposed usage charges to mitigate the problem. As the market for water
does not adequately protect the environment, the contamination caused by the markets
are remedied with regulations, fee imposition or with corrective taxes on polluting
activities. Therefore, water is a common resource.
Externalities
Price of Water
Qmarket
Qoptimum
Quantity of Water
supply curve because it brings into account the external cost imposed on society by goods
producers. The difference between these two curves reflects the cost of the pollution
emitted.
To determine what quantity of clean water should be produced, a benevolent
planner will require to maximize the total surplus derived from the market (the value to
consumers of goods minus the price of making commodities). The planner will
understand that the cost of producing clean water includes the extraneous costs of the
pollution. Thus, it is rational to choose the level of resource produced at which the
demand curve crosses the social-cost curve. This intersection determines the optimal
quantity of clean water from the societal point of view.
It is observed that the balance amount of goods, Q market, is bigger than the socially
optimal quantity, Qoptimum. The understanding of this inefficiency is that the market
equilibrium reflects only the private cost of output. In the market equilibrium, the
marginal consumer values goods less than the social cost of producing it. That is, at
Qmarket, the demand curve lies below the social-cost curve. Therefore, reducing clean water
production and consumption under the market equilibrium level raises total economic
welfare.
To achieve the optimal outcome, taxes should be imposed on industries that
pollute the water supply. The function of such a tax, called internalizing the externality
will give buyers and sellers in the market an incentive to take account of the external
effects of their actions. The industry will take account on the cost of pollution when
deciding how much output is to be produced. As the market price would reflect the tax on
producers, consumers will have the incentive to consume a smaller quantity of water.
Conclusion
In conclusion, water is a common resource. It is scarce due to overconsumption
and water pollution. Negative externalities arise due to industrialization leading to
pollutants being emitted into the water source. Thus, government should impose taxes in
order to prevent overconsumption and water shortage in the future.
61
APA Reference
Griffin, A. (2015). Hadrian the robot bricklayer can build a whole house in two days.
Retrieved from http://www.independent.co.uk/life-style/gadgets-and-t
ech/news/hadrian-the-robot-bricklayer-can-build-a-whole-house-in-two-days10347229.html
Huffman, T. (2015). Corn yields up, prices down. Retrieved from
http://www.effinghamdailynews.com/news/farm_fair_2015/corn-yields-upprices-down/article_efe25caa-359b-11e5-bf24-6b856d5d6065.html
J.Holzer, H. (2015).A $15-hour minimum wage could harm Americas poorest workers.
Retrieved from http://www.brookings.edu/research/opinions/2015/07/15-dollarminimum-wage-harm-economy-holzer
Keene, N. (2015). Huge Demand for Brickies: Much moolah to be had for willing
workers. Retrieved from http://www.dailytelegraph.com.au/news/nsw/hugedemand-for-brickies-much-moolah-to-be-had-for-willing-workers/storyfni0cx12-1227245387308
Scott, C. (2015). FAO urges sustainability over immediate profits to safeguard water
supplies. Retrieved from http://www.foodnavigator.com/Policy/FAO-urgessustainability-over-immediate-profits-to-safeguard-water-supplies
Wan IlaikaMohdZakaria. (2015). Honda: Car prices to fall post-GST. Retrieved from
http://www.thesundaily.my/news/1303673
Zatlin, A. (2015). Americans Are Having Fun (And Spending). Retrieved from
http://www.benzinga.com/economics/15/08/5781095/americans-are-havingfun-and-spending
62
Marking Scheme
Marking Scheme
Marks
63