Price to a change in its price. From

Price elasticity of demand is a
measure to show the responsiveness, or elasticity, of the quantity demanded of
a good or service to a change in its price. From calculating the
PED at each price level found in question 1a, the PED is changing along the
demand curve (found below), when the co-efficient is greater than one, then
demand is said to be price elastic, meaning that is highly responsive to a
change in price. When the co-efficient is less than one, then demand is price
inelastic, demand is not really responsive to a change in price. When the
co-efficient is one, demand is unit elastic because price and quantity change
by the same percentage. PED on a linear demand curve will fall continuously as
the curve slopes downwards. The first law of demand states that as price increases,
less quantity is demanded. This is why the demand curve slopes down to the right. PED = 1 at the midpoint of a linear demand curve is unit elastic. At
PED>1 price is elastic and at PED<1 price is inelastic. (tutor2u, 2018)                   c) Increases in demand causes the demand curve to shift to the right (diagram found below), this can be caused due to a number of factors that can cause quantity demanded of books to increase. A reduction or elimination of tax on books, some people would prefer to read a real book rather than reading online, thus people who read online would go back to reading through real books. Taxes can also be reduced in order to encourage people to read more, thus the decrease or elimination of tax increases quantity demanded of books. When people have increase in their income this enables them to consume more. If price of substitutes including mobile phones increases due to various taxes imposed by the government because of a large population experiencing negative impacts due to technology including nerve damage and disrupted sleep among society, the quantity demanded for books will increase, in order for people to relax they will read, as some wouldn't afford buying expensive mobile phones or laptops among other gadgets.     Positive adverts showing the positive externalities when one reads will increase quantity demanded, parents especially will enforce reading into their childs' schedule. This will ultimately also increase the quantity demanded for books. All of the above will lead to a shift of the demand function, due to factors rather than price changing.                                           2 a)  A monopoly is a single large firm producing unique products. It is a price maker since it determines the prices. In Malta we have 'Enemalta' being the only postal service company is a price maker meaning that it can increase or decrease its price, this is because there are no other direct competitors.  Price of stamps can increase and people still needs to use it since they would need to send letters. Maltapost is a single large firm, with no other direct sellers competing, another very important assumption of a Monopoly. It also produces unique products, no other company in Malta produces stamps, thus its products are unique. In a Monopoly, there are barriers through entry that prevent other companies from getting into the market and produce the same products, these include patents and trademarks amongst others. : (tutor2u, 2018) b) Monopolies produce where marginal revenue is equal to marginal cost (at Point E). Below this point marginal revenue is greater than marginal cost (at Point F), meaning that with each additional unit produced, the extra revenue is greater than the extra cost incurred. Therefore firms will continue to produce until marginal revenue is equal to marginal cost. Beyond this point the extra cost incurred for each additional unit produced is greater than the extra revenue. Given that a monopoly is a price maker they set the price equal to average revenue. This price is higher than price required to cover average cost. The difference is the abnormal profit. In 2016 according to the chairman of Maltapost, the firm have made a pre-tax profit of 2.93 million euro. A diagram that describes this abnormal profit is found below. (, 2018)                                    c) The main advantages of a Monopoly include avoidance of duplication of resources, this resulting into wastage of resources, being a Monopoly it enjoys economies of scale since it would be the only one producing the product, meaning that a company would better produce lots of a product then producing a few since the costs will be lower when producing many, being a large company a monopoly can use its large amounts of profits to improve. Having price discrimination in a Monopoly can help the weaker part of society. They can also invest in machinery as they will be able to buy it. To the government monopolies can be a source from where revenue can be gained. The main disadvantages of a monopoly include having low quality goods and services. Prices can also be high although the quality wouldn't be good. Another disadvantage of a Monopoly is a decline in consumer surplus resulting into a deadweight loss due to high prices and less quantity is produced (diagram found below), consumers wouldn't be able to consume at that high price, thus there would be a loss in welfare. Due to the firm producing unique products the products can be outdated; they wouldn't be improved.     d) The utilities sector of an economy is usually associated with a natural monopoly. Natural Monopolies occur when there is only one room for one firm to fully exploit the economies of scale that are available.  Malta is also dominated by a natural monopoly in the utilities sector. Enemalta is the only company providing Electricity in Malta. Having more than one company that offers utilities in the same market would result in inefficiency and extra costs. To build a company like Enemalta very high costs have to be paid upfront to buy machinery, this would lead to other companies neglecting to enter the market. If another company enters the market there would be double the infrastructure, thus double the costs. The company would have acquired enough economies of scale like technical expertise and financial advantages amongst others. Allowing it to produce at its minimum cost, other firms attempting to enter the market will not have these economies of scale allowing them to produce at the minimum cost therefore they will have to exit the market, leading to the firm dominating the market. Because establishing a natural monopoly in the utilities market requires such a large initial capital outlay, this bars new entrants and a monopolist can abuse its dominant position in a given market. For this reason, there is extensive government regulation in place that sets the prices for utilities companies and oversees their economic activities. (Anon, 2018)   3 a) Gross Domestic Product is the total value of goods and services produced within a country. Gross Domestic Product is calculated by working the following formula: Household final consumption + NPISH final consumption + General Government expenditure + Acquisition less Disposals + Exports – Imports   For Year 1 the National Gross Domestic Product is calculated as follows: 1,262,327 + 33,158 + 419,121+ 29,451 -1657 + 1,534,541 + 401,842 – 1,688,284 = LM 1,990,499( in thousands)   For Year 2 the National Gross Domestic Product is calculated as follows: 1,321,866 + 34,523 + 443,186 – 2,029 + 6,000 + 411,802 + 1,735,667 - 1,851,456 =  LM 2,099,559   b) When comparing year 1 and year 2, the country has experienced an increase in GDP this means that economic GDP is growing hence people are earning more capital from year 1 to year 2 overall. This can be shown in the following calculations. The difference in GDP from Year 1 to Year 2 is calculated as follows:   GDP Year 2 – GDP Year 1         x 100              GDP Year 1     2099559-1990499   x100           1990499 = 109060      x 100 = 5.48%           1990499   There is an increase of 5.48% from year 1 to year 2, this indicates positive growth.   C) The best indication of overall economy is given by the real GDP because the real GDP measures the amount of output with adjustments made for inflation, it also measures at constant prices, while nominal GDP calculates at current prices having no adjustments made for inflation. Calculating GDP at current year prices could lead to overestimation of GDP. This is because if prices have increased, this may give the impression that output has increased, but in reality the prices would have led to such a real change. Thus the real GDP gives a better indication of the economy overall. (, 2018), (Spaulding, 2018)   D) The additional unit to calculate the GDP in retail terms is the retail price index this serves as an economic indicator that measures inflation, mainly determining the monthly average change in the prices of goods and services purchased by private households.  Every month, indices for each item are calculated to derive the annual and monthly inflation rates.  Such indices are then aggregated into the 10 main RPI groups.  Apart from the inflation rate, these indices are also used to calculate the Cost of Living Adjustment (COLA).   (, 2018)       E) In our example during Year 1, the total savings amounted to: = 1,990,499- (1,262,327+ 33,158) = 1,990,499 - 1,295,485 = 695,014 Lm000s   During Year 2, the total savings amounted to: = 2,099,559 - (1,321,866 + 34523) = 2,099,559 - 1,356,389 = 743,170 Lm000s   Rate of Savings Change can be calculated as follows: Year 2 – Year 1       x100         Year 1     743170 - 695014     x 100           695014   48.156     x 100 = 6.93% 695014     Based on Year 1 and Year 2, people are saving more in Year 2. This can be because income has increased thus, the amount of savings increased. As having a greater amount of income, more jobs offered in Year 2 could also lead to higher savings. More savings can also be linked to people getting worried for the future, maybe the country is prospected that it's going to experience a bad period in the future, thus people would think that it's best to save up money. Savings can also be increased by interest rates getting higher as this would provide an incentive to save. Changes in asset prices, such as houses and shares, can affect confidence and generate wealth effects. In response, households may change their savings. For example, a rise in house prices would tend to encourage spending and discourage saving because higher house prices lead to positive equity for homeowners, and less need to save for the future.                            



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