Price elasticity of demand is ameasure to show the responsiveness, or elasticity, of the quantity demanded ofa good or service to a change in its price. From calculating thePED at each price level found in question 1a, the PED is changing along thedemand curve (found below), when the co-efficient is greater than one, thendemand is said to be price elastic, meaning that is highly responsive to achange in price.
When the co-efficient is less than one, then demand is priceinelastic, demand is not really responsive to a change in price. When theco-efficient is one, demand is unit elastic because price and quantity changeby the same percentage. PED on a linear demand curve will fall continuously asthe 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. AtPED>1 price is elastic and at PED<1 price is inelastic. (tutor2u, 2018) c)Increases in demand causes the demandcurve to shift to the right (diagram found below), this can be caused due to anumber of factors that can cause quantity demanded of books to increase. A reduction or elimination of tax onbooks, 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.
Taxescan also be reduced in order to encourage people to read more, thus thedecrease or elimination of tax increases quantity demanded of books. When people have increase in theirincome this enables them to consume more.If price of substitutes includingmobile phones increases due to various taxes imposed by the government becauseof a large population experiencing negative impacts due to technology includingnerve damage and disrupted sleep among society, the quantity demanded for bookswill increase, in order for people to relax they will read, as some wouldn’tafford buying expensive mobile phones or laptops among other gadgets.
Positive adverts showing the positiveexternalities when one reads will increase quantity demanded, parentsespecially will enforce reading into their childs’ schedule. This willultimately also increase the quantity demanded for books. All of the above will lead to a shiftof the demand function, due to factors rather than price changing.
2a) A monopoly is a single largefirm producing unique products. It is a price maker since it determines theprices. In Malta we have ‘Enemalta’ being the only postal service company is aprice maker meaning that it can increase or decrease its price, this is becausethere are no other direct competitors. Price of stamps can increase andpeople still needs to use it since they would need to send letters.
Maltapostis a single large firm, with no other direct sellers competing, another veryimportant assumption of a Monopoly. It also produces unique products, no othercompany in Malta produces stamps, thus its products are unique. In a Monopoly, thereare barriers through entry that prevent other companies from getting into themarket and produce the same products, these include patents and trademarksamongst others.
: (tutor2u, 2018)b) Monopolies produce where marginalrevenue is equal to marginal cost (at Point E). Below this point marginalrevenue is greater than marginal cost (at Point F), meaning that with eachadditional unit produced, the extra revenue is greater than the extra costincurred. Therefore firms will continue to produce until marginal revenue isequal to marginal cost.
Beyond this point the extra cost incurred for eachadditional unit produced is greater than the extra revenue. Given that amonopoly is a price maker they set the price equal to average revenue. Thisprice is higher than price required to cover average cost. The difference isthe abnormal profit.
In 2016 according to the chairman ofMaltapost, the firm have made a pre-tax profit of 2.93 million euro. A diagramthat describes this abnormal profit is found below. (Maltapost.com, 2018) c)The main advantages of a Monopoly include avoidance of duplication ofresources, this resulting into wastage of resources, being a Monopoly it enjoyseconomies 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 afew since the costs will be lower when producing many, being a large company amonopoly can use its large amounts of profits to improve. Having pricediscrimination in a Monopoly can help the weaker part of society. They can alsoinvest in machinery as they will be able to buy it. To the governmentmonopolies can be a source from where revenue can be gained.
The main disadvantages of a monopolyinclude having low quality goods and services. Prices can also be high althoughthe quality wouldn’t be good. Another disadvantage of a Monopoly is a declinein consumer surplus resulting into a deadweight loss due to high prices andless quantity is produced (diagram found below), consumers wouldn’t be able toconsume at that high price, thus there would be a loss in welfare.
Due to thefirm producing unique products the products can be outdated; they wouldn’t beimproved. d) The utilities sector of an economy is usually associated with anatural monopoly. Natural Monopolies occur when there is only one room for onefirm to fully exploit the economies of scale that are available. Malta isalso dominated by a natural monopoly in the utilities sector. Enemalta is theonly company providing Electricity in Malta. Having more than one company thatoffers utilities in the same market would result in inefficiency and extracosts. To build a company like Enemalta very high costs have to be paid upfrontto buy machinery, this would lead to other companies neglecting to enter themarket. If another company enters the market there would be double theinfrastructure, thus double the costs.
The company would have acquired enougheconomies of scale like technical expertise and financial advantages amongstothers. Allowing it to produce at its minimum cost, other firms attempting toenter the market will not have these economies of scale allowing them toproduce 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 theutilities market requires such a large initial capital outlay, this bars newentrants and a monopolist can abuse its dominant position in a given market.For this reason, there is extensive government regulation in place that setsthe prices for utilities companies and oversees their economic activities. (Anon, 2018) 3 a) Gross Domestic Product is the totalvalue of goods and services produced within a country. Gross Domestic Product is calculated byworking the following formula:Household final consumption + NPISHfinal consumption + General Government expenditure + Acquisition less Disposals+ Exports – Imports For Year 1 the National Gross DomesticProduct 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 DomesticProduct 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 isgrowing hence people are earning more capital from year 1 to year 2 overall. Thiscan be shown in the following calculations. The difference in GDP from Year 1to Year 2 is calculated as follows: GDP Year 2 – GDP Year 1 x100 GDP Year 1 2099559-1990499 x100 1990499= 109060 x 100 = 5.
48% 1990499 There is an increase of 5.48% from year1 to year 2, this indicates positive growth. C) The best indication of overalleconomy is given by the real GDP because the real GDP measures the amount ofoutput with adjustments made for inflation, it also measures at constantprices, while nominal GDP calculates at current prices having no adjustmentsmade for inflation.
Calculating GDP at current year prices could lead tooverestimation of GDP. This is because if prices have increased, this may givethe impression that output has increased, but in reality the prices would haveled to such a real change. Thus the real GDP gives a better indication of theeconomy overall.
(Courses.lumenlearning.com,2018), (Spaulding, 2018) D) The additional unit to calculate the GDP inretail terms is the retail price index this servesas an economic indicator that measures inflation, mainly determining themonthly average change in the prices of goods and services purchased by privatehouseholds. Every month, indices for each item are calculated to derivethe annual and monthly inflation rates. Such indices are then aggregatedinto the 10 main RPI groups. Apart from the inflation rate, these indicesare also used to calculate the Cost of Living Adjustment (COLA).
(En.wikipedia.org, 2018) E) In our example during Year 1, the totalsavings amounted to:= 1,990,499- (1,262,327+ 33,158)= 1,990,499 – 1,295,485= 695,014 Lm000s During Year 2, the total savingsamounted to:= 2,099,559 – (1,321,866 + 34523)= 2,099,559 – 1,356,389= 743,170 Lm000s Rate of Savings Change can becalculated as follows:Year 2 – Year 1 x100 Year1 743170 – 695014 x 100 695014 48.156 x 100 = 6.93%695014 Based on Year 1 and Year 2, people aresaving more in Year 2. This can be because income has increased thus, theamount of savings increased.
As having a greater amount of income, more jobsoffered in Year 2 could also lead to higher savings. More savings can also belinked to people getting worried for the future, maybe the country isprospected that it’s going to experience a bad period in the future, thus peoplewould think that it’s best to save up money. Savings can also be increased byinterest 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 maychange their savings. For example, a rise in house prices would tend toencourage spending and discourage saving because higher house prices lead topositive equity for homeowners, and less need to save for the future.