Ba-Eco101 Basic Microeconomics

BA-ECO101 BASIC MICROECONOMICS
Explain the following:
1. Demand and supply, and its impact to the economy.

- Demand is referred to as a consumer's desire and readiness to pay for a given
commodity or service. It is the link between the quantity of an item or service
that people will buy and the price they will pay for the good. While supply refers
to the number of units of products or services that a provider is willing and able
to deliver to market at a certain price. The willingness and ability to supply
items to the market are determined by stock availability and the supply
determiners. Price changes have an effect on market equilibrium as well. Price
increases will result in increased supplies, whereas price decreases will have
the reverse impact. Supply and demand is a fundamental economic premise
that when the supply of an item or service exceeds the demand for it, prices
decrease. Prices tend to rise when demand exceeds supply. When demand
remains constant, there is an inverse connection between supply and pricing of
products and services.
2. Different kinds of cost with example.

FIXED COST - Are expenses that does not change even though there is an increase
or decrease in the volume of goods produced.
Example: rental lease or mortgage payments, salaries, insurance payments, property
taxes, interest expenses, depreciation, and some utilities.
VARIABLES COST - Are expenses that varies with the volume of production output.
Change base on sale activity. Remain the same regardless of sale.
Example: costs of goods sold (COGS), raw materials and inputs to production,
packaging, wages, and commissions, and certain utilities (for example, electricity or gas
that increases with production capacity)
DIRECT COSTS - The direct cost is the cost which can be assigned to the of certain
goods and services.
Example: direct labor, direct materials, commissions, piece rate wages, and
manufacturing supplies.
INDIRECT COSTS - The indirect cost is the cost which cannot be directly attributed
to the product of goods and services.
Example: production supervision salaries, quality control costs, insurance, and
depreciation.
TOTAL COST (TC) - in the simplest term is all the costs incurred in producing
something or engaging in an activity. In economics, total cost is made up of variable
costs + fixed costs.
Example: combining $16,000 fixed costs with $25,000 variable costs, would come to
$41,000.
MARGINAL COST OF PRODUCTION - is the change in total production cost that
comes from making or producing one additional unit. To calculate marginal cost,
divide the change in production costs by the change in quantity.
Example: it may cost $10 to make 10 cups of Coffee. To make another would cost
$0.80.
AVERAGE COST PER UNIT OF PRODUCTION - is equal to total cost of production
divided by the number of units produced.
Example: the cost of producing 80 ballpens is PHP400, so the average variable cost is
PHP400/80, or PHP5 per ballpen.
AVERAGE FIXED COST - is a management accounting formula that measures the
fixed production expenses per good produced by dividing total fixed-costs by number
of units produced.
Example: The fixed cost of an output is PHP1500, if 2 outputs were produced, then
1500 divided by is equal to PHP750 which is the average fixed cost.
AVERAGE VARIABLE COST - is a variable cost divided by output. It increases as
production increases.
Example: the variable cost of producing 80 candies is PHP400, so the average variable
cost is PHP400/80, or PHP5 per candy.
AVERAGE TOTAL COST - is the total cost divided by output. Like Average Variable
Cost, Average Total Cost declines for a while but eventually it will begin to rise.
Example: The total cost of an output is PHP2200, if 2 output were produced, then
2200 divided by 2 is equal to 1100 which is the average total cost.
3. How does Price Ceiling and Price Floor affects the economic circulation?
- A price ceiling can increase the economic surplus of consumers as it decreases
economic surpluses for the producer. The lower price will result is a shortage of
supply and hence decreased sales. A price floor can result in a lowering of
overall economic surplus, or total welfare, for both the producers and the
consumers.
4. Strategies of companies in Cost minimization and profit maximization.
- There are a lot of strategies in minimizing cost and maximizing the profit that
every company can adapt. This are some examples of them; Product
differentiation, Low-Price Strategy, and Control Cost.
Product Differentiation
Companies that can differentiate themselves by offering high-quality products or
services are generally able to fetch higher market pricing. While pricing alone cannot
ensure profit, it does provide businesses with the potential to maximize profit.
Low-Price Strategy
Customers in the market are not uniform. When clients want products or services with
basic features at reasonable rates, organizations catering to these customers may
pursue a low-price approach. When a product or service's demand is very elastic, the
lower the price, the greater the demand.
Control Cost
Companies might lose money not because of a lack of sales income, but because of
expense overruns. Cost control is an important step toward decreasing loss. Companies
that can operate at a continuous low-cost level will be better equipped to withstand any
price decrease or market slump and remain profitable.
5. Give example of products under elastic demand and inelastic demand. Defend
your answer.
- An example of an elastic product is a Porsche sports car. Because a Porsche is
typically such a large portion of someone's income, if the price of a Porsche
increases in price, demand will likely be elastic. Customer’s will likely buy an
alternative sports car that is more affordable. We can see how sensitive the
demand is when the price of Porsche sports car increases.
- An example of an inelastic product is gasoline. Even if gas prices get higher,
people may not be able to stop commuting to work, taking their kids to school,
and driving to the store. Thus, people will still purchase gas even at a higher
price. We can see that the price increase of gasoline did not significantly impact
it’s demand.

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BA-ECO101 BASIC MICROECONOMICS

Explain the following:

1. Demand and supply, and its impact to the economy.

2. Different kinds of cost with example.

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