Economics

Question 1: Explain the how the price mechanism works and how it responds to changes in consumer demand or producer supply. (10 marks) Illustrate the interdependence of markets i.e. how the goods/services market affect the factor market, and the effect of a rise in demand for that good or service. (10 marks) The Price Mechanism is perhaps the most basic feature of the market economy for allocating resources to various uses. It is the system in a market economy whereby the decisions of producers determine the supply of commodity and the decisions of buyers determine the demand. The interaction between the consumers’ demand for a good and the supply of that good by a producer determine the price. To put more simply; prices are determined by shortages and surpluses. Normally a shortage of a product causes the price to rise, whereas a surplus causes the price to fall. The price will determine how much of a product a producer decides to supply. If the product price is high then profit is greater and more will be supplied due to producer profit motive. If consumers decide that they want more of a good (or if producers decide to cut back supply), then demand will exceed supply. The resulting shortage causes the price to rise. The result is that consumers will be discouraged to buy as much whereas producers will be encouraged to supply more. The price of a good will continue to rise until the shortage has been eliminated. The opposite is true if consumers decide that they want less of a good causing the price to fall until the surplus is eliminated. As this process is continued we can see that there is only one price at which there is neither upward nor downward pressure on price. This is termed the equilibrium price and occurs when demand equals supply. Question 2: Using relevant diagrams and illustrations show the relationship between demand and price. (10 marks) Specific to the travel market rank the determinants of demand in priority supported by a brief description of each situation. (10 marks) Question 3: What is opportunity cost and why is opportunity cost an important concept in economics' (10 marks) Provide examples to support your answer. (10 marks) The concept of opportunity cost has a very important place in economic analysis. It is defined as the value of a resource in its next best use. It is the amount of income or yield that could have been earned by investing in the next best alternative. The opportunity cost of a good can be given a money value. For instance, a labor is working in a factory and is getting $2000 P.M. The entrepreneur is paying him this amount because he can earn this amount in the next best alternative employment. If he pays less than this amount, he will move to next best alternative occupation, where he can get $2000 P.M. So in order to detain a productive service say labor in the present occupation, the cost should be equal to the amount which he can get in some alternative occupation. Similarly, a piece of land or capita! must be paid as much as they could earn in their next best alternative use. The total alternative earnings of the various factors employed in the production of a good constitute the opportunity cost of a good. In a money economy, opportunity or transfer cost is defined as the amount of money which a firm must make to resource suppliers m order to attract these resources away from alternative lines of production. In the words of Lipsay, "The opportunity cost of using any factor is what is currently foregone by using it". The idea of opportunity cost has an important bearing on the decisions involving scarcity of resources, their alternative uses and the choice. "What you would have done if you didn't make the choice that you did". I have a number of alternatives of how to spend my Friday night: I can go to the movies, I can stay home and watch the baseball game on TV, or go out for coffee with friends. If I choose to go to the movies, my opportunity cost of that action is what I would have chose if I had not gone to the movies - either watching the baseball game or going out for coffee with friends. Note that an opportunity cost only considers the next best alternative to an action, not the entire set of alternatives. Question 4: Using online travel agents as suppliers of a service, show the relationship between market supply and demand, when 1) demand is elastic and 2) when demand is inelastic. (10 marks). What determines price elasticity of demand' (10 marks) Question 5: Outline the features of the four market structures. (10 marks) Give examples to support your choice of market structure that you consider to be most appropriate for the travel industry business. (10 marks). End of case study: Total marks awarded 100