Analyse The Concept Of Opportunity Cost Economics Essay

Introduction

The answers start with the basic theories of microeconomics and contact with an analysis of actual cases to solve the following four problems. It refers from the opportunity cost, scarcity of resources, cross-price elasticity, income effect, substitution effect, the producer surplus to long-run equilibrium for a perfectly competitive industry.

1. (a) The concept of opportunity cost is due to the scarcity of resource, the scarcity of resource determines that the resource can not be used for purpose B any longer if the resource has been used for purpose A. Therefore, opportunity cost means that if a resource can be not only used for one purpose but also used for another purpose (if it used for one purpose, it must give up other uses due to the scarcity of resources), then the opportunity cost indicates that the resource used for purpose A refers to the net incomes it should have got if it was used for a better purpose B. That is, if the resource has been used for a purpose A, you will lose the possible incomes, so it is a loss of opportunity. This loss must be taken into account when the company choose the use of corporate resources in the selection, only the opportunity cost is the real cost to the economists. Opportunity cost is characterized by selective and hidden.

The friend above says he has a free pass to go to the game of cricket between Australia and South Africa and it won’t cost me anything, according to the concept of opportunity cost above, he is wrong about the cost of going to watch the cricket match .The reasons are as follows. On the one hand, I will lose my time on watching the match; on the other hand, if I do not go with him, I can do my own business, such as study or something meaningful, so I would have lost the incomes I should have got.

(b) Resources are scarce. Scarcity of resources has two meanings:

One meaning is that we have to cost if we want to obtain any resources . The other one is that any resources are limited relative to people’s needs and desires.

Nowadays, universities are confronted with the problem of scarcity of resources with respect to the degree courses it provides.

It is the higher quality teaching resources and the scarcity of supply of higher education demand for high quality teaching resources that restrict the improvement of the quality of higher education. There are both structural imbalances and the total lack of teaching resources problems. The main factors that affect our level of sharing of teaching resources and efficiency are resource development, resource sharing mechanism design and resource sharing of technical support.

For example, Ideological and Political Theory Course teaching resource are scarcity, which can not meet the normal practice of teaching needs; the scattered, idle and waste related issues in the use of the Ideological and Political Theory Course teaching resource are also important factors that affect the supply and demand balance in addition to its own supply shortage. In specifically speaking, there are two aspects. On the one hand is the disperse regions, which refers to the non-uniformity of time and space in the rule of teaching resources in the Ideological and political theory; on the other hand is the non-uniformity on time, which refers to the differences between the history resources and reality performance.

(1) Demand–supply analysis indicate that the market prices are fully determined by market supply and demand, that is the products’ prices depend on the point of intersection of the market demand curve and the market supply curve, which is called equilibrium price in the Economics.

As noted above, the points in the demand curve indicate the quantity of goods that consumers are willing to buy in a specific price, the points in the supply curve indicates the quantity of goods that manufacturers are willing to provide in a specific price .when the supply and demand curves intersect in one point, quantity of demand equals quantity of supply. Consumers and manufacturers can do mutually satisfactory deals. If the price is higher than the equilibrium price, quantity of supply will be greater than the quantity of demand, the sellers can not find enough buyers, goods are stored and then the market prices will be forced to reduce; If the price is lower to a certain extent, quantity of demand is greater than the quantity of supply, if buyers want to buy the goods they needed, they will raise the price consciously, the sellers will sell excess inventory, as the quantity of demand increasing, the market price back to equilibrium price, quantity of supply equals the quantity of demand at this time and market adjust the balance of restored goods.

(2) Cross-price elasticity indicates the responsiveness of the quantity demanded of one product to the price change of another related products .When the cross -price elasticity is positive, the quantity demanded of product x and y moves in the same direction, they are alternatives .If the cross-price elasticity is negative, the quantity demanded of product x and y goods moves in the opposite direction, they are complementary products .If the cross-price elasticity is 0, the quantity demanded of product x has no effect on y, that is the two products are independent, unrelated products.

a) The cross -price elasticity of Cars and bicycles is Zero. It indicates that cars and bicycles are unrelated products.

b) The cross -price elasticity of Metros and Barinas are Slightly less than zero, It indicates that they are complementary products, but the complementarily is a litter week.

c) The cross -price elasticity of Cars and petrol are considerably less than zero. It indicates that they are Strong complementary products. Only the two products combined can they produce a greater effect on consumers.

The cross -price elasticity of Sugar and cars are considerably greater than zero. It indicates that they are strong alternative products, the two products have similar effects on consumers so they are alternative.

The cross -price elasticity of Cars and trips to Perth is slightly greater than zero. It indicates that they are alternative products, but the alternative is a litter week.

3.1(a)

Demand quantity and demand price changes into the reverse relationship, which is the law of demand. Under normal circumstances, when the market price rises, demand will decrease; and when market prices fall, demand will increase.

It makes sense that consumers will buy more this kind of product when prices falls, and when the price rises, consumers will buy less, now let us find out why this happened. Substitution effect refers to the fact that the declining prices make one product less expensive than other alternative products. This change will cause that the prices decline and consumers buy more, or prices rise and consumers buy less. When the printer’s price falls, consumers will use to buy the printer to replace the purchase of other products or services. For example, if the prices of printers fall, consumers who print digital photos at Wal-Mart may buy their own printer to print photos.

Income effect refers to the fact that the impact of price change on consumer purchasing power caused by the demand quantity changes on this product. Purchasing power refers that a certain amount of income could purchase the number of products. When product prices fall, consumers’ purchasing power of income will increase, which often cause them to buy more quantity of this product. When product prices increase, consumers’ purchasing power of income will reduce, which often leads them to buy small quantities of this product.

Therefore, the falling of printers’price lead consumers to purchase more printers, both because they are cheaper than other alternatives, but also because of consumer purchasing power of incomes increased.

However, in a few occasions, there had emerged specific goods that Demand quantity and demand price changes in the same direction, this phenomenon discovered by the British statistician Robert Giffen, and then it is called “Giffen goods.”

In 1845 famine occurred in Ireland, potatoes prices increased, but strange thing is the demand of potatoes increased too. This is contrary to the law of demand. This phenomenon was called “Giffen problem.” British economist Marshall in his famous “Principles of Economics” (1980) discussed the problem in detail in his book making “Giffen problem” spread down. In 1845, the potato in Ireland is a very strong low-end product. When potato prices increased, consumers became poorer. Income effect made consumers to buy less meat and more potatoes. Also, because potatoes become more expensive compared with meat, the substitution effect made the consumers want to buy more meat and fewer potatoes. However, in this particular case, the income effect is so large that more than the substitution effect. Consumers results to buy less meat and more potatoes. This can explain the “Giffen problem”. It also can explain the impact of the income and substitution effects on the law of demand.

3.2 What is producer’s surplus? Illustrate and explain.

SMC

AVC

Q0

P0

H

E

F

Q

P

When the manufacturer provided a certain number of products, there was a difference between actually received total payment and willing to accept minimum total payments .this difference was called Producer surplus.

It was usually represented by the area which below market price curve and above the firms supply curve (that is, the corresponding part of the SMC curve), the reason is: We know that in production, as long as the price per unit is greater than marginal cost, firms production is always beneficial. At this point, manufacturers will be able to get the producer surplus. Thus, in the figure, the shaded area which below market price curve and above the firms supply curve (that is, the corresponding part of the SMC curve) between the production of zero to maximum output Q0 , to represent the producer surplus. the rectangular area OP0EQ0 which below the price curve represent that actually received total payment, the rectangular area OHEQ0 below he supply curve (that is, the corresponding part of the SMC curve) represent that manufacturers are willing to accept the minimum payment, the difference between the two areas is producer surplus. As a result, producer surplus can also be expressed mathematically:

-PS means producer surplus

– Q0 means the supply of manufacturers is Q0 when the price is P0

-f(Q)means Anti-supply function

– P0Q0 means manufacturer actually received total payment

-means the manufacturers are willing to accept the minimum payment

In addition, it should be noted that in the short term, because fixed costs can not be changed, so the marginal costs of all production is inevitable equal to total variable costs, this way. Producer surplus can also defined by the difference between manufacturers total payment and total variable costs.

(a)

In long-run equilibrium for a perfectly competitive industry, P=AC=MC. Of what significance for the allocation of resources is the equality of: i) MC and AC and ii) P and MC.

In long-run equilibrium for a perfectly competitive industry is P=AC=MC ¼Œwe can also express it in another way: P=AR=MR=SAC=LAC=SMC=LMC

i) We can explain it in this way .MC> AC notes that the marginal cost is the opportunity cost when the manufacturers product a multi-product (it may be worth to produce a production which is more than the required additional resources to be used in the production of other products) is greater than the average cost ,indicating that the marginal cost low the average cost, if the manufacturers still produce more productions the average cost will higher, contrast, the manufacturers are losing money, then firms will reduce production to increase income, until MC<AV. But when MC <AV, the marginal cost is less than the average cost, indicating that the marginal cost increase the average cost ,now the firms are profitable ,and then they will increase the yield to increase revenue until MC>AC, according to this circumstance, the manufacturers will adjust the productions until MC = AC . So only when MC = AC, all of companies achieve long-term equilibrium.

ii) P = MC means that the price equals marginal cost and allocating resource among the various products is optimal according to a social point. Because the price P is the value evaluation of a community to product one more product, the marginal cost MC is the opportunity cost when the manufacturers product one more product (it may be worth to produce a production which is more than the required additional resources to be used in the production of other products). When a company produces a kind of product and its output are in the case of P> MC, it means that the value of production of this product is more than the value of using those resources to produce the other productions and meanwhile the output of the products are relatively short, so it should produce more those productions. If P <MC, it shows that those productions are produced more than they are needed, so we should reduce the productions of such products and increase productions of other products. Visibly, only when P = MC it can means that enterprises’ output are appropriate in this level and the resource allocation among various products is optimal, and then the consumer needs are fully satisfied.

Conclusion

According to the four above answers, I gain a deeper understanding of the microeconomic theory from the opportunity cost, scarcity of resources, cross-price elasticity, income effect, substitution effect, the producer surplus to long-run equilibrium for a perfectly competitive industry.