Reference no: EM132641262

Economic Environment of Business

SECTION A

(a) Differentiate between internal and external economies of scale and analyse three internal economies which supermarkets benefit from.

(b) Use Extract B to calculate the three firm concentration ratio for sales in the supermarket industry in December 2015

(c) Differentiate between money income and real income of households and explain how you would calculate the real income from the money income. Support your answer with an example.

(d) Use Extract A to identify two significant points of comparison between the changes in real income and real food prices for low-income households in the UK over the period shown.

(e) Extract B refers to "the monopoly power of well-established firms" in the supermarket industry.

Explain two factors that could influence the monopoly power of firms in the supermarket industry, and using relevant examples, analyse how the monopoly power of a firm can be measured.

(f) Extract C states that "have the changes in the supermarket industry been for the better, and if so, for whom?"
Use the extracts and your knowledge of economics to assess whether the changes in the supermarket industry are likely to be better or worse for consumers and firms.

(g) The supermarket industry is often described as being oligopolistic. Analyse the main features of such markets and explain why the supermarket industry is oligopolistic.

SECTION B

QUESTION 2

(a) Suppose that the general demand function for good X is

Qd = 60 - 2Px + 0.01M + 7PR

Where:
Qd = quantity of X demanded, Px = price of X, M = (average) consumer income, PR = price of a related good R

(i) Is good X a normal or inferior good? Explain why.
(ii) Are goods X and R, substitutes or complements?

(b) Rising jet fuel prices recently led most major U.S airlines to raise fares by approximately 15%. Explain how this substantial increase in airfares would affect the following:
(i) the demand for air travel
(ii) the demand for hotels
(iii) the demand for rental cars

(c) Bloomberg Businessweek recently declared "We have entered the age of the Internet", and observed that when markets for goods or services gain access to the Internet, more consumers and more businesses participate in the market.

Use supply and demand analysis to predict the effect of e-commerce on equilibrium output and equilibrium price of products gaining presence on the Internet.

(d) In an article about the financial problems of USA Today, Newsweek reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise its price from 50 cents to 75 cents, which he estimated would bring in an additional $65 million a year. The paper's publisher rejected the idea, saying that circulation would drop sharply after a price increase, citing the Wall Street Journal's experience after it increased its price to 75 cents.

What implicit assumptions are the publisher and the analyst making about price elasticity, and what factors should a business manager normally consider while deciding on whether to increase price or not?

QUESTION 3

(a) Should an educational establishment take on more students? The answer given to this question by the administrators of many universities, colleges and schools since the early 1990s has been a resounding "Yes" as they have avidly competed for students. At the same time, the amount of resources they have available per student has declined, and yet many of the administrators have claimed that the quality of education that students have received has not declined and some even claim that it has increased. The arguments they use have partly to do with the marginal cost per student being lower than the average cost, and the possibility of achieving economies of scale.

Many of the academic and administrative staff, on the other hand, claim that it is only their harder work that prevents a decline in standards and that a further reduction in moneys earned per student would lead to an inevitable erosion of the service they could provide for students.

Assuming you were managing an educational establishment, assess these arguments in the context of your own establishment and answer the following:

(i) What are the fixed and what are the variable costs associated with your particular courses? Would the marginal costs be significantly different from the average cost?

(ii) Are there any significant economies of scale associated with courses with large number of students and large educational establishments?

(iii) If there were a further decline in the unit of resource, i.e, the money earned per student, should your establishment take on more or fewer students?

(b) Differentiate between perfect competition and monopolistic competition and explain how firms reach equilibrium in such markets in the short run. If the firm is loss-making in the short run, analyse whether it should close down immediately. [10 marks]

QUESTION 4
(a) Assume that two firms A and B are currently emitting 100 units of a pollutant each. Now assume that a standard is set, permitting them to emit only 50 units of pollutant each. If either firm emits less than 50 units, it will be given a credit for the difference. The credit can then be sold to other firm, allowing it to go over the 50 unit limit by the amount of the credit. Assume that the marginal cost of pollution reduction for firm A is £2000 per unit and for firm B is £1000 per unit, irrespective of the current level of emission.
(i) How many units of pollution will each firm emit after trade in credits between the two firms has taken place? Illustrate your calculations. [3 marks]
(ii) What can we say about the price at which the credit will be traded? Explain how you arrive at your answer.
(iii) What are the major components of cost and benefits that must be taken into account while deciding on whether to construct a new public hospital or not near any of these firms?
(b) How is the level of unemployment measured and what are the difficulties that are likely to arise while measuring unemployment?

QUESTION 5
(a) Differentiate between monetary policy, fiscal policy and supply-side policies of the government, using relevant examples or cases, analyse how changes in such policies are likely to
(i) benefit and
(ii) affect business organisations
(b) International trade is becoming more and more protectionist in nature, as countries are finding it more beneficial to group into trading blocs so as to protect their interests collectively. The experience of the European Union as a major trading bloc indicates the extent to which world trade is subject to such protection.

(i) Differentiate between the different types of trading blocs.
(ii) What are the major objectives behind protectionism? Use a diagram to illustrate this.
(iii) Using relevant examples, explain how protectionist measures in international trade tend to affect business organisations.

QUESTION 6

(a) Using relevant examples and the PEST analysis, analyse the factors which are likely to influence the internal and external business environment.
(b) Differentiate between a currency appreciation and a currency depreciation and using relevant examples, analyse how such fluctuations in the foreign exchange rates are likely to (i) benefit and
(ii) affect business organisations in your country.

Attachment:- Economic Environment of Business.rar