Questions 3

A) Define business economics - 3 marks

Study of business decision making through applying economic theories in the following
areas, since resources that firms have are limited. Production decisions, Financial decisions,
human resource related decisions and distribution decisions.Business economics is a field of
applied economics that studies the financial, organizational, market-related, and environmental
issues faced by corporations.

B) Factor production factors - 5marks

Land - Water, trees, (naturally available substances)
Labour - Physical and intellectual manpower
Capital - Tools, machinery, factories, (things used to make other things)
Entrepreneurship - Investing time, resources, labor, capital

C) Elements in the Microeconomics framework (explain product pricing/ factor pricing /

theory of economic welfare) - 7 marks
Microeconomics studies economic actions and behaviour of individual units and small
groups of individual units.
Product pricing
- Theory of demand
- Theory of production and cost
Theory of distribution (factor pricing)
- Wages
- Rent
- Interest
- Profits
Theory of economic welfare

D) Circular flow of income (economic agents)

Describes how money is exchanged in the process of production, distribution and
consumption of goods and services, in a circular manner, from producer to consumer back to
producer.

E) market structures ( characteristics of monopolistic competition 4 characteristics)

Additional info
Characteristics of business economics
Applied economics
Micro in nature
Normative in nature
Pragmatic in approach
Study of allocation of resources
 Conduct macroanalysis throughout political, economical, social, technological, ecological
and legal environments

Three parts to production process

Factors of production
Producer
Consumer
Question 4

A) Capitalist economic system( 5 characteristics for free market /

Market economic system is referred to as capitalism and “hands off economics”.
Producers make goods based on the demand for them, consumers pay for the goods based on
the supply.

Characteristics
Productivity results in personal wealth
Limited involvement of government
Economy based on supply and demand
Businesses and industries owned by individuals/companies
Wide variety of choices and products
Individual freedom and choice emphasized
Drawbacks
Results in unequal societies. Many poor people and few wealthy people.
Encourage free trade. Large companies exploit laborers, lesser developed nations
Result in economic monopolies - stops competition and results in higher prices

B) Factors that determine demand curve shift right and left & theory of demand
Other factors cause supply curve to shift right and left

Shifts caused by
- Consumer income: for normal good income inc, demand inc.
: for inferior good income inc, demand dec
- Prices of related goods
: complements - fall in price of good1, increases demand of good2
: substitutes - fall in price of good1, reduces demand of good2
- Tastes
- Expectations (about future prices)
- Number of buyers

C) Law of demand ( underlying reasons sn under law of demand/ why there is inverse
relation slide 4 (income effect and substitution effect)
The quantity demanded of a good falls when the price of the good rises and vice versa,
provided that all other factors affecting buyers decisions are unchanged.
1. Substitution effect
Price of good inc, consumer substitute good (coke price dec, pepsi consumption dec,
coke consumption inc)
2. Income effect
Decrease in price of commodity equivalent to inc. in consumer income
Consumer responds as an income increase
Increase consumption of wider range of goods (including good with reduced price)
D) Illustrate cross elasticity calculation demand (benefits org can gain from examining it
- Elasticity seeks to measure strengths of various effects (eg: price of good on consumer
demand, price of raw materials on quantity of goods supplied)
- Cross elasticity of demand (CPed) measures responsiveness of demand for goodX
following change of price of goodY(related good).

Items under cross structure

Theory of production
Defined as transformation of factors into goods
- Total physical product(TPP) = f(K,L)
Where K- Capital, L- Labour
- Average Physical Product = TPP/Q
- Marginal Physical Product = Change in TPP / Change in Q

E) How to calculate total cost ( variable + fixed + explicit)

- Market value of all inputs(resources) used in production

Average cost
- Average fixed cost (AFC) = Fixed cost (FC) / Quantity
- Average variable cost (AVC) = Variable cost (VC) / Quantity
- Average total cost (ATC) = Total cost (TC) / Quantity
TC = FC + VC
ATC = AFC + AVC

Marginal cost
- MC = Change in total cost / Change in quantity

Opportunity cost
Question 5 macroeconomic

A) Unemployment ( types) explain 3 - 6 marks

Three types of unemployment - seasonal - cyclical

- structural
- frictional

Seasonal –Regular seasonal changes in employment / labour demand

Cyclical - Cyclical unemployment occurs with changes in economic activity over the
business cycle. Economists describe cyclical unemployment as the result of businesses not
having enough demand for labor to employ all those who are looking for work at that point within
the business cycle.

Structural - Structural unemployment occurs when there is a mismatch between the jobs that
are available and the people looking for work. This mismatch could be because jobseekers don’t
have the skills required to do the available jobs, or because the available jobs are a long way
from the jobseekers. 2) Structural unemployment is long-lasting unemployment that comes
about due to shifts in an economy. This type of unemployment happens because though jobs
are available, there's a mismatch between what companies need and what available workers
offer.
Frictional - Frictional unemployment occurs when people move between jobs in the labour
market, as well as when people transition into and out of the labour force. 2) Frictional
unemployment is the result of voluntary employment transitions within an economy. Frictional
unemployment naturally occurs, even in a growing, stable economy. Workers choosing to leave
their jobs in search of new ones and workers entering the workforce for the first time constitute
frictional unemployment.

B) Supply side policies ( trading innovations) & Demand side policies - 4marks

Demand side policies ( to reduce cyclical employment)-

–Lower interest rates (a monetary policy stimulus)

–A lower exchange rate (helps exporters)
–Lower direct taxes (fiscal stimulus to spending power)
–Government spending on major capital projects (e.g. improving the transport infrastructure)
–Employment subsidies (including the New Deal programme) – designed to reduce the cost to a
business of employing additional workers
–Incentives to encourage flows of foreign investment in SL – particularly in areas of above
average unemployment
Supply side policies ( to reduce structural and frictional unemployment ) -

–Increased spending on education & training including an emphasis on “lifetime-learning”)

–Improved flows of information on job vacancies
–Changes to tax and benefits to improve incentives
–Measures designed to make the labour market more flexible so that workers have the skills
and education that gives them improved employment options.

C) illustrate the following concepts - 6 marks

1. Circular flow of income diagrams

The circular flow of income or circular flow is a model of the economy in which the major
exchanges are represented as flows of money, goods and services, etc. between economic
agents
2. Diff between GDP and GNP

a) GDP is the value of output produced by factors of production located within a

country and GNP (Gross National Product) is the output produced by a country’s
citizens, regardless of where the output is produced.

b) Gross National Product (GNP) measures the final value of output or expenditure
by SL owned factors of production whether they are located in the SL or
overseas or GNP measures the value of output produced by domestic factors of
production, regardless of whether the production takes place inside Sri Lanka
borders. GDP measures the value of output produced within the domestic
boundaries of Sri Lanka and GDP includes the output of the foreign owned firms
with production plants located in Sri Lanka.

3. Business cycle ( explain /how gov will react when there is boom or trough or peak/
contractionary policy /expansionary policy)

Incase a boom or peak -

The budget deficit tends to decrease during booms, which pulls back on aggregate
demand. Therefore, automatic stabilizers tend to reduce the size of the fluctuations in a
country's GDP.

Contractionary policy - A form of fiscal policy in which :

- a decrease in government purchases (Governments engage in contractionary
fiscal policy by raising taxes or reducing government spending)
- an increase in taxes, and/or a decrease in transfer payments are used to correct
the inflationary problems of a business-cycle expansion
- The goal of contractionary fiscal policy is to close an inflationary gap, restrain the
economy, and decrease the inflation rate.

Expansionary policy -

Expansionary fiscal policy is when the government increases the money supply in the
economy using budgetary instruments to either raise spending or cut taxes—both having
more money to invest for customers and companies.
- an increase in government purchases
- a decrease in taxes
- an increase in transfer payments are used to correct the problems of a
business-cycle contraction (Eg :Samurdi)
- The goal of expansionary fiscal policy is to close a recessionary gap, stimulate
the economy, and decrease the unemployment rate.
4. Fiscal policy

Fiscal policy is the use of government spending and taxation to influence the economy.
Governments typically use fiscal policy to promote strong and sustainable growth and
reduce poverty.
The Goal of Stabilization:
- Influence the amount spent and produced in an economy
- Meant to meet potential output
- To have less movements in the business cycle

Two Policies : Expansionary Policies and Contractionary Policies are used to control
output.

5. Monetary policy ( open market ops / effect on money supply on buying and
selling)

Monetary policy -

Attempts to influence the level of economic activity (the amount of buying and selling in
the economy) through changes to the amount of money in circulation and the price of
money – short-term interest rates.
Monetary policy is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy
used by the government of a country to achieve macroeconomic objectives like inflation,
consumption, growth and liquidity.

(Interest rates the key area of Monetary Policy)

Open Market Operations (OMO) -

1) An open market operation (OMO) is an activity by a central bank to give (or take)
liquidity in its currency to (or from) a bank or a group of banks.
2) Open market operations -the purchase and sale of securities in the open market
by a central bank--are a key tool used by the Federal Reserve in the
implementation of monetary policy.

Effect on money supply on buying and selling -

Monetary policy impacts the money supply in an economy, which influences interest
rates and the inflation rate. It also impacts business expansion, net exports,
 employment, the cost of debt, and the relative cost of consumption versus saving—all of
which directly or indirectly impact aggregate demand.

D) Explain Phillip's curve - 4 marks

It is a historical inverse relationship between the rate of unemployment and the rate of inflation
in an economy. The theory claims that with economic growth comes inflation, which in turn
should lead to more jobs and less unemployment.
Phillips curve, graphic representation of the economic relationship between the rate of
unemployment (or the rate of change of unemployment) and the rate of change of money
wages.

The lower the unemployment in an economy, the higher the rate of inflation

E) recognize reasons behind scenarios where GDP increase and unemployment is

high..this is the opposite normally.. If automated production is there this happens
- 5 marks

Additional to this
There will be a statement to explain (carried out 5marks)