British University College

Higher Diploma in Business – Class A

Assessment Kit
BUSINESS ECONOMICS

Submitted To – Sir U Kyaw Myo Min

Submitted By – Group 8
Yoon Nu Eain
Ei Cho Paing
Kaung Thant
Shunn Lei Lei Kyaw

Submitted Date – 13.10.2023

Assignment - Essays
Table of Contents
Executive Summary.........................................................................................................................1

Introduction......................................................................................................................................2

Question 1........................................................................................................................................2

Question 2........................................................................................................................................5

a. Decreasing the interest rates.................................................................................................5

b. Increasing the interest rates..................................................................................................6

Question 3........................................................................................................................................7

Perfectly competitive firm...........................................................................................................7

Question 4........................................................................................................................................8

The economic problem of scarcity and resource allocation.........................................................8

Question 5........................................................................................................................................9

Health.........................................................................................................................................10

Education...................................................................................................................................10

Income........................................................................................................................................10

Conclusion.....................................................................................................................................11

References......................................................................................................................................11

Executive Summary
This research explores a monopolistic competitor's short-run cost and demand statistics. It begins
by figuring out the marginal cost and marginal revenue, which are crucial decision-making
indicators. The firm's output level, price, and overall profit are then determined. Examining
changes in demand, pricing, and profit, long-term effects are taken into account. Furthermore,
both decreasing and growing viewpoints on the influence of Central Bank interest rate
adjustments on supply and demand are covered. The examination explores the economic issues

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of scarcity and resource allocation as well as the reasons why fully competitive companies stick
to market pricing. Finally, it highlights the Human Development Index (HDI) as a more accurate
indicator of quality of life than real GDP per capita. As a result, decision-makers and regulators
will greatly benefit from this research's broad grasp of many economic ideas and their real-world
applications.

Introduction
Business economics is a branch of applied economics that focuses on the issues those
organisations, markets, and the environment present to enterprises. Business economics analyses
important company traits, such as firm organisation, management, expansion, and strategy, using
economic theory and quantitative techniques. The field of business economics has many
potential research areas, including the growth of businesses, the role of entrepreneurs, business
interactions, and the role of government regulation. Company economics focuses on economic
theories, strategies, traditional company practices, capital raising, profit-making, raising
productivity, and overall management strategy. Business economics also investigates how
outside economic factors, such as adjustments to industry laws or unexpected changes in the cost
of raw materials, influence business choices (Banton, 2019).

Question 1
Output Total Marginal Quantity Price (€) Total Marginal Profit (€)
(Q) Cost (€) Cost (€) Demanded Revenue Revenue
(€)
0 25 - 0 60 0 - 0
1 40 15 1 55 55 55 15
2 45 5 2 50 100 45 55
3 55 10 3 45 135 35 80
4 70 15 4 40 160 25 90
5 90 20 5 35 175 15 85
6 115 25 6 30 180 5 65
7 145 30 7 25 175 -5 30
8 180 35 8 20 160 -15 -20

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9 220 40 9 15 135 -25 -85
10 265 45 10 10 100 -35 -165
(a) According to economic theory, a unit's marginal cost is the difference in overall production
costs that arises from manufacturing or producing an extra unit. A marginal cost study seeks
to identify the point at which a business can experience economies of scale to improve
production and overall operations. In order for the manufacturer to turn a profit, the marginal
cost of producing one extra unit must be lower than the unit price (Tuovila, 2023a).

Change in Total Cost

Marginal Cost (MC) =
Change in Quantity

Output (Q) Total Cost (€) Marginal Cost (€)

0 25 -
1 40 40−25
=15
1−0
2 45 45−40
=5
2−1
3 55 55−45
=10
3−2
4 70 70−55
=15
4−3
5 90 90−70
=20
5−4
6 115 115−90
=25
6−5
7 145 145−115
=30
7−6
8 180 180−145
=35
8−7
9 220 220−180
=40
9−8
10 265 265−220
=45
10−9
For output 1, the total cost is 40, the change in total cost is 15, and therefore the marginal cost is
15.

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Marginal revenue is the extra money made from the sale of a further unit of output. While
marginal revenue may be constant above a certain level of output, the law of diminishing returns
dictates that it will eventually begin to decline as the output level rises. According to economic
theory, perfectly competitive businesses continue to produce goods and services until marginal
revenue and marginal cost are equal (Tuovila, 2023b).

Total Revenue ( TR ) = Price × Quantity

Change in Total Revenue

Marginal Revenue ( MR ) =
Change in Quantity Demand

Output (Q) Price (€) Total Revenue Calculation of Marginal

Marginal Revenue (€)
Revenue (€)
0 60 0 ×60=0 - -
1 55 1 ×55=55 55−0 55
1−0
2 50 2 ×50=100 100−55 45
2−1
3 45 3 × 45=135 135−100 35
3−2
4 40 4 × 40=160 160−135 25
4−3
5 35 5 ×35=175 175−160 15
5−4
6 30 6 ×30=180 180−175 5
6−5
7 25 7 ×25=175 175−180 -5
7−6
8 20 8 ×20=160 160−175 -15
8−7
9 15 9 ×15=135 135−160 -25
9−8
10 10 10 ×10=100 100−135 -35
10−9

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For output 1, the total revenue is 55 and the change in quantity demand is 1, therefore the
marginal revenue (MR) is 55.

(b) The table shows that the company's marginal cost function at that level is MC = 15 euros,
and its marginal revenue function is MR = 25 euros. The corporation can increase its profits
by working at the output level when MC = MR. In the short term, the company will produce
at the output level of Q = 4 units at a price of 40 euros per unit.
Thus, the company's entire profit is calculated using the following formula:
Total profit= ( Price-Average total cost ) ×Quantity
The average total cost is calculated using the method above by dividing the total cost by the
quantity. According to the data, it will cost 70 euros to make four units. As a result, the
average cost to produce 4 units is 70 euros, which is calculated as 17.5 euros per unit. Total
profit thus equals (40 euros minus 17.5 euros) * 4 units = 90 euros. Therefore, the company's
entire short-term profit is 90 euros.

(c) Long-term demand is elastic and inversely associated with marginal profit. Price changes
when elasticity causes a change in quantity demand. Overall sales rise when prices are lower,
eventually leading to a loss. Under monopolistic competition, the prices might be the same,
and other comparable products might be substituted, but the goods themselves might not be
the same. Demand can rise without prices going up, and long-term economic growth is
challenging to achieve. Demand declines with more competitors because it depends on an
equilibrium condition of zero. The corporation can anticipate that economic profit will likely
be realised when the demand curve slopes downward (Rita, Kim-Phuc and Sébastien, 2021).

Question 2
Through the acquisition or sale of assets on the open market, central banks frequently alter the
money supply while enforcing monetary policy. Open market operations have an impact on
short-term interest rates, which in turn affect longer-term rates and the status of the economy.
When central banks reduce interest rates, monetary policy becomes more lax. As interest rates
rise, monetary policy becomes more restrictive (INTERNATIONAL MONETARY FUND,
2023).

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a. Decreasing the interest rates
Economic activity changes based on what the Central Bank expect the adjustment to do to the
fund rate or discount rate. In times of poor or sluggish national economic growth, this is
sometimes used to lower the discount rate in an effort to reduce the cost of borrowing for
member banks. When a Central Bank needs to lower interest rates, its broad goals include
boosting borrowing, increasing spending, and stimulating economic activity. When banks can
borrow money from the Central Bank at a lower cost, they may pass those savings along to
customers by imposing lower interest rates on personal, auto, and home loans. Low interest rates
encourage an environment in the economy that is favourable to consumer borrowing, which
leads to a rise in consumer expenditure. Although a decrease in the discount rate favourably
affects interest rates for clients seeking bank loans, clients also notice a decrease in interest rates
on savings choices. Given this, long-term investing in secure financial vehicles, including money
market savings accounts or certificates of deposit, may be discouraged (Investopedia, 2019).

The Central Bank boosts the money supply that banks may lend by decreasing the reserve
requirements, which in turn causes a boost in the amount of money banks must maintain in
reserve and a fall in interest rates. Lower rates expand the money supply and stimulate the
economy. However, falling interest rates might increase inflation. Therefore, the Central Bank
must exercise caution to avoid maintaining interest rates at unsustainable levels for an extended
period of time. The Central Bank has the ability to purchase government securities on the open
market. It increases the amount of money by doing this and injecting that into the banking
system. Banks may offer more loans at cheaper interest rates as the money supply rises
(GALLANT, 2019).

b. Increasing the interest rates

When the economy is growing at a rate that might lead to hyperinflation, the Central Bank is able
to boost interest rates. If member banks cannot borrow from those at a profitable rate, lending to
the general public gets prohibited until interest rates are once again lowered. When this tactic is
employed, consumer spending decreases because higher discount rates directly impact the
interest rates that consumers pay on loans for commodities. Raising the discount rate makes
lending less desirable for both banks and consumers, but it increases the likelihood that people
will receive more alluring interest rates on low-risk savings options. In order to impede the

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economy's growth, a central bank will raise interest rates. Increasing interest rates will make
borrowing more expensive because loans now have higher interest rates. Because of this, using
credit to buy products and services is more expensive. The economy is going to slow down as
consumers cut back on their spending (Investopedia, 2019).

When reserve requirements are raised, banks are unable to lend as much money, which causes
the money supply to fall and interest rates to rise as a result. On the other hand, the Central Bank
has the option of publicly selling bonds. As a result, there is less money available, which causes
banks to be less able to lend money, which raises interest rates (GALLANT, 2019).

Question 3

Perfectly competitive firm

The ideal competitive economic model is one of market structure. Economists use it to study
how people behave in highly competitive markets where no buyer or seller has an edge over any
other buyer or seller, as well as the effects that result from this. Every participant in a market
with perfect competition makes ethical deals (Thomas, 2022).

Characteristics of perfect competition are

Homogeneous product: All vendors in a market with perfect competition provide the same items.
In other words, all companies in a market produce identical goods.

Free entry and exit: In this type of market, new enterprises ought to be able to freely enter the
industry or, eventually, leave it.

A high number of buyers and sellers: In an ideal competitive environment, there are a great
number of buyers and sellers. Each buyer only takes home a small portion of the market's supply
since there are so many buyers. Likewise, only a small portion of the overall output is provided
by a single source. A competitive firm is therefore relatively small in size compared to the
industry in which it operates.

No buyer's performance: In a very competitive market, no seller's goods are preferred by

customers. Because the products that each vendor sells are the same, customers can purchase the
item from any of them.

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Perfect knowledge: Both buyers and sellers are fully or perfectly aware of the market price at the
time of the transaction. Because of this, a market for goods that is totally competitive is limited
to having one price (S, 2017).

In the market, competitors' prices are higher than the costs of the products or services. This
strategy works best for companies that can benefit from economies of scale. Using lower pricing
points is another alternative for a loss-leader strategy. Companies entering a market for the first
time frequently employ a loss-leader approach. It entails pricing goods or services at a lower
level that is not lucrative but draws in new clients or enables a business to sell those customers
more expensive, more profitable goods or services (PROS, 2023).

Being forced to accept the market's current equilibrium price by competing businesses is what is
meant when a company operates in a setting of perfect competition and is referred to as a price
taker. If a business in a highly competitive market raises the price of its products by even a
penny, it runs the risk of losing all of its sales (Academy, 2023).

A business operating in an environment of perfect competition is not permitted to set its prices
above or below what the market would take. Firms in perfect competition are compelled to
produce at a level where their marginal cost equals the market price by the principles of profit
maximisation, fierce rivalry, and market equilibrium. Any variation from this pricing would have
undesired effects, such as lost sales, a smaller market share, or an ineffective use of resources.
Thus, in a fully competitive market, supply and demand naturally decide prices, and businesses
operate as price takers to ensure that they do not charge more or less than the going rate.

Question 4

The economic problem of scarcity and resource allocation

Scarcity is a fundamental concept in economics that affects consumer choices and the value of
goods and services. It arises from the limited availability of resources and can restrict consumer
options. Scarcity is a crucial factor in economic models and can lead to some people being
unable to afford certain items or services. It can also be intentionally created, as with
governments controlling the production of money, which, when excessive, can lead to inflation
and reduced purchasing power. While some inflation can benefit an economy by increasing

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spending, excessive inflation is generally detrimental, emphasising the importance of managing a
nation's money supply (National Geographic Society, 2022).

The top three economics-related issues are as follows: First, decide what to create: The
distribution of scarce resources must take into account the composition of the economy's overall
output. The second is production strategy, namely choosing between employing capital- or
labour-intensive manufacturing techniques. The final query, "for whom to produce," concerns
the distribution of the nation's resources among its citizens.

Resource allocation is a dynamic process that adjusts constantly to the environment, including
shifts in consumer preferences, technical developments, and variations in resource availability. A
key purpose of economics is the efficient and equitable distribution of resources, and finding the
appropriate balance between these goals might differ depending on the economic structure and
societal values of a given area or nation.

The distribution of resources is primarily divided into two categories: continuous and one-time.

Continuous: It needs to continuously use the required resources. Financial resources, for
instance, are frequently needed in order to run the business.

One-time: It suggests that a process's resource allocation and utilisation are both one-time events.
In order for a company to operate, for instance, technology and equipment need to be purchased
only once; additional purchases are not required daily. It is a one-time allotment as a result.

The need for prudent resource management is mostly brought on by shortages. The core of the
economic problem of scarcity is the disparity between scarce resources and customers'
potentially boundless requirements and wants. Time and money are two important instances of
scarce resources. A majority of people are either lacking in one, the other, or both (Vaia, 2023).

Question 5
The Human Development Index (HDI), a statistic used by the United Nations to evaluate the
levels of economic and social growth in various countries, was developed and compiled in 1990.
The average number of years spent in education, the anticipated number of years spent in high
school, the median age at birth, and the gross national income (GNI) per capita make up this

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indicator. An overview gauge of basic human development accomplishment levels is the HDI.
The average of the indices for every one of the life variables taken into account—knowledge and
understanding, leading a life of good health and longevity, and having a standard of living that is
deemed to be acceptable—is used to compute a country's HDI.

Health
The health component of the HDI is created using the life expectancy determined at birth in each
nation. This component is normalised so that it is equal to 1 at age 85 and 0 at age 20,
respectively.

Education
To measure education on two separate levels, the expected years of schooling for a kid at the
normal age for starting school as well as the average years of education for inhabitants of a
nation are utilized. Each of them is then normalised, resulting in the 15 average years of
schooling and the eighteen years of predicted education being equal to one.

Income
The purchasing power parity (PPP)-based gross national income (GNI) per capita, a widely used
indicator of average income, was chosen as the economic indicator to represent the quality of
life. The standard of living is normalised to be equal to 1 when the GNI per capita exceeds
$75,000 and to 0 when it reaches $100 (Chappelow, 2020).

Human development is given more attention by the HDI than by the GDP. In addition to a
nation's capability for production, it also takes into account the general quality of life there. It is
believed that a nation's education and healthcare are just as important as its economic strength.
GDP is seen as a means, not an end, in the interest of advancing humanity. One of the factors
used to determine the Human Development Index is GNI per capita, or, to put it another way, the
purchasing power of the ordinary individual. In contrast to GDP, the Human Development Index
offers a more comprehensive picture of a country. For instance, the HDIs of countries with
comparable GDPs may differ significantly. When two nations' HDIs are out of whack while
having comparable GDPs, it can be used by policymakers to pinpoint pressing domestic
problems like poor health or education.

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Economists analyse a country's prosperity based on its economic development using the GDP per
capita, a worldwide indicator of a country's level of wealth. It is unable to determine how money
is being spent, whether on healthcare, military equipment, or education (Jordan, 2017).

Conclusion
In conclusion, studying short-run cost and demand data enables a monopolistic rival to make
well-informed choices regarding price and output levels. Businesses may optimise their output to
increase profits by estimating marginal costs and marginal income. Firms produce when
marginal cost equals marginal income in the near run, setting the production level and price.
Long-term changes in demand, price, and profit depend on market dynamics, with new rivals
joining if there is a profit and leaving if there is a loss. When central banks change interest rates,
lowering rates encourage borrowing and spending, potentially raising prices, while raising rates
restrain spending, thus reducing demand and raising prices. Being price takers, perfectly
competitive enterprises are unable to depart from the market price, maintaining equilibrium.
Economic systems must be constructed to address the economic issue of resource scarcity. In
addition, the Human Development Index (HDI) offers a more comprehensive indicator of
wellbeing than actual GDP per capita, taking into account variables like life expectancy and
education.

Word Count – 2,797

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