Price elasticity income elasticity and cross elasticity

Price pliantity income e dyingicity and cross elasticity rationalize the concept of elasticity of command and discuss the factors that subside elasticity of occupy. Distinguish amongst bell elasticity, income elasticity and cross elasticity of train and evaluate on their importance especially to businessmen.Solutions to Question 22.1 Concept of Elasticity of DemandElasticity is a term that was initially developed by known economical scholar called Alfred Marshall, and has been since used in measuring the relationship that exists between ware price and its quantity conveyed. It typically fol lowed the law of convey that states that the lower the price of goods and returns, the high the quantity that go forth be shooted of much(prenominal) goods and services i.e. it primarily explains only the developed directions of turns in the beg for the trade good, but not really explaining the extent of that swop. A further growth on these lapses led to the concept of elasti city of gather ups.In practical term, elasticity means the act of responsiveness. Mean spot, elasticity of convey has been theoretically defined as the responsiveness of the actual quantity demanded of a product to the change in its actual price. E.K. Estham argued further that elasticity of demand could be defined as the measure of the degree of responsiveness of the quantity demanded to any small change in its price.This measure of the degree of responsiveness of the actual quantity demanded of a product to any changes in its price can be calculated with the use of the formula on a lower floorA good diagram to represent the launch down(prenominal) sloping curve of elasticity of demand could be seen as the incremental changes that are caused in the quantity that is demanded along the x axis, notably going in the opposite directions that are relative to these changes in the commodity price along the y axis. Below is figure 1 that aptly depicts the degree of responsiveness of de mand delinquent to changes in prices of the commodityThus, vivid observations of the above elasticity of demand complement the simple mathematical presentations of the elasticity of demand as presented above. Notably, the elasticity of demand is commonly expressed as Ed. Diagram 1 above indicates that depending on the actual responsiveness to any changes in prices of commodity, elasticity of demand could be all elastic or inelastic as seen described through the angles of the above demand curves. Importantly, economist swallow argued that the flatter these curves, the more(prenominal)(prenominal) elastic is the price of the commodity, interim steeper curves entrust mean the more the price is inelastic.2.2 Factors that determine elasticity of demandBelow are the of the essence(p) factors that directly or indirectly play the degree of demand to any small change in price1. Nature of the commodityElasticity has been argued has primarily depending on if the actual commodity to be demanded is a basic necessity, a comfort or a luxury. This is because goods that fall under the basic necessities of life have been categorized as having inelastic demand, patch those comforts and luxuries goods are categorized under the elastic demand.2. Availability of the substitutes of goods or servicesGoods or services with available substitutes have been theoretically and practically argued and established as having elastic demand and those goods and services that are without available substitutes normally have inelastic demand. Good examples of these goods are coffee and tea that serve as substitutes to each other. They are substitutes because a change in the price of tea might make people to switch over to buying coffee. Alternatively, an change magnitude in the price of coffee may also make people shift to buying tea. But a good example of inelastic good is common salt because it has no substitute.3. Uses and/or applications of the goods or servicesThe usage of goods or services may affect its elasticity either elastic or inelastic. Good example is electricity, any decrease in its price provide eventually led to consumers ability to make more use and further establishing electricity as having elastic demand curve.4. Consumers proportion of the income that is spent on the commodityPractically we have noticed that the consumers can spend only a very small constituent of its income in buying such goods. Good example is salt and matches that normally take a very small percentage of consumers income, qualification them having inelastic demand curve.5. The prices of goodsGenerally speaking, cheap goods and services normally have inelastic demand curve, while the expensive goods normally have elastic demand curve.6. Income of the consumersScholarly arguments have steern that the rich or high income earners normally have inelastic demand curves for their goods and services, while the poor or lower income earners normally have elastic demand curve. Thi s is because he rich and high income earners willing buy the goods and services at every levels of its prices, whereas the poor or lower income earners tends to change along the quantity of their consumptions due to changes in price.7. Time pointEvidence has shown that elasticity of demand would better occur in the long run employment of the goods or services than at the short run. This is primarily because in the long run production and supply actes, the consumers could adjust to their individual demands by switching or trying cheaper substitutes. labor severalize has shown that productions of the cheaper substitutes are only possible only at the long run operational processes.8. Income and Wealth Distribution in the societyThe presence of unequal distributions of the content income would the demand for the goods and services to be relatively inelastic. Most advance countries that allow even distributions of their income and wealth will make possible elastic demand for its c ommodity.2.3 Differences between price elasticity, income elasticity and cross elasticity of demandBelow are the three types of elasticity-Price elasticityIncome elasticity is further divided into 3 i.e. Zero income elasticity of demand, Negative income elasticity of demand and Positive income elasticity of demand.Cross elasticity1. Price Elasticity of demandPrice elasticity of demand has been defined as the actual degree of responsiveness of the quantity that is demanded of a good or services in response to the changes in its actual price i.e. price elasticity of demand primarily measures how much of a change in actual price of any good that affects the demand for these goods or services, departure all other factors to be constant. To calculate price elasticity, there is need to divide the proportionate of change in the quantity that is demanded by the proportion of change in the price.EP= parting change in the quantity demandedPercentage change in the price2. Income elasticity Income elasticity of demand has been argued as measuring how much of a change in consumers income that affects the demand for such goods or services if its price and all other factors remained constant. Below is the formula for calculating income elasticity of demandEY= Percentage change in the quantity demandedPercentage change in the incomeAs divided into three, Zero income elasticity shows that a change in the consumers income will have no significant effect on the quantity that is demanded of such goods. Good examples are salts, matches and cigarettes. Next is negative income elasticity that shows that an increase in the incomes of consumers will air current to the decrease in the quantity that is demanded of such goods. This positioning mostly occurs in inferior goods. Last is positive income elasticity that means an increase in the incomes of consumers will lead to the increase in quantity that is demanded of such goods.3. Cross elasticityCross elasticity of demand measures the actual change in the demand for commodity A due to the change in the price of commodity B.ED= Percentage change in the quantity that is demanded of commodity APercentage change in the price of commodity BThe above formula indicates that if the goods or services that have substitutes and cross elasticity are positive i.e. as above any increase in price of commodity X will finally conduce in the increase in sales of commodity Y.2.4 Importance Elasticity of Demand to businessmen.As evident above, the concept of elasticity of demand has been playing a vital role in the decision making processes of the business world, especially as it relate to fixing commodity prices with the aim of making larger profits. Good example is if the cost of production tends to be change magnitude the company will want to pass this rising cost to the consumers through raising the price of the commodity. Practical examples have also shown that near companies do change their commodity price even without any visible change in the actual cost of their productions. But practically, whether the raising price is following any meet up in the cost of production or otherwise has proved to be honest depends on the following steadsThe actual price elasticity of the demand for such goods or ser product, i.e. the percentage change is subject to how high or low the proportionate changes in its actual demand relate to the percentage change in commodity price.The price elasticity of the demand is also very relevant for business in determining the value of their substitute, this is because when the commodity price increases the actual demand for the product substitutes also increases automatically even if the products prices generally remained unchanged.Businessmen are also able to know that increase the price of their goods would only be beneficial ifThe demand for their products is less elasticThe demand for their products substitutes is also much less elastic.Finally, the usefulness of elas ticity of demand also stands in its ability established the essential quantitative relationships that exist between the quantity demanded of a product and its price or any other determinants of demand.Question 4 Discuss both(prenominal) of the characteristics of the Malaysian sparing. Discuss some of its weaknesses and suggest some appropriate policy proposals to strengthen the frugality in fix up to enable it to become a developed economy by 2020.Solution to Question 44.1 Characteristics of the Malaysian economy.Malaysia is one of the countries located in the Southeastern Asia. The detonator is called Kuala Lumpur. Malaysia comprised of two parts, one part is the Peninsular Malaysia and while the other is the East Malaysia which is called Malaysian Borneo. The Peninsular part has 11 states while the East Malaysia comprises of 2 states. Malaysian economy clay is an open economy system the economic involves domestic community and the international community. more so the econo my is a state oriented market economy. The rural has a fast developing economy. The economy was class-conscious 3rd largest among the south East Asian countries in 2007. Where Malaysia suited is a great advantage for its foreign trade.Malaysia GDPThe Gross house servant Product of Malaysia depends solely on its pastoral, manufacturing industries and the service firmaments.The agricultural firmament contributed 9.7 % to the country GDP in 2007. Also in the area of manufacturing industries it contributed 44.6% to the country and t of service sector contributed 45.7 % as well to the GDP. For the PPP (Purchasing Power Parity), the country is ranked 29th in the world. They have GDP growth rate of 20 % and it was realised towards the end of 20th century. In 2009 GDP of Malaysia was estimated US$ 207,400 billion PPP was calculated to be $ 3.9 billion.Malaysia Natural ResourcesMalaysia is rich natural resource, manage agriculture, minerals and forestry. Most agricultural plant resou rces of Malaysia are rubber, pine apple, palm oil tobacco etc. The countrys economy In the area of Forestry, the loggings contributed a larger heart and soul to the countrys economy. More so, in the plantation area is timber, rubber plant and palm tree. When we talk of minerals resources, Malaysia is a rich deposit of minerals like tin and petroleum.Sectors of Malaysia EconomyMalaysian IndustriesMining Industry Malaysian EconomyMalaysia mining industry has contributed a lot to the economy through the export of mine products. The most important ones are oil, gas and tin. Malaysia was ranked has the worlds largest producer of tin in 1980. The sea transportation was easy because the mine is located in location of the mines in the peninsular Malaysia. Crude oil production and natural gas has increased to a higher level over the last few years. In 1999, the overall production of petroleum reached 693,000 barrels. Production of melted natural gas was estimated to be 3.8 billion cubic fe et. There are major oil refiners in MalaysiaManufacturing Industry Malaysian EconomyIn Malaysia there are many developed manufacturing industries. The manufacturing industries of Malaysia are, electronics manufacturing industries, furniture manufacturing industries and Food processing industries etc. In the sector of manufacturing, the country is ranked in the 23rd localization in the world countries.Malaysian ServicesMalaysian Tourism Malaysian EconomyMalaysia in the sector of touristry was ranking the 9th position in the world. The common tourism locations in Malaysia are Kuala Lumpur, Sabah, Perlis, Malacca, Terengganu etcBanking and FinanceThe bank Negara Malaysia is in charge of finance sector. Master Plan was introduced in 2001 after the 1999 financial crisis and this gave more room for to Moslem banking. May Bank is said to be the largest bank in Asia Pacific that practice Islamic Banking. However Malaysian brass plan to give licensure to more sectors by the end of 2010 to improve the opportunities of Islamic Banking.4.2 Some Weaknesses in Malaysian economy.4.2.1 Political WeaknessIn Malaysia Malay half of the population holds the constitutionally position in society, and this a kind of discrimination among the three race, this is not only in jobs but in wealth as well. Controversial Internal security measure Act (ISA), give room for detention without trial, has been abuse by the organisation on many occasions with intention of quelling unrest. More so, some of the detentions brass used it to oppress the regime opposition.BMI Political Risk RatingsThe Malaysias short-term policy-making risk range (STPR) of 80.2 shows higher compared to other regional country like Indonesia, Philippines and Thailand. As the opposition to Pakatan Rakyat eer challenges the BN coalition being witnessed in the defeat of the 2010 budget bill in parliament in 2009, the people thought that general political perceptual constancy will be maintained. However, it is en courage that Malaysia was able to maintain a peaceful political environment, but this all depend on Prime minister of religion Najib Razaks his straight to encourage unity in the nation with diverse ethnicity and faiths.4.2.2 frugal WeaknessMalaysias is becoming importer of oil in the next few years, Malaysia Economic bleakness will be as much of a burden as a benefit, because of it confirmations of a high level of vulnerability to global growth and capital flows. The taxes collected on oil contribute over 40% of the states revenues despite the fact that it was expected to become a net oil importer by the send-off of 2011. Because the government had difficult in having alternative income, this will make hard for the governments function perfectly and maintain economic development, which is potentially leading to stagnate economy.BMI Economic Risk RatingsIn the previous quarterly report Malaysias STER rating has being declining to be 73.5. And still Malaysia is still in the respe ctable V-shaped recovery of 4.1% now the 2009.The actual GDP growth is1.7%), never the less Malaysia is exposed to a Chinese double-dip slowdown, most especially if Beijing was unable to diffuse the satisfactorily recent airplane propeller bubble in the near future. Malaysia in addition, has a huge fiscal shortage that is over 7% of GDP in the year 2009 and this has bring the LTER rating down to 72.6.4.2.3 Business Environment WeaknessThe country will keep price subsidization will a peripheral and it has become part of the economy system or economy life of Malaysia. Some of the big construction project and contract for foreign firm are all under the earth of formal Prime Minister Mahathir Mohamed so they are not directly connected to the government. In order words engaging in businesses in the country will always mean doing businesses with the politically connected people.BMI Business Environment Risk RatingsFurthermore, in (BER) Business Environment Rating Malaysia scores over fairish which is 63.4 but the score was dragged down because of the comparatively low score of 55.3 for the Infrastructure subcomponent like public transportation, mean while, in 2009 a reduction in the amount of red tape boosted the Institutions subcomponent to a score of 66.9 from 59.4.4.3 Some policy proposals to strengthen Malaysian economy.There is a recommendation policy which moldiness be followed accompany with this, is other improvements in the economy.Firstly there should be huge notification should be on diversification. Most of the Malaysias export markets focused on technology sector and electronics which are vulnerable to global slumps in demand, mostly the US, the US are major exporter of Malaysian goods. Opening trade of a country economy is an important factor to decide a kind of exchange rate system that is desirable. If any country relies on trade, the unbending exchange rates provide stability in the market economy. Anyway, when having the exchange rate fixed d oes not mean the economy will remain competitive in foreign trade when some other countries are faced with inflation. Never the less it firmness of purposeed to the second element, the inflation rates.The inflation rate of the trade partner is relevant factor so as the inflation of domestic inflation with the fixed rate in order words the approach is not straightforward. So it is better for the country to remain with the fixed rate to avoid inflation tendency in the economy. Another recommendation is labor market flexibility which is used to determine which exchange is better in a given period of time. In this respect if there is flexibility in the labor market, the fixed exchange system work better. There must be flexible labor market and flexible exchange rate in order to avoid unemployment because of the output shock.Further more, the degree of financial development of the country is important. So when a country seems to be financially underdeveloped, fixed exchange rate is bett er to avoid urge effects of foreign speculation. finally is how to decide on which exchange rate system is better, and the mobility of capital. Mean while, it is better for exchange rate to be flexible when the capital mobility is high. Observation, Malaysias decision in pegging its funds to the dollar seems adequate. With solid financial institutions and credible policymakers, it would be adequate, as well transforming to a flexible exchange rate system.Concludsivly, easing the changings Malaysia will have to persistently implement consistent macroeconomic policies so as to maintain financial stability and sustainable fiscal and external positions.Question 7 Elaborate what you deduce by dearth backing. What are its limitation as an instrument of economic development. Assuming that you are the economic advisor to the prime minister and he/she invite for your recommendations to eliminate a federal deficit, what would you recommend?Solution to Question 77.1 Elaborate what you und erstand by deficit overcompensate.What do we mean by deficit financing this is a strategy or ways to management of money which when spending is more than collected at the same period of time. In order words this is referred to budget deficit, this approach is used in business that is small, household budgets, in corporations and also in, governments sector mostly in all the level. If deficit financing is used in the right way it will help to launch a chain of the event and this will help in financing situation instead of any debt may cause problem or difficult to pay. Mostly common or know example of government deficit financing is how the government stimulate the economy of that country or nation to put a stop to any recession that country is facing. The government has a forwardness aside a plan which will involved using borrow resources to purchase, the government can use different strategy like increasing demand output for product in all business sector of that nation. It also helps in the motivation of many business in order for them to hire more employees and it will reduced the level of unemployment in the country during the period of recession. Further more, the consumer confidence and trust will be restored in the market place because of the just transformation, and these make it safe for the buyer to buy more goods and services. If the economy of a country in closely looked into and the deficit financing is carefully monitored, it will bring back economy stability in the country over short period of time like few month or few years. famine spending in economic does not only occurred in the government sector only but also in all business as well A company may plan to spend a certain amount of money as a kind of upfront sentiment that they will be able to generate the fund back for investment .An investor or company owner may decide to buy a saucily machine for the company production with the hope that a new machine will hasten and make the produc tion of goods in a less period of time with larger unit of goods, and with less cost. This kind of idea or strategy in business help the business to flourish and the manufacturer will be able to pay off his debt and have budget surplus instead of deficit, the owner of the business will be debt free and enjoy the surplus.7.2 The limitations of famine financing being an instrument of economic development.In any given economy, the government normally embarked many projects that assisted it in generating the desired economy outputs both(prenominal) in investment and other capital projects. If the government prints more money out it will cause inflation in that economy and this situation normally affected the poor people in that society. The rich will be richer and the poor will be poorer. The buyer straight will be bring down to greater level and the businessmen profit margin will increase. In any society there is always the people that have and those who do not have so any increase made in price domestics goods leads to importation of cheap goods and the domestic goods high price will reduced the export. This in turn leads to adverse in balance of payments. Never the less this will affect the cost of the production because the raw material used in process of production has being increased, so the goods will be increased as well, perhaps it will definitely reflect on foreign investment, it will be less draw outed by other country. Good example is figure 3 below that aptly depict government spending in OECD countriesSource OECD (2010).Listed below are the disadvantages of deficit financing and some other cogent reasons to be alert about a National debt.The interest PaymentIn a society people do not lend to the government with the charity. Government must pay interest on every debt they are involved in just like any one in the society, it was recorded that last year government spent the sum of 31 billon on interest payments alone. smell at this in a perspective manner it will equate to 15 p on income tax. This amount is more than what UK spends on National Defense. The government borrowing for the year 2007/08 going to be 42 billion same amount the government pays in interest.The Crowding Out effectsThe government debt always affect the private sector because they sell bond to the private sector in order for the government to borrow money and this in turn lead to less private investment because the government has bombard them with the bonds. Also the private spending is more efficient than the government level of spending because the government result to inefficient spending .this is what we called crowing out, the private investor is crowded out with government bonds because the government needs to borrowThe financial displace outThe financial crowding out is when the government want to borrow large sum of money and they tried to increase the interest rate on bonds in order to attract many lender. The bonds rate is increased this will d efinitely put pressure on the interest rate generally, in order words this increase in the interest rate will affect the economy of that country because people will reduced their way of spending, investment level will be low and later run the economy growth will be low.The tax rises for the future.The tax rises for the future look into how the public sector debt is being paid. Any increasing public sector debts indicated that the future taxpayer will be the one to bear the burden by paying the bill. No matter the situation of the public sector debt reduced or not, the future taxpayer will be the one to pay the interest on the debts. Further this will a problem because, has it was mentioned above, changing of demographics show that government finances is usually placed under pressure, though without borrowing from at that moment of time.Limits Fiscal PolicyIn a normal situation the government should be able expand the fiscal policy in a situation where the economy is facing problem o r recession. When a government has urge public debt they tried to reduced the scope by lowering tax in order to enhance demand. Then government must increase taxes and cut their spending in order to meet up with the budget .this is advisable because of the existing problems in the market economy.7.3 Suggested recommendations to eliminate a federal deficitIn summary, I like to recommend these three-step formulas for prosperity1) Elimination of federal taxes.It will good to cancel government taxes because when the citizen gives money to the government is just like throwing coals to Newcastle. Government is the maker of money, they are the producer that has no limitation to their production. . When the citizen sends taxes to the government, they just used it to pay debt. When you send your tax money to the government, the government simply uses it to pay down debt. When paying down debt it destroys the economy money in a given society. In order words taxes damaged money in the society. More so, the federal tax system is a waste of resources, it will be good if the government can spend the billions of dollars spent on compliance on production of useful goods for citizen and this will ease the problem of the economy and the people. The first suggested tax that should be eliminated is the Medicare taxes and Social Security taxes. These will be politically fashionable also regressive taxes directly impact businesses on low and the middle income people. That politician that ends FICA will becomes a hero.This will give federal government the prospect to create money to support retirement and health care sector.2) Elimination of federal borrowing.Government being a producer of money, an established government will not need to borrow money. These are inefficient they are harmful, the exercise which provides no economic benefit. The Federal government borrowing provides semantic impression that government is in debt, and people it find repugnant.If there no borrowing the re would not be debt.3) Establishing a national, money-supply goal.It is good to organize a sexual intercourse, a congress that will look into the checking vizor called money created, They will add money to this account when needed. They will write checks and make a kind of transfers from the Money Created account in payment for all goods and services.This will be the suggested system for federal money creation in our economy. The congress will be the one to determine on how much money to be added to the Money Created account, however giving Congress power over money creation. Thus, the Federal will stick to master the interest rates and inflation. The congress will spend what is necessary on retirement, the military health care, crime prevention, education, the infrastructure, and other national needs.The country will be free the tyranny of semantics and the problem of federal debt. This society prosper has rapid growth in their economy.Question 8 What are the constraints norma lly countries face in achieving a sustainable economic growth. What are the merits and demerits of attempting to achieve a faster growth rate in this country.Solution to Question 88.1 Constraints facing the motion of a sustainable economic growth.As evident in existing literatures that sustainable literally means ability of a system to endure and last long. So, sustainable economic growth means an economic development that is able to last longer According to late David Pearce who happen to be one of the outflank environmental economists in his generation, states that sustainable economic growth primarily indicates that each of the generation should be able to pass on much of its capital as inheritance to its coming generations, under this Pearce approach he defined capital as including physical capital like machineries and infrastructures, also intellectual capitals like companionship and technology and lastly environmental capitals like environmental qualities and stocks of the natural resources.This sustainable growth is what the world is witnessing from the groups of emerging economies have been trying all within them to continue to excel, particularly China and India that have remained as major drivers of the recent global expansions.But, evidence has shown that while the recent global growth outlook seems more positive, I will like to use this opportunity to mention that there are major four constraints which could threaten the sustainable growth of any country, i.e.The prices of Oil the uncertain increase in the prices of oil by producing countries have always been tried to remedy by both the OECD and its other sister organizations such as world(prenominal) Energy Agency all working very add to help many countries in addressing their short and long-term growth challenges as a result of sudden increase in energy prices, problems or fluctuations in security of supply and other alternative sources. If not properly curtailed globally, fluctuations in oi l prices could significantly impede economic growth of countries.External imbalances in trades The imbalances in current accounts of trading partners across the globe has reached an unprecedented levels especially between countries like the US, Japan, China, and some other Asian coun