Mozo, Jhoana May O.

BS BIO II

Assignment in Economics 01
Basic Economics with Taxation/Agrarian Reform

1. Define all terms relevant to the discussion of the principles of elasticity. Give examples, if
applicable. (3 pts. for each term)

a. Price elasticity – refers to varying levels of responses of different groups of people

(consumers and producers) in relation to the changes in price (decrease or increase) of the
different commodities available in the market.

b. Demand - Demand refers to the amount of goods and services that buyers are willing to
purchase. Typically, demand decreases with increases in price; this trend can be graphically
represented with a demand curve. Demand can be affected by changes in income, changes in
price, and changes in relative price.

c. Microeconomics - analyzes the details of economy. It deals with the economic behavior of
individual units such as the consumer., firms and entrepreneurs or the goods’ producer.

d. Macroeconomics – has a broader scope than microeconomics studies and analyzes the
economy’s aggregates. It looks into the employment, unemployment, money, supply, pricing
level and the output of goods and services.

e. Goods – are items designed to bring utility. It is also known as tangible goods or material
goods.

f. Services – are intangible goods rendered by individual or groups.

g. Consumer goods – these are finished products that gives direct satisfaction to those who
availed them.

h. Producer goods – are goods used in the production of other goods and services. Also known
as Capital Goods.

i. Traditional Economy – the means and way of production are generally based on customs,
traditions and beliefs.

j. Mixed Economy – the production and distribution of goods and services are clearly owned
and managed by the private and government sector.

k. Market – where goods and services are brought. A place where buyers and sellers transact.

l. Income - The amount of money or its equivalent received during a period of time in exchange
for labor or services, from the sale of goods or property, or as profit from financial
investments.

m. Capital – man-made production tools which include equipment, machinery, building and
other infrastructure.

n. Scarcity - the fundamental economic problem of having seemingly unlimited human

needs and wants, in a world of limited resources.
 o. Entrepreneur – a  person who has possession of a new enterprise, venture or idea and assumes
significant accountability for the inherent risks and the outcome.

2. Discuss the Law of Diminishing Returns and Law of Diminishing utility. How do these laws
explain economic behavior of both the producers and consumers? Discuss. (9 points for each law)

A. Law of Diminishing Returns

This Productivity. The law states that when successive unit of variable input used with a fixed input
beyond a certain point, the additional is also known as the Law of Diminishing Marginal product
produced by each additional unit of variable input decreases. The law of diminishing returns has been
described as one of the most famous laws in all of economics. In fact, the law is central to production
theory, one of the two major divisions of neoclassical microeconomic theory. The law states "that we will
get less and less extra output when we add additional doses of an input while holding other inputs fixed.
In other words, the marginal product of each unit of input will decline as the amount of that input
increases holding all other inputs constant.Explaining exactly why this law holds true has sometimes
proven problematic.

 Behavior of consumers and producers (explanation is in the form of giving example)

Consider a factory that employs laborers to produce its product. If all other factors of production
remain constant, at some point each additional laborer will provide less output than the previous
laborer. At this point, each additional employee provides less and less return. If new employees
are constantly added, the plant will eventually become so crowded that additional workers
actually decrease the efficiency of the other workers, decreasing the production of the factory. 

B. Law of Diminishing Utility

In its most general form, the law of diminishing marginal utility states that, in the absence of "tipping
points", as increasing amounts of a good or of a service are consumed, past some point of consumption
the utility (usefulness) of successive increases drops. This is follows from an assumption that economic
factors are rational, and therefore put each available amount to the best possible use, so that (on the
assumption that there is no tipping point) the next available amount must then go to a less important use. 
In mainstream economics, it is often assumed that utility can be quantified. In that case, the marginal
utility would be an actual arithmetic difference. To get the marginal utility of the nth unit of a good or
service, one could subtract the total utility without that unit from the total utility with that unit. 

 Behavior of consumers and producers (explanation is in the form of giving example)

This is the premise on which buffet-style restaurants operate. They entice you with "all you can
eat," all the while knowing each additional plate of food provides less utility than the one before.
And despite their enticement, most people will eat only until the utility they derive from
additional food is slightly lower than the original.

For example, say you go to a buffet and the first plate of food you eat is very good. On a scale
of ten you would give it a ten. Now your hunger has been somewhat tamed, but  you get another
full plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most
people would stop before their utility drops even more, but say you go back to eat a third full
plate of food and your utility drops even more to a three. If you kept eating, you would
eventually reach a point at which your eating makes you sick, providing dissatisfaction, or 'dis-
utility'.

In short, as the the producers keeps on giving great priveledges for the consumers, in the end the
consumers will be tamed and will drop their utility easier.
3. What are the kinds of demand elasticity? Supply Elasticity? Name them and explain the workings
of each kind. Give sample situation for each.

 Demand Elasticity

a. Elastic Demand - Describes a supply or demand curve which is relatively responsive to changes
in price. That is, a curve wherein the quantity supplied or demanded changes easily when the
price changes. A curve with an elasticity greater than or equal to 1 is elastic.

Example : If the quantity demanded changes by an equal proportion to price then the value of
the coefficient will be equal to one. In this case demand is said to have unitary elasticity.

b. Inelastic Demand – the demand is inelastic when there is a lesser change in quantity demanded in
response to a change in price.

Example : If the quantity demanded changes by a smaller proportion than price then the value
of the coefficient will be less than one. In this case demand is described as price inelastic.

c. Unitary Demand - the demand is unitary when there is an equal change in price and in quantity
demanded (increase or decrease).

Example : If the quantity demanded changes by an equal proportion to price then the
value of the coefficient will be equal to one. In this case demand is said to have unitary
elasticity.

d. Perfectly Elastic Demand – a demand is perfectly elastic, when there is an infinite change in
quantity demanded while there is no change in price.

Example : In perfectly competitive markets (such as, say, coal), if you can charge slightly less
than your competitors, and still make a profit, you will find your customers will attempt to
buy as much as you can produce.

e. Perfectly Inelastic Demand – this is said to be perfectly inelastic if there is no change that occurs
in quantity demanded as an outcome of the change in price. This results when people is in need of
a good or a service that is monopolized by one producer, and there are no working substitutes.

Example : Perfectly inelastic demand occurs when buyers have no choice in

the consumption of a good. In an analogous way, perfectly inelastic supply occurs when
sellers have no choice in the production of a good.

 Supply Elasticity

a. Perfectly Elastic Supply – Perfectly elastic supply means that the price is fixed and that supply
is infinite at that price only. At other prices there is no supply. This means that the price
elasticity of supply = ∞

b. Perfectly Inelastic Supply – Perfectly inelastic means that quantity demanded or supplied is
unaffected by any change inprice. In other words, the quantity is essentially fixed.

c. Relatively Elastic Supply – Relatively inelastic means that relatively large changes in price
cause relatively small changes in quantity. In other words, quantity is not very responsive to
price. 

d. Relatively Inelastic Supply – Relatively elastic demand is a concept where a change in the
price results in more than proportionate change in the quantity demanded. For ex, 3% fall in
the price leads to 9% increase in demand
 e. Unitary Elastic Supply - An elasticity alternative in which any percentage change in price
cause an equal percentage change in quantity. In other words, any change in price, whether
big or small, triggers exactly the same percentage change in quantity.

4. In your view, what do you consider as the best form of business organization? Why? (5 points)

Corporation is the best form of business organization, because for me this form of business
organization has lots of benefits as what i have researched about it. Base on my understandings,
corporation provides limited liability for the investors, none of the shareholders in a corporation
is obligated for the debts of the corporation. Creditors can look only to the corporation's assets for
payment. One of the good benefits that the corporation has to offer, it has some tax benefits such
as deductibility of health insurance premiums. And this form of business is really a big help or
big jump of raising money capital. Compare to other for of business organization, it’s life span
takes more than a decade and you can also renew you and your partners corporation if it still
works for 50 years.

5. How are the internal and external economies of scale related to business profits? What beneficial
effects do these provide to the entrepreneur if attained? Explain. (10 points)

Answer : before i explain or state if how are internal and external economies of scale related to
business profits, let me first share if whate are the meaning of these terms. Internal economies of
scale, when a company reduces costs and increases production, internal economies of scale have
been achived. External economies of scale occur outside of a firm within an industry. Thus, when
an industry’s scope of operations expands due to, for example, the creation of a better
transportation network, which results in a decrease in cost for a company working within that
industry, external economies of scale are said to have been achieved. Business profits is the
income a company working within an industry. How are they related? External and internal scale
of economies and business profits has the same goal, by achieving the money or expenses they
give in that business/industry. For example in business, a business may have other goals but if
they do not make profit in the business then they will have to end the business. As well as the
internal economies of scale, internal economies of scale is when a company is cut in size but the
remaining firms still hold the same amount of final output. Therefore the company has become
more efficient in production and has experienced internal economies of scale. The internal part of
the business expands enabling the business to make higher profits. They are different from
external economies of scale, which focus on an industry as a whole.

One of the beneficial effect of these that provides for an entrepeneur is that, these things may help
from his/their business to expand more and they would probably achieve a great or big return on
their business.

6. Why is it that there is inverse relationship between price and demand? How is it working in this
way? Explain this in relation to the economic behavior of the consumers and producers. (7 points)

Answer : In economics, demand is the desire to own anything and the ability to pay for it and
willingness to pay. The term demand signifies the ability or the willingness to buy a particular
commodity at a given point of time. As price decreases, quantity demanded increases that’s why
there is an inverse relationship between demand and price.

For example, a specific item had it’s big discount, of course lots of consumers will tend to buy it
and will grab all of the discounted items that they all wanted. This example shows from price
side, how decreasing cost increases the demand of consumers.
7.What determines demand (there are three determinants) and supply (one determinant) elasticity?
Name them and explain each. (10 points)

Answer:

DEMAND

 Population. population is of course a key determinant of demand. Although all forest products do
not necessarily enter final consumer markets, the actual markets are largely presumed to be
functionally related to population. Growing populations are positively correlated to timber
demands in the aggregate, as well as specifically to individual forest products. Frequently,
population and income estimators are combined, as in the case of the use of Gross Domestic
Product per capita.

 Level. a key determinant of demand is the level of income evident in the appropriate country or
region under analysis. As a generality, the higher the level of aggregate and/or personal income
the higher the demand for a typical commodity, including forest products. More of a good or
service will be chosen at a given price where income is higher. Thus determinants of demand
normally utilize some form of income measure, including Gross Domestic Product (GDP).

 Taste and preferences. All markets are shaped by collective and individual tastes and
preferences. These patterns are partly shaped by culture and partly implanted by information and
knowledge of products and services (including the influence of advertising). Different societies
use forest products differently because of these differences in taste and preferences. For example,
markets for wood products in Japan are commonly recognized as requiring very high product
quality standards, the importance of visual attributes of wood, and other preferences not
commonly found in many other markets.

SUPPLY

 Price of Goods. The increase in price of goods especially raw materials decreases the supply
of finished goods in the market. An increase in the prices of goods increases the cost of
producing further goods.

8. Graph each of the (5) kinds of demand elasticity as well as that of supply elasticity. Which of
these kinds have inverse relationship? Identify and explain. (12 points)

 Demand Elasticity

 Elastic Demand
 Inelastic Demand

 Unitary Demand

 Perfectly Elastic Demand

 Perfectly Inelastic Demand

 Supply Elasticity

a. Perfectly Elastic Supply

b. Perfectly Inelastic Supply

c. Relatively Elastic Supply

d. Relatively Inelastic Supply

e. Unitary Elastic Supply

 Elastic demand, Inelastic demand, Perfectly Elastic demand, Relatively Elastic Supply, Relatively
Inelastic Supply are the kinds of supply and demand elasticity having the inverse relationship.
Because you can see in these graphs that whenever there is a change in price of goods in the
market, consumers will give big response towards the changes in prices of goods. For example,
the prices of ladies dress in a specific mall gives a big discount, for example 80% discount for all
the ladies dress, lots of consumers would wanted to have a pair of different dresses, inshort there
is an increase in quantity demanded.