Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics

1

Question 1
(a) Distinguish between Positive and Normative Economic Perspectives in
Economics.
Positive economics (sometimes called Descriptive Economics) is the study of
economic reality and why the economy operates as it does. It is biased purely on facts rather
than opinions. This type of economics is made up of positive statements which can be
accepted or rejected through applying the scientific method. "Malaysia bought five Sukhoi
last year" is a positive statement in which it happened to be a simple declaration of fact.
Normative economics (also called Policy Economics) deals with how the world
ought to be. In this type of economics, opinions or value judgments which is known as
normative statements are common. "We should reduce taxes" is an example of a normative
statement.
Positive economics is objective and fact based, while normative economics is
subjective and value based. Positive economic statements do not have to be correct, but they
must be able to be tested and proved or disproved. Normative economic statements are
opinion based, so they cannot be proved or disproved. While this distinction seems simple, it
is not always easy to differentiate between the positive and the normative. Many widely-
accepted statements that people hold as fact are actually value based.
For example, the statement, "government should provide basic healthcare to all
citizens" is a normative economic statement. There is no way to prove whether government
"should" provide healthcare; this statement is based on opinions about the role of government
in individuals' lives, the importance of healthcare and who should pay for it. The statement,
"government-provided healthcare increases public expenditures" is a positive economic
Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
2

statement, because it can be proved or disproved by examining healthcare spending data in
countries like Canada and Britain where the government provides healthcare.
Disagreements over public policies typically revolve around normative economic
statements, and the disagreements persist because neither side can prove that it is correct or
that its opponent is incorrect. A clear understanding of the difference between positive and
normative economics should lead to better policy making, if policies are made based on facts
of positive economics, not opinions (normative economics). Nonetheless, numerous policies
on issues ranging from international trade to welfare are at least partially based on normative
economics.
POSITIVE ECONOMICS NORMATIVE ECONOMICS
It expresses what is. It expresses what should be.
It is based on facts. It is based on ethics.
It deals with actual or realistic situation. It deals with idealistic situation.
It can be verified with actual data. It cannot be verified with actual data.
In this value judgments are not given. In this value judgments are given.
It deals with how an economic problem is
solved.
It deals with how an economic problem should
be solved.






Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
3

(b) Distinguish between Microeconomics and Macroeconomics
Microeconomics is generally the study of individuals and business decisions,
macroeconomics looks at higher up country and government decisions. Macroeconomics
and microeconomics, and their wide array of underlying concepts, have been the subject of a
great deal of writings.
Microeconomics is the study of decisions that people and businesses make regarding the
allocation of resources and prices of goods and services. This means also taking into account
taxes and regulations created by governments. Microeconomics focuses on supply and
demand and other forces that determine the price levels seen in the economy. For example,
microeconomics would look at how a specific company could maximize its production and
capacity so it could lower prices and better compete in its industry.
Macroeconomics, on the other hand, is the field of economics that studies the behaviour
of the economy as a whole and not just on specific companies, but entire industries and
economies. This looks at economy-wide phenomena, such as Gross National Product (GDP)
and how it is affected by changes in unemployment, national income, rate of growth, and
price levels. For example, macroeconomics would look at how an increase/decrease in net
exports would affect a nation's capital account or how GDP would be affected by
unemployment rate.
The bottom line is that microeconomics takes a bottoms-up approach to analyzing the
economy while macroeconomics takes a top-down approach. Regardless, both micro- and
macroeconomics provide fundamental tools for any finance professional and should be
studied together in order to fully understand how companies operate and earn revenues and
thus, how an entire economy is managed and sustained.
Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
4

MICROECONOMICS MACROECONOMICS
Microeconomics is the study of particular
firm, particular household, individual prices,
wages, incomes, individual industries, and
individual commodities.
Macroeconomics deals not with individual
quantities as such but with aggregates of
these quantities not with individual income
but with national income, not with individual
prices but with the price level not with
individual output but with national output.
Micro means very small or millionth part.

Macro means large or whole.
The subject or example of microeconomics is
about person, an investor, a producer.
The subject of macro economics is about
national production, national income, income
level.

As it analyzes individually it provides a
partial concept or partial figure of a country.

As it analyzes overall it provides full figure
or complete reflection of a country.
Micro economics is concerned with the
individual entities.
Macroeconomics is concerned with the
overall performance of the economy.





Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
5

Question 3
(a) What is price elasticity of demand?
A measure of the relationship between changes in the quantity demanded of a particular
good and a change in its price. Price elasticity of demand is a term in economics often used
when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % Change in Quantity Demanded
% Change in Price

If a small change in price is accompanied by a large change in quantity demanded, the
product is said to be elastic or responsive to price changes. Conversely, a product is inelastic
if a large change in price is accompanied by a small amount of change in quantity demanded.

(b) Describe price elasticity of supply and three elasticity concepts.
Price elasticity of supply measures the relationship between change in quantity supplied
and a change in price. The formula for price elasticity of supply is:
= Percentage change in quantity supplied
Percentage change in price

The value of elasticity of supply is positive, because an increase in price is likely to
increase the quantity supplied to the market and vice versa.

Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
6

Three Elasticity Concepts
Spare production capacity - If there is plenty of spare capacity then a business can
increase output without a rise in costs and supply will be elastic in response to a change in
demand. The supply of goods and services is most elastic during a recession, when there is
plenty of spare labour and capital resources.
Stocks of finished products and components - If stocks of raw materials and
finished products are at a high level then a firm is able to respond to a change in demand -
supply will be elastic. Conversely when stocks are low, dwindling supplies force
Time period and production speed - Supply is more price elastic the longer the time
period that a firm is allowed to adjust its production levels. In some agricultural markets the
momentary supply is fixed and is determined mainly by planting decisions made months
before, and also climatic conditions, which affect the production yield. In contrast the supply
of milk is price elastic because of a short time span from cows producing milk and products
reaching the market place.

(c) Explain Five ranges elasticity of demand
Alternative Coefficient (E)
Perfectly Elastic E =
Relatively Elastic 1 < E <
Unit Elastic E = 1
Relatively Inelastic 0 < E < 1
Perfectly Inelastic E = 0

Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
7

Perfectly Elastic
The top of the chart begins with perfectly elastic, given by E = . Perfectly elastic
means an infinitesimally small change in price results in an infinitely large change in quantity
demanded.
Relatively Elastic
The second category is relatively elastic, in which the coefficient of elasticity falls in
the range 1 < E < . With relatively elastic demand, relatively small changes in price cause
relatively large changes in quantity. Quantity is very responsive to price. The percentage
change in quantity is greater than the percentage change in price. Here a 10 percent change in
price leads to more than a 10 percent change in quantity demanded (maybe something 20
percent).
Unit Elastic
The third category is unit elastic, in which the coefficient of elasticity is E = 1. In this
case, any change in price is matched by an equal relative change in quantity. The percentage
change in quantity is equal to the percentage change in price. For example, a 10 percent
change in price induces a equal 10 percent change in quantity demanded. Unit elastic is
essentially a dividing line or boundary between the elastic and inelastic ranges.
Relatively Inelastic
The fourth category is relatively inelastic, in which the coefficient of elasticity falls in
the range 0 < E < 1. With relatively inelastic demand, relatively large changes in price cause
relatively small changes in quantity. Quantity is not very responsive to price. The percentage
change in quantity is less than the percentage change in price. In this case, a 10 percent
Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
8

change in price induces less than a 10 percent change in quantity demanded (perhaps only 5
percent).
Perfectly Inelastic
The final category presented in this chart is perfectly inelastic, given by E = 0.
Perfectly inelastic means that quantity demanded is unaffected by any change in price. The
quantity is essentially fixed. It does not matter how much price changes, quantity does not
budge.













Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
9

Question 4
(a) Explain the following terms..
Scarcity
A pervasive condition of human existence that exists because society has unlimited wants and
needs, but limited resources used for their satisfaction. In other words, while we all want a
bunch of stuff, we can't have everything that we want.
Opportunity Cost
The cost of an alternative that must be forgone in order to pursue a certain action. Put another
way, the benefits you could have received by taking an alternative action. The difference in
return between a chosen investment and one that is necessarily passed up. Say you invest in a
stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave
up the opportunity of another investment - say, a risk-free government bond yielding 6%. In
this situation, your opportunity costs are 4% (6% - 2%).
Ceteris Paribus
Used as shorthand for indicating the effect of one economic variable on another, holding
constant all other variables that may affect the second variable. For example, when discussing
the laws of supply and demand, one could say that if demand for a given product outweighs
supply, ceteris paribus, prices will rise. Here, the use of "ceteris paribus" is simply saying that
as long as all other factors that could affect the outcome such as the existence of a substitute
product remain constant, prices will increase in this situation. Contrasts with "mutatis
mutandis".

Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
10

Comparative Advantage
A comparative advantage in producing or selling a good is possessed by an individual or
country if they experience the lowest opportunity cost in producing the good. For example, if
a cruise company found that it had a comparative advantage over a similar company, due to
its closer proximity to a port, it might encourage the latter to focus on other, more productive,
aspects of the business.
Absolute Advantage
The ability of a country, individual, company or region to produce a good or service at a
lower cost per unit than the cost at which any other entity produces that good or service.
Entities with absolute advantages can produce something using a smaller number of inputs
than another party producing the same product. As such, absolute advantage can reduce costs
and boost profits.
Law of Demand
The law of demand states that there is a direct relationship between the price of a good and
the demand for it. In particular, people generally buy more of a good when the price is low
and less of it when the price is high. This is a general rule that applies to most goods called
normal goods. As the price of a normal good increase, people buy less of it because they are
usually able to switch to cheaper goods.
Law of Supply
States that at higher prices, producers are willing to offer more products for sale than at lower
prices. States that the supply increases as prices increase and decreases as prices decrease.
States that those already in business will try to increase productions as a way of increasing
profits.
Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
11

(b) List and Explain categories of resources
Land
Economists include in the category of land all sorts of naturally occurring resources, such as
water and timber, as well as the actual physical expanse of land. These resources are all
limited and society has to weigh how best to use them. There are concerns that humanity may
run out of some natural resources if not used in moderation. That's why, for example, there is
a need to be careful about water consumption.
Labour
Labour refers to the resource represented by workers. Workers are necessary to produce any
sort of goods. An organization may be able to produce more quantities of a good by
employing more workers. However, the workers will have to be paid wages, and the business
will have to decide whether the costs of employing more workers are outweighed by the
benefits. If the business decides the benefits of employing more workers outweigh the costs,
it will employ more workers.
Capital
Capital includes the resources used in production. This includes physical capital such as tools
and machines, the human capital gained through education and training and the financial
capital needed to produce a good. There is a certain cost involved in assembling various
goods and financing them in order to produce an output. Entrepreneurs will only invest
capital if they expect the benefits to outweigh the costs.


Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
12

Question 5
(a) Identify and Explain types of unemployment
Structural Unemployment
Changes occur in market economies such that demand increases for some jobs skills while
other job skills become outmoded and are no longer in demand. For example, the invention of
the automobile increased demand for automobile mechanics and decreased demand for
farriers which is the people who shoe horses.
Frictional Unemployment
This type of unemployment occurs because of workers who are voluntarily between jobs.
Some are looking for better jobs. Due to a lack of perfect information, it takes times to search
for the better job. Others may be moving to a different geographical location for personal
reasons and time must be spent searching for a new position.
Cyclical Unemployment
This occurs due to downturns in overall business activity. It occurs during recessions
because, when demand for goods and services in an economy falls, some companies respond
by cutting production and laying off workers rather than by reducing wages and prices.
Wages and prices of this sort are referred to as sticky. When this happens, there are more
workers in an economy than there are available jobs, and unemployment must result.
Seasonal unemployment
Unemployment that occurs because the demand for some workers varies widely over the
course of the year. Seasonal unemployment can be thought of as a form of structural
unemployment, mainly because the skills of the seasonal employees are not needed in certain
Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
13

labour markets for at least some part of the year. That said, seasonal unemployment is viewed
as less problematic than regular structural unemployment, mainly because the demand for
seasonal skills did not gone away forever and resurfaces in a fairly predictable pattern.
(b) List and explain three major concern of macroeconomics
Inflation
Inflation is an increase in the overall price level. Hyperinflation is a period of very rapid
increases in the overall price level. Hyperinflations are rare, but have been used to study the
costs and consequences of even moderate inflation.
Aggregate Output
Aggregate output is the total quantity of goods and services produced in an economy in a
given period. A recession, contraction, or slump is the period in the business cycle from a
peak down to a trough, during which output and employment fall. A depression is a severe
reduction in an economys total production accompanied by high unemployment lasting
several years. An expansion, or boom, is the period in the business cycle from a trough up to
a peak, during which output and employment rise.
Unemployment
The unemployment rate is the percentage of the labour force that is unemployed. The
unemployment rate is a key indicator of the economys health. The existence of
unemployment seems to imply that the aggregate labour market is not in equilibrium.



Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
14

Question 6
(a) Explain Market Structure
Market structure is best defined as the organisational and other characteristics of a market.
We focus on those characteristics which affect the nature of competition and pricing but it
is important not to place too much emphasis simply on the market share of the existing firms
in an industry.
(b) Why would a firm stay in business while losing money?
The total revenue-total cost method is one way the firm determines the level of output that
maximizes profit. Profit reaches a maximum when the vertical difference between the total
revenue and the total cost curves is at a maximum.
Each firm in the industry is very small relative to the market as a whole, all the firms sell a
homogeneous product, and firms are free to enter and exit the industry. A price-taker firm in
perfect competition faces a perfectly elastic demand curve.
It can sell all it wishes at the market-determined price, but it will sell nothing above the given
market price. This is because so many competitive firms are willing to sell at the going
market price.





Muhammad Syazwan Abdul Rahman FAL 12031054 Business Economics
15

(c) List and compare four market structures
Perfect competition
Perfect competition happens when numerous small firms compete against each other. Firms
in a competitive industry produce the socially optimal output level at the minimum possible
cost per unit.
Monopoly
A monopoly is a firm that has no competitors in its industry. It reduces output to drive up
prices and increase profits. By doing so, it produces less than the socially optimal output level
and produces at higher costs than competitive firms.
Oligopoly
An oligopoly is an industry with only a few firms. If they collude, they reduce output and
drive up profits the way a monopoly does. However, because of strong incentives to cheat on
collusive agreements, oligopoly firms often end up competing against each other.
Monopolistic competition
In monopolistic competition, an industry contains many competing firms, each of which has a
similar but at least slightly different product. Restaurants, for example, all serve food but of
different types and in different locations. Production costs are above what could be achieved
if all the firms sold identical products, but consumers benefit from the variety.