Question

1. Compare both fixed and variable costs with examples. What are explicit and implicit costs why must you consider both t be efficient?

2. if you had the power and the authority to create a health care law for this country what would you do?

3. what do we mean by "Price elasticity of demand"? other than a price list and elasticity determinants that affect you own price elasticity of demand for an item.

4. Explain the "Law of diminishing marginal utility" and how this affects your personal life throughout the day?

Answer 1

1. Fixed costs are the sum total of expenditure incurred by the producer on the purchase or hiring of fixed factors of production. These are also called supplementary costs, or overhead costs or indirect costs. These costs do not change with the change in output. Example; Depreciation.

Variable Cost: Variable costs are the expenditure incurred by the producer in the use of variable factors of production. When output changes, these costs also change. As the output increases, these costs also increase and vice-versa. These costs are called Prime costs or Direct costs. Variable costs include expenses like Purchase of raw material, wages of casual labor, expenses on expenditure. Example: Raw material expenses.

Explicit cost is the direct cost which is made in the course of running a business. Example; Electricity bill, wages, rent, etc.

Implicit cost is the cost that occurred but not shown in account. It represents opportunity cost of firm. Example: In order to earn money from its own business, person give up his job.

3.

The elasticity of Demand measures the extent to which quantity demanded of a commodity increase or decrease in response to increase or decrease in any of its quantitative determinants. The elasticity of demand measures the responsiveness of the quantity demanded of a good, to change in its price, price of other goods and change in consumer's income.

Some goods are elastic and others are inelastic because of various factors like: Nature of commodity, availability of substitutes, different uses of commodity, postponement of the use, income of the consumer, habit of consumer, proportion of income spent on a commodity, price level and time period.

Determinants of Elasticity of Demand:

1) Nature of the commodity: Ordinarily, necessaries like salt, kerosene oil have less than unitary elastic demand. Luxuries, like air conditioner, costly furniture, etc have greater than unitary elastic demand. The reason is that change in their prices has a great effect on their demand. Comforts like milk, fans, etc have neither very elastic nor very inelastic demand. Jointly demanded goods, like, car and petrol, pen and ink, camera and film, etc have ordinarily inelastic demand.

2) Availability of substitutes: Demand for those commodities which have substitutes are relatively more elastic. The reason being that when the price of a commodity falls in relation to its substitute, the consumers will go in for it and so its demand will increase. Commodities having no substitutes like cigarettes have inelastic demand.

3) Income of the consumer: People whose income are very high or very low, their demand will be inelastic. Because rise or fall in price will have little effect on their demand. Conversely, middle income groups will have elastic demand.

4) Habit of consumer: Goods in which a person becomes accustomed or habitual will have inelastic demand like coffee, tobacco etc. It is so because a person cannot do without them.

Proportion of Income spent on a commodity: Goods on which a consumer spends a very small portion of the income i.e. toothpaste, newspaper, needles, etc will have an inelastic demand. On the other hand, goods on which the consumer spends a large proportion of the income i.e. scooter, cloth etc have elastic demand.

Time period: Demand is inelastic in short period but elastic in long period. It is so because in the long-run, a consumer can change his habits more conveniently than in the short period.