The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

Answer for question 01

01a.
“Economics is a social science that studies human behaviour as a relationship
between ends and scare means which have alternative uses. That is the study
of the trade-offs involved when choosing between alternate sets of decisions”
Lionel Robbins (1935).
According to this definition of the economics, primarily concerned how people
choose to use limited or scarce resources in attempting to satisfy their
unlimited wants. Resources are the things which can be use in production of
goods and services for fulfil the requirements of society. The society's
resources are divided into four types such as;
• Labour - Human resource used for the production.
• Land - limited natural resource given freely from nature to use as
an input for production.
• Capital - Man made resources including, buildings, plant,
machinery & equipments. ( money is the financial capital)
• Enterprise - The firm or individual who coordinate and managed
the other resources effectively for the production process.
As per this concept, every individual cannot fulfil their requirements by
themselves because of the unavailability of the required resources in his own
hand. The above resources are not equally distributed among the society. So
society as a whole examines and identifies the choices that have to be made
and where there a scarcity and choice, there are costs.
As a result of the competing demand for the same resources, society makes a
choice about their use by assessed based on the followings;
• What is the best resource allocation for the most required goods
and services to the society and the quantity requirement of the
resources?
• How are the resources to be used for the best production?
• For whom are the rewards of production?
The choice of the factors of production (resources) effectively for the end
product by based on the above assessment. Due to the scarcity, society has to
scarifies with some best alternate use of resources is the opportunity cost.

01b.
i)
GDP at current market prices
This curve has shown the annual percentage of GDP growth or fall based on the
current market prices in each and every year in between 2001 to 2010.
According to the curve there was a growth of GDP in whole duration with
significant fluctuations. The annual percentage changes in current market
prices are based on the previous year and the achieving of the figures are not
only depending on the increase of GDP but also due to the rising of prices
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

called as inflation. The nominal growth can be identified from the high level
curve.
GDP at 2004 prices
This curve has shown the annual percentage of GDP growth or fall in each and
every year based on the 2004 prices called as real GDP values. It always
excludes the rise of price. The figures of the low level curve are always less
than the respective nominal values.

ii)
The level of GDP in highest at current market price - Year 2010.

The level of GDP in Lowest current market prices - Year 2001.

iii)
Annual estimated % value in 2004 (GDP at 2004 Prices curve), - A = -2
Annual estimated % value in 2007 (GDP at 2004 Prices curve), - B = +10

Cumulative sum of values(difference without + or -), C= (A+B) = 12

Index value for GDP in 2004, - D = 100

So Index value for real GDP in 2007, – (C+D) = 112

iv)
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

Answer for question 02

For instance, Andrew Simon is my representative consumer and he consumes

varying amounts of fast food, hamburgers and hot dogs per month. Assume
further the price of hamburger is $20, the price of hot dog is $10 and the
budget allocation for the above fast food is $200.According to the Simon
Budget constraints, if he entirely consumes hamburgers he can buy 10
Hamburgers a month and similarly if he relay only on hot dogs, he buys 20 hot
dogs per month. Suppose that the price of the hot dogs doubles and the new
price of hot dog is $20. But the price of hamburger stays the same.
Figure 01 show how the price change effect the Simon's initial budget line CG
and the new budget line swivel inwards, pivoting on point C as CG1.

Figure 01 Effect of a Price Change

Hamburgers
U

C U0
10

E
5

3
3
32 E0

G1 G

20
0 8 10
Hot Dogs

The effect of the price change of hot dogs can be spilt into two effects:

• The substitution effect of a price change

According to the above, the steeper budget line CG1 shows, the hot dogs are
relatively expensive and hamburgers are relatively cheaper. Simon must now
give up more hamburgers to buy extra hot dogs. Therefore Simon is likely to
substitute relatively cheaper Hamburgers for hot dogs.
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

The tendency to change Simon's purchase based on changes in relative price is

called the substitution effect. With substitution effect, the consumer considers
the new relative prices of the goods in order to keep the overall level of
satisfaction unchanged.
• The income effect of a price change
When the hot dog price goes up, Simon is not able to buy as many, which he
could purchase before. The new budget line CG1 is inside the older one, Simon
has to select a point on lower indifference curve E0 means the price change of
hot dog decrease the purchasing power. That means the real terms he has
become worse off. The income effect is the change in consumption that results
from the gain or loss of purchasing power.

If Simon relay to unchanged his budget with income supplement in order to

leave his worse off, he can stay on the same indifference curve while he makes
the substitution in favour of the relatively cheaper hamburgers.
Figure 02 shows the income and substitution effect of price change.

Figure 02 The income and substitution effect of a Price Change

Hamburgers
U Substitution effect: E to S
H

C U0 Income effect: S to E0
10

E
5

3
3 E0
32 J
G1 G

20
0 8 10
Hot Dogs

The new budget line, HJ, is drawn touching at, S, his original indifference
curve, U, and parallel to the new budget line CG1. The substitution effect is
shown by the shift from point E to S. The Pure income effect is shown by the
shift from point S to E0.
The relatively cheaper good’s demand has risen and has fallen in dearer one.
For the inferior good the substitution effect is negative means the PED value is
negative. For pure income effect can reinforce the substitute effect and further
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

reducing the consumption of normal good. In that case effect is positive means
the PED value is positive. In the figure 02 the income effect is zero because it
does not change in the number of hot dogs.

Answer for Question 03

I would like to examine the one of category of imperfect competition called as

“Oligopoly” and asses the behaviour of real firms.
Oligopoly market structure is such a fairly common in real world and is the one
which is dominated by few large firms and leading firms account for a large
percentage of market share. The computer industry and the car automobile
industry are very good examples of real oligopolistic market. Key
characteristics of oligopolistic market in real business world is shown in the
Table 01 as follows,

Table 01 OLIGOPOLISTIC MARKET

Characteristics Description Examples
Few large dominant Include few large firms The gasoline industry in
firms with many small which are dominant in USA, dominated by a
ones. existence, and each of few giant firms such as
which is relatively large Exxon, Mobil, Chevron
compared to overall size and Texaco.
of the market.
Identical Products. intermediate goods used Steel, petroleum and
by other different aluminium
industries later on for
manufacturing their
products
Differentiated Products manufacture the variety of House hold products,
products for the personal computers and
consumption automobile industry
Barriers to entry Entry barriers help Huge initial cost
existing firms to control without income,
market and maintain the undivided resource
dominance. ownership, comes up
with innovative
production techniques,
government restrictions
and copyright issues

Because of the above three key characteristics and through the

diversity, real oligopoly firms gains the following behaviours to
maintain the market with achieving the supernormal profits in the long
run.
1. Interdependence
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

Reaction and anticipation to the behaviour of rival firms are two elements to
the oligopolistic interdependence. Always each oligopolistic firm keeps a close
eye on the decision made by rival firms and respond appropriately, because
firms engage in competition among the few. Decision made by one will affect
others. Consider the leading two athletic brands like, Nike and Addidas, if Nike
introduce a new running shoe with some extra features, then the Addidas
needs to introduce a comparable shoe to keep the competition because its
existing model does not have that extra features. If Addidas does not react
appropriately, the buyers will like to choose the new Nike shoe over the older
Addidas .Each firm taking action to counter that to rival firm, which then takes
further action, which then prompts more action.
2. Rigid Prices.
Because of the interdependence, oligopolistic market tends to keep the prices
relatively constant and compete in separate ways without change the price. As
per the previous example, if Nike increases the price of the shoe, buyers will
select the Addidas shoe with same features and the Nike is likely to loose
customers and market share and Addidas will win the customers from Nike.
If Nike reduces the price of the shoe, Addidas will respond and reduce the price
as well. Then result is that each firm retain the market share with fewer prices.
The net result is that neither firm can gain a competitive advantage by price
change and willing to constant prices.
3. Non price Competition
Among the Oligopolistic firms, price competition if ineffective and therefore
generally rely on the non price method of competition such as advertising,
product differentiation, keep barriers to entry, research and development and
after sales services. The key for a firm if to attract buyers and increase market
share, while keep the constant price.

The above three behaviours in oligopolistic firms can be illustrate by the

demand curve called as “Kinked demand curve” in Figure 03.
If the firm reducing the prices, rival firms will follow the same, then the
demand curve will be relatively inelastic for the price reduction. If the firm
increase the price, rival firms would not expect to follow, then the demand
curve would be relatively elastic. Therefore be a kink in the demand curve
shown at K in figure 03. Above rival’s price (PR) being price elastic and below it
relatively price inelastic. The marginal revenue curve associated with this
kinked demand curve would be discontinuous with a gap in it (M 1M2 in Figure
03).
The typical cost curves superimposed to the kinked curve, the MC curve will
pass between MR gap (M1M2). Then assume that the firm is profits maximise
and it will equate the marginal revenue with marginal cost. There is no output
at which MR actually equals MC. Anyhow Qe will be the best output and the
clearing price of Qe will be Pe (kink price is the price that rival firms are
charging).Barriers to entry will help them to earn supernormal profit in long run
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

and the shaded area is the profit they earn even in long run shown in Figure
03.

Figure 03 Equilibrium in Oligopoly

Price
MARGINAL
COST

P e =PR K
AVERAGE
COST
Supernormal M1
profit
AC
3 DEMAND
3 (Average revenue)
3 M2

Qe
0 Quantity per time period

Oligopoly market is always inefficient; because of the welfare loss is available.

The oligopoly firms not to choose a range of products and it gains the resource
misallocation in the market. No contribution for the maximum welfare to the
consumers. The firm satisfies with the supernormal long run profits and not
willing to maximise their output. Even the long run equilibrium, no guarantee
for the minimised the average cost of production. It will effect to the excess
capacity. Due to the non price competition, devote resources to research and
development and the end product will be better quality product, techniques and
after sales services. The dynamic efficiency is another advantage in long run of
oligopoly market.
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

Answer for Question 04

4a.
Land is one of the prime factors of production and different type of factor of
production than others. It has special characteristics as a factor of production,
such as;
• Free gift of nature- land is a gift of nature given to man free of
cost.
• Limited in supply- other factors of production can be increased in
supply to a greater or lesser extent. but it is impossible to increase the
supply of land
• Primary factor of production- in every kind of production, we have
to make use of land
• Passive factor of production- land is a passive factor of production
because it cannot produce anything by itself
• Permanent- land is indestructible
• Immovable
• Differs in location
• Many uses.
Land is absolutely necessary for all production and the value of land is not
related to the cost of production. The value of the land is entirely determined
by the best use to which it can be put. The land price has an inherent tendency
to rise with parallel to the growth of economy because of the quantity of the
land is fixed.
In the free market system buyers and sellers are solely responsible for the
choice and the price of the product. The price fluctuation of a product in free
market is basically depending on the demand and supply of the particular
product. Land also applicable the same, but land is typically an appreciating
asset. While the quality of the land is improved due to the development of
transportation, infrastructure and the development of economic surrounding,
people are willing to move to the developed areas and investors see this
tendency as the economy grows and they buy lands ahead of boom areas
withholding it from use in order to take more benefits by increased the value in
future. Then the price of the lands in the area which people move from, are to
be reduce due to the decline of the demand and the price of the land in both
areas shall be fluctuate significantly in a short period. Natural disasters and war
can be reduced the prices of the land in respected areas and again can be
increased gradually in a free market with the developments.
In the free market economy, inflation can be expected and therefore some
buyers purchase land not for developing it but to use it as a "place" to store
assets and protect them from inflation. In high inflation environments, the
demand for land as a hedge against inflation is substantial. Since these buyers
do not develop their land, idling of land becomes widespread in high inflation
situations. The monopolistic power of land owners tends to increasing of the
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

land prices. Land scarcity encourages land hoardings and it affects to available
lands yet more scarce.
4b.
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

APPENDICES.

http://wiki.answers.com/Q/What_are_the_characteristics_of_land_as_factors_
of_production#ixzz1ELeQqX5E

http://ingrimayne.com/econ/Introduction/ScarcityNChoice.html

http://ingrimayne.com/econ/Introduction/ScarcityNChoice.html
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

REFERENCE:
The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO

The College Of Estate Management Economics 01

University of Reading Bsc. ASSIGNMENT 01 Module Code: F101ECO