Explain and apply the concept of opportunity cost. Explain the Law of Supply. Ex

Question

Explain and apply the concept of opportunity cost.

Explain the Law of Supply.

Explain the Law of Demand.

Explain the difference between a mixed market economic system and a command and control economic system(Communist).

Define elasticity and explain how a firm may use this concept.

Suppose that when the price of milk rises 10%, the quantity demanded of milk falls 2%. Based on this information is this good elastic or inelastic?

If the price elasticity of a good is .05 what will happen to quantity demanded for that good if the price is increased.

If a good is elastic and the price is increased, what do you believe will happen to total revenue?

Discuss the concept of diminishing marginal utility as it pertains to consumption.

What is the difference between accounting profit and economic profit?

Explanation / Answer

(1) Opportunity cost (OC) refers to the benefit foregone by choosing one alternative over another. This is an implicit cost that, when added to explicit (accounting) cost, gives rise to economic cost. Therefore, when OC is deducted from accounting profit (= Revenue - Accounting cost), economic profit is derived.

For example, assume I was earning $200,000 per year from a full-time job which I quit to start my own business from which annual revenue is $500,000 and annual accounting cost is $350,000. Here accounting profit equals $(500,000 - 350,000) = $150,000. But economic profit is -$50,000 (= $500,000 - $350,000 - $200,000), so there is an economic loss which is arrived at by deducting the salary of $200,000 which I sacrificed by leaving the job and starting the business.

(2) The law of supply states that quantity supplied of a good and its price are directly related. Therefore, when price of a good increases (decreases), its quantity supplied increases (decreases), causing an upward movement along its supply curve.

(3) The law of demand states that quantity demanded of a good and its price are inversely related. Therefore, when price of a good increases (decreases), its quantity demanded decreases (increases), causing an upward movement along its demand curve.

NOTE: As per Chegg Answering Policy, first 3 questions have been answered.

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